22 March 2009

Overpopulation and Environmental Degredation

While on my exercise bike, I listed to a Counterpoint podcast called Population and Environment. In this podcast, Mark O'Connor claims that Australia is overpopulated and action needs to be taken to reduce population in Australia by reducing immigration and birth rate. I think there are problems with reducing immigration and birth rate.

If we look at carbon dioxide emissions, reducing immigration, I doubt, will have much effect on global carbon emissions. Suppose an American comes to Australia, purchases a car, and drives it. By driving he is producing pollution in the form of carbon dioxide emissions. However, had this individual stayed in America instead of coming to Australia, who is to say that this individual wouldn't have driven around in a car in America and caused the same problem? Some people, e.g. Ross Gittens, argues that people move from one place to another to better their lives, and by doing so they must increase the degree to which they pollute. For example, the individual in my example may be unemployed in America and hence he stays home and does nothing, which means he is environmentally friendly. However, once he gets a job offer in Australia, he travels here, spews jet emissions, and then spews even more carbon emissions once he drives to and from work in his car. This is a fair argument. Free immigration increases the potential for economic growth, which in turn increases pollution because trade usually involves energy consumption of some kind. However, we have now a tricky trade-off between environment and economy. Suppose that environment is more important than economy. We could achieve the same economic inefficiency simply by increasing taxes or by implementing an emissions trading scheme. Blocking immigration may even be both economically and environmentally inefficient if it blocks the transfer of knowledge and skills related to environmental productivity. For example, suppose that BHP Billiton in Australia wants to reduce emissions from its mining operations. Suppose also that in a Japanese university there is an scientist there who knows how to reduce emissions using some technology. BHP wants to hire this scientist but because immigration is banned, the scientist cannot come to Australia and BHP cannot implement green technology into its business. This means that BHP is not able to be as green as it wants to be.

O'Connor also claims that Australia ought to reduce natural population growth by getting rid of the Baby Bonus. An idea would be to introduce a tax on childbirth. I believe that lower birth rate can be achieved simply by taxing energy or by establishing an emissions trading scheme. A child costs approximately $250,000 to raise from birth till 18. When a couple wants to have a baby and believes that it has the ability to produce $250,000 over the next 18 years, the couple will have a baby. However, suppose a cap-and-trade scheme is implemented. This should raise the price of energy, which means the cost of having a baby should also increase, say, from $250,000 to $300,000. An increase in the cost of having a baby should decrease birth rate.

Applying a global tax on energy or a global emissions trading scheme will reduce carbon emissions. However, many poor people will not be able to cope with the higher costs of energy, and that is why I suggest a global redistribution system.

According to someone at Sustainable Population Australia, there are more problems that high population creates behind carbon emissions (see "Overloading Australia" Author Gets Opinion Piece in The Advertiser): "Mark pointed out that many of the environmental problems we face in Australia today - including water shortages, unaffordable housing, excessive greenhouse gas emission - are all linked to excess population."

Water shortage is not a problem. If there is a lack of water in Australia, we can simply import water (see Australia Could Import Water from Japan). Currently Australia has more than enough coal, oil, and food to feed its population, but currently about 54 per cent of Australia's exports are food, minerals, or energy. Because of global trade, shortage of food, energy, or minerals is not really an Australian problem. Rather, it is a global problem. When there is a scarcity of some good, there is a tendency for technology to improve to take advantage of the high prices from scarcity. If oil prices climb very high because of increasing scarcity, technology may improve to find alternative sources of energy. Of course, it is possible for humans to find no technology to fix problems of water and oil scarcity. It is possible, I think, for humans to live without oil, but it is not possible for humans to live without water. If there is finite water then we will have no choice but to all die. The human race will be wiped out eventually. In reality, clean water comes from rivers and streams after it has been filtered through rock, etc. Water can even be filtered using machines.

Another problem mentioned at SPA is unaffordable housing. This problem I believe is easily fixed. Suppose we have a fixed number of house and all of a sudden we have a surge in population. We have more people bidding for the same amount of houses, so obviously the price of houses goes up. This problem can easily be fixed simply by increasing the number of houses available. This can be achieved by reducing barriers that are imposed currently on property developers, including complex zoning laws, urban limits, etc. One of the reason why American property is so cheap at the moment is because there are so many houses there that have been abandoned after the 2007 residential real estate crash.

21 March 2009

China and India Cooperation Needed?

Many claim that without cooperation from China and India, global coordinated reduction in carbon dioxide emission is doomed.

It is true that China and India are large economies but the economy outside these two countries is large as well.

Suppose, say, 20% of the world's coal, petrol, and gas is in India and China. If the other 80% is subject to taxation or emissions trading then this will increase the price of energy even in China and India.

OPEC controls less than 50% of the world's oil and they have considerable influence on the price. If the rest of the world controls about 80% of the world's raw material then together they will have a lot of influence on the price, and high price is what reduces consumption and emissions.

If China and India do not cooperate, raw materials may be cheap in China and India but expensive around the rest of the world. Companies may move to China and India. However, this cannot continue forever. If the whole world depends on China and India for energy then the heavy consumption will eventually deplete resources in the two countries and then China and India will be reliant on importing energy at higher prices.

Currently China and India already have to import oil, natural gas, and coal.

15 March 2009

Trusting Others for Food

I have read a news article about a Subway worker who was fired for stuffing lettuce up his nose before putting it back into the serving tray. If you ate at Subway there is a slightly chance that you ate lettuce contaminated with some kid's snot.

The article goes on to claim that this is not the first time this sort of thing has happened.

It is the latest incident in which fast-food chain employees have been caught out on film after teenage girls working at a KFC in the US were punished after taking a bath in the mammoth kitchen sink - and a male Hungry Jack's worker was sacked for the same offence.

I also have anecdotal evidence of this sort of thing. My aunt told me that, if someone hasn't finished his meal, some restaurants collect the leftovers from the guy's plate and serve the leftovers to someone else. Other person I know works in a sausage factory. He told me that he has seen sausages being dropped on the floor and then picked up again and put on the conveyor belt.

The problem is that there is an incentive for food suppliers to use contaminated food because throwing the food out is wasteful and not profitable. People who eat at restaurants, however, cannot see how the food is prepared.

One way to fix this problem is perhaps to grow your own raw ingredients and then bring them to a chef to make food. Then you watch the chef make the food with your own eyes. Another way to fix the problem is to simply grow as much food as you can from your own backyard and simply eat that.

Why Australians Should Hold US Dollars

The chart above shows the performance of the US economy (measured by the S&P500 index, labelled GSPC) and the Australian economy (measured by the All Ords index) compared to the performance of the US dollar relative to the Australian dollar.

What I find interesting is how the Australian economy is pretty much following the US economy. An Australian who holds Australian shares in his super fund won't get much diversification by investing in US stocks since the two seem to copy each other.

Interestingly, the strength of the US dollar seems inversely related to the performance of the stock markets. Even stocks go up, US dollar goes down. When stocks go down, US dollar goes up. This then provides an excellent tool we can use to smooth out the volatility of the stock market.

I have always said that one easy way for Australians to be being exposed to US dollars is simply to make microloans via Kiva. The company is based in America, so any Australians lending money need to convert their Australian dollars into American dollars.

The chart above only goes back two years. Let's look at the performance of the stock markets versus the US dollar over the last five years.

What I think is interesting is that the Australian economy has outperformed the US economy over the last five years. Our economy has done about two times better. The US dollar would be bad for diversification if it were exactly inversely correlated to the stock market. For example, if half your portfolio is in an S&P500 ETF and the other half in an S&P500 inverse ETF then you are wasting your time because you pay fairly significant management fees to hold on to these ETFs and the net effect is a portfolio that mimic holding 100 per cent US dollars.

The chart above shows that the US dollar is not exactly inversely related to the stock markets. Until mid-2006, the US dollar remained flat while the stock markets boomed. Then the US dollar started to fall as the economy keep booming. Scared that the US dollar was collapsing, everyone invested in oil and raw materials, sending prices of petrol, food, metals, etc through the roof. Then three-quarters of the way through 2008 the stock markets tumbled sharply and the carry trade unwinded, which resulted in a boom in the US dollar.

Growth in the economy can be real, e.g. if an oil company invents a cheaper way to extract oil from the ground then they become more profitable, oil is cheaper for consumers, etc. This has benefits for everyone. Company profits are higher, dividend payments should rise, and thus stock prices should go up. The US dollar should remain the same. Nothing is really happening to it. If the technology is invented in the US and many people want to buy it from Americans, perhaps the US dollar will rise slightly.

In contrast to real economy growth, we can have fake growth caused by an increase in the money supply. If there is more money in the economy then this can stimulate economic activity. It is the principle behind all the recent stimulus packages given by central banks around the world today. More money in the economy simply increases the price of everything, including stocks. While people who hold on to stocks may think that they are richer because stock prices have gone up, in reality they are no richer because the currency is depreciating. What is the point of seeing your stocks go up 5 per cent when the price of milk (and everything else) goes up by 5 per cent as well?

This is why people should hold US dollars in their portfolio. When there is real economic growth, the US dollar seems to stay relatively flat while the stock market booms, allowing you to make a net gain. On the other hand, if there is fake economic growth because of more money in the economy, the US dollar seems to be almost exactly inversely related to the stock market, which allows you to preserve your wealth during inflation or deflation. If there is an increase in the money supply, the US dollar falls, which is bad, but companies can charge higher prices and the stock market should rise. However, if there is a massive contraction in the money supply then stocks will plummet but US dollars should go up because of the dollar's increasing scarcity. Holding currency then is the best way to ride out what is looking like a period of deflation or, as one person calls it, stagdeflation.

14 March 2009

Random Excuse Generator

Some co-workers asked me to go out with them on a Friday night and I was really quite tired, so I needed to come up with an excuse. I googled around for a random excuse generator on the Internet, and while I could not find anything useful, I did find this interesting Youtube video.

12 March 2009

Critique of Buy and Hold

On the train to work today I was listening to a Bloomberg podcast with Zvi Bodie. He claimed that the biggest myth out there in the investing world--a myth that has plunged many mom-and-dad investors into poverty--is if you buy diversified shares (e.g. through a stock mutual fund or stock index fund) and hold for the long run then somehow, simply by holding for a long time, risk is eliminated. Zvi claims that this goes against financial theory and cannot be.

More return means you take on more risk. This is a fundamental law of financial economics. If this were not the case (e.g. if stock returns in the long run were no more risky than Treasury bond returns) then arbitrage will ensure that this will no longer be the case. Bonds will give you, say, 5% in the long run. Many claim stocks will give you 10% in the long run, beating bonds.

If stock returns are double the return of bonds in the long run and just as safe, in an efficient market, individuals would perform risk arbitrage, buying bonds from investors, using those bonds to buy stocks, wait for a long time, get 10% returns from those stocks, sell those stocks, pay back 5% in bonds to the bond investors, and then pocket 5% profit. In an efficient market where participants have information about risk, this cannot happen.

Stocks then must be riskier than bonds and the long run does not diminish the risk.