Gold and the tragedy of climate Barbie - Peter Diekmeyer (26/06/2019)

June 26, 2019

Catherine McKenna is everything you’d want in a politician. Canada’s Minister of the Environment is bright, energetic, and clearly committed to the war against climate change, which she describes as “the biggest challenge we face.”

However, if man-made climate change is real, then McKenna—who has been lugging around the unfortunate sobriquet “Climate Barbie”—is on track to become the worst environment minister in Canada’s history.

That’s because, far from slowing greenhouse gas emissions growth, trillions of dollars of hidden government subsidies fostered by suppressed interest rates are almost certainly causing it.

Interestingly, gold is at the center of this complicated story, which calls into question not just the economy and your personal investments, but if you believe the experts, the future of the species.

Trillions in secret government subsidies

Our back of the envelope calculation suggests that planetary-scale government suppression policies, which are keeping interest rates down by an estimated 5.0 percentage points across the yield curve, related to $244 trillion of global system debts (as estimated by the Institute of International Finance) are quietly transferring $12 trillion from savers to governments, businesses, and households each year*.

These subsidies, which began quietly with the vast credit expansion after the Nixon Administration delinked the U.S. dollar from gold in the early 1970s, have been ongoing and mimicked by all major global economies at an exponentially increasingly pace since the mid-1980s.

The upshot has been vast global overspending, overinvestment, population growth, and resulting carbon emissions build-ups which free markets, left on their own, would have drastically curtailed starting decades ago.

Billions in hidden subsidies to the Trans Mountain pipeline expansion

The idea that Western governments, which are supposed to be the guardians of environmental stewardship, are instead subsidizing despoliation seems ludicrous.

However, consider the effects of 5.0 percentage point interest rate suppression** in Canada.

Suppressed interest rates will transfer billions of dollars (mostly from savers and pensioners) to Canada’s recently approved Trans Mountain pipeline expansion project, which will be financed largely with borrowed money.

These sorts of subsidies, which also benefit Canada’s bloated housing market, have led to vast overbuilding and GHG emissions from the resulting gas, petroleum electricity, and other production needed to power and heat the places.

Free markets would have encouraged Canadians to buy or rent smaller properties and to share accommodations. In other words: to live smarter.

Indeed, suppressed interest rates have distorted every sector of the economy for so long that if man made climate change is indeed a thing, then those hidden wealth transfers (which equate to almost a sixth of global GDP) are almost certainly the most important driver.

Baffling the “best and the brightest”

Whether McKenna, who has a master’s degree from the London School of Economics, actually understands the scale of the misallocations caused by government interest rate suppression is an open question.

During recent decades, university economics faculties have focused on econometric models that rely on tangible data.

But government interest rate suppression is not visible and is thus never studied.

McKenna and the Trudeau government, to be fair, are only following a series of complex policies that were put in place gradually over the course of decades by governments in Canada, the United States, and around the world.

However, the side effects (which include more than 95 million motor vehicles produced last year compared to 49 million in 1990) are getting worse.

This reveals two sad truths.

The first is that since the gradual removal of the gold standard and free currency markets—starting with the founding of the Federal Reserve in 1913—imposing true checks on governments, which have unlimited power to borrow, print, and spend (often in secret) have been increasingly impossible.

The second, as the McKenna experience suggests, is that even the top people in government, the best and the brightest, are powerless to stop the process.

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* These are gross amounts. For example, many Canadians own RRSPs, where they are punished by low interest rates, as well as mortgages that benefit from supressed interest rate subsidies. In these cases, the effects partially net themselves out.

** Caused by a variety of government initiatives, ranging from loose Bank of Canada monetary policies to the country’s fractional reserve system (which enables banks and the banking system to create money) to subsequent bailouts when they lend too much.