How Green Was My Valley

The world is changing right in front of our eyes and politics are - finally - starting to reflect this.

In last Sunday's elections, voters in the German state of Baden-Wurttemberg elected a Green Party prime minister (governor) for the first time in the country's history, trouncing Mrs. Merkel's conservative CDU and significantly altering the wider political balance for the entire nation.  It should be noted that the state of Baden-Wurttemberg was a conservative party stronghold for 58 years in a row. The nuclear disaster in Japan doubtless had something to do with it, but I believe it was going to happen anyway. 

Germany is way ahead of every other major nation in shifting electricity generation to renewable/green sources.  In the past 25 years the entire increase in production has come from such sources (see chart below - click to enlarge).

 Chart: IEA

Germany - Going Green

So, yes, Germany's "valley" is very green, indeed.  Are the rest of us going to do something about it, or are we going to stay stuck in the past and suffer the consequences?

Oh, and if you're wondering: How Green Was My Valley is a classic film from 1941 about a Welsh coal -mining town.  From IMDb: "This story of a Welsh valley's turn-of-the-century descent from pristine paradise to despoiled coal mining region, is told in flashback form by Huw Morgan, an old man who has decided to leave the valley forever."

The World's Banzai! Moment

Banzai!: A traditional Japanese exclamation meaning "ten thousand years" (somewhat equivalent to our own "hooray!").  Often used in the context of a banzai attack, a last ditch desperate charge.

Centuries from now when historians examine our time, I imagine they will conclude it took an earthquake, a tsunami and a nuclear catastrophe for people to finally snap out of  their Permagrowth lethargy - the one  induced by rampant consumerism, excess debt and  the unchecked use of poisonous "black"  fossil and nuclear energy.  Japan may be featured as villain or angel, depending on which path it chooses to take after the current emergency is over.

Will it go green and reach for Sustainability, or will it stay black and remain blinded by Permagrowth?

First, let's look at where the country stands right now:

• Japan is one of the world's blackest nations energy-wise.  In 2008 97% of all energy supplied came from coal, oil, gas and nuclear sources (see chart below, click to enlarge). 

Chart: IEA

Japan: A Black-Energy Nation

•  Japan is one of the world's most highly indebted economies. In mid-2009 total debt stood at 472% of GDP, up from 245% in 1980 (see chart below, clock to enlarge).  The most rapid escalation came after 1990 as the government started borrowing heavily in an attempt to keep the Japanese  Permagrowth model running.  It failed, and the economy has been stagnant for years, no matter how many bridges to nowhere it built.  Importantly, most of this debt is internal and serviced from local savings, preventing outright collapse.  However, financing reconstruction after the earthquake-tsunami-nuclear disaster is another matter altogether.

Data: McKinsey Global Institute

Japan: A Country Awash In Debt

Right now, then, Japan is certainly a Permagrowth "villain".  But catastrophic events can often lead to radical change and - who knows? - in the aftermath Japan may well become a Sustainability "angel".  It already exhibits some sustainable-like elements: Japanese society is stable and technologically sophisticated, with zero population growth and high living standards.

When seen from the perspective of Permagrowth Japan is perceived as weak (e.g. no GDP growth);  but from the Sustainability viewpoint a weakness may very well be an advantage (e.g. zero population growth).

I sincerely hope that the Japanese people, justly famous for their stoicism and perseverance in the face of serious trouble,  cry "banzai!" and choose Sustainability for their reconstruction model.  If they do and succeed (which they will), it will be the entire world's Banzai Moment.

Assuming this happens, then renewable energy will be a big winner.  I recently bought some shares in FAN, an exchange traded fund that tracks the ISE Global Wind Energy Index.  Given its recent bottom-scratching performance (see chart below, click to enlarge) I think it's a decent candidate for fans (pun smile) of long-term buy-low, sell-high strategies.

First Trust Global Wind Energy ETF

Yet Another Three Sigma Event

Not all natural catastrophes are as "natural" as they appear: the mega earthquake and tsunami in Japan may be as natural as they come, but the ongoing nuclear disaster is anything but..  

What has apparently happened is that, while reactors were  properly and safely shut down after the quake, the systems required to cool down their 6% residual fission had to operate on power supplied by diesel generators which, however,  were flooded by the tsunami and immediately knocked-out.  Oh yeah, they were NOT located on high ground, the plant designers relying instead on a seawall to protect them (ask any ship architect were emergency generators  must be placed).  

Then again, such monster 10 meter tsunami waves were not supposed to happen, right..? Now, does this ring the Nuclear Hubris Bell, or what? 

(If you do anything in the aftermath of this,  I  insist it is to read and apply Nicholas Taleb's extremely appropriately titled The Black Swan: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility")

Or, does it remind us of that other three-sigma event that was also never supposed to happen?  You know what I'm talking about: the sudden collapse of investment-grade alphabet-soup bonds which were transmuted from toxic waste into "ultra-safe" investments.

Before the global financial crisis hit,  I often compared the debt and derivatives situation to a chemical (or nuclear) reaction approaching a "critical" point.  Such a reaction may proceed for quite some time without any adverse effects, but if left unchecked it can create an explosion within a split second.

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A Graphic Representation of A Critical Reaction

High debt and nuclear power have something in common: they are inherently unstable, so no matter how "robust" you try to make their containment systems they can never be 100% safe.  Furthermore, the adverse effects from three-sigma accidents involving them are obviously widespread and dangerous to the extreme.  

So, why do we keep using them?  Why do we still fuel our Permagrowth economy with Debt and Nukes, instead of earned income and renewable energy?  I shall leave the answer to others, but I firmly believe it to be a huge mistake.

Private Debt Comparison: USA v. Greece

The "Greek Debt Crisis" is once again in the forefront since the EU leaders are meeting today and tomorrow - yet again - to figure out how to deal with it and the larger issue of debt and competitiveness inequalities across Europe.  The discussion on debt, however, focuses almost exclusively on government borrowing - a mistake, in my opinion.  

Here's a chart that compares Greek and US private sector debt (households and corporations) as a percentage of GDP (it excludes financial sector debt).  Note how fast Greek private debt rose once the country entered the eurozone: it literally exploded from 44% of GDP at the end of 2000 to 111% at the end of last year.  Membership to the club had its (extremely dubious) privileges.

Greek Private Sector Debt Zoomed (excludes financial sector debt)

This debt explosion fueled private consumption and, thus, GDP growth.  Does it sound familiar?  Of course it does;  in the last decade Greece and the US went "shopping" for their economic models at the exact same bargain store: Debts 'R Us.

For another (admittedly more questionable) comparison, in the next chart I include debt of the financial sector.  It changes our perspective, doesn't it?

This Chart Includes Financial Sector Debt

Including financial sector debt leads to double counting for some of the debt (e.g. securitized mortgage loans) and distorts the picture considerably.  However, it does provide a valid warning that has to do with inter-connectivity, counter-party risk and financial globalization (think Bear Stearns, Lehman and falling dominoes).

Let's hope that Europe's leading lights (smile) figure out a solution...

Update: After pulling an all-nighter, EU leaders agreed to extend the duration and lower interest  rates on Greek loans.  More intriguingly, they also agreed to allow the financial stability fund (EFSF) to purchase government bonds in the primary bond market, i.e. when new bonds are issued. 

This appears a pretty good compromise between outright purchases in the secondary market and no purchases at all.  Properly implemented, it will:
 
(a) Provide real incentive for over-indebted countries to put their financial houses in order fast so they can go back to borrowing from the free market, benefiting from the underlying purchase support. 
(b) Convince markets there is real commitment to help eurozone countries when and if needed, but keeps the pressure on governments to reform their economies.

In other words, it's a workable combination of carrot and stick - the latter being  absolutely necessary to appease Mrs. Merkel's angry German voters who objected to outright bond purchases in the secondary market, viewing them as bailouts for profligate Greeks.