{"text":[[{"start":6.1,"text":"In finance, wailers and preppers are always among us — they just change what they’re freaking out about depending on what resonates. The playbook and arguments often remain the same, though."}],[{"start":16.12,"text":"Thus it should be no surprise that past prophets of performance Armageddon due to climate change — hello central bankers, woke pension funds and right-on economists — now blame our impending financial doom on excessive government borrowing."}],[{"start":30.14,"text":"Who can blame them? Climate financial risk remains negligible. Investors have moved on. And few topics eclipse sovereign indebtedness these days. But you would have reckoned lessons were learnt. In fact, the same mistaken arguments are being pushed again."}],[{"start":44.86,"text":"The first is that debt implosions are going to happen soon — just as we were told to apply climate-risk discounts in our equity valuations immediately. Yes, bankruptcies happen fast at the end, as the old saying goes. But Japan’s government has run three-figure net debt-to-output ratios for over 15 years."}],[{"start":63.74,"text":"Carmen Reinhart and Kenneth Rogoff wrote a paper in 2010 that said economic growth collapses when debt-to-output ratios exceed 90 per cent. It turned out to be wrong, and not just because they famously made a calculation error. Oil and gas stocks haven’t collapsed from “transition risk” last time I looked either. Predicting is hard."}],[{"start":82.62,"text":"The second repeated error is obsessing over one side of the ledger. Ramming net zero down UK company throats when the country only produces 0.8 per cent of the world’s carbon is nonsensical, for example. Total emissions are what matters. A reduction there is the same as a reduction here. With debt, however, the distribution does count. But for the planet as a whole there is no problem. My liability is your asset and they match. Always look at both columns of any balance sheet."}],[{"start":110.46,"text":"Sovereign debts must be compared with all state assets too. In 2018 the IMF valued public assets across 31 countries at just over $100tn (220 per cent of output). McKinsey Global Institute data suggests that while global financial assets and liabilities cancel out, net non-financial assets exceed $600tn."}],[{"start":131.18,"text":"Too much focus on mitigation and not enough on adaptation is the third shared mistake. Climate risk obsessives prefer the former as it’s about reducing emissions in the first place. This is akin to calling on politicians to borrow and spend less."}],[{"start":146.58,"text":"But adaptation is the here and now; that means building sea walls and installing air conditioners. Similarly, nation states can do a lot to avoid being in the red. Financial repression is one popular move. Reinhart and Maria Belen Sbrancia found that in advanced economies real interest rates were negative roughly half the time from 1945 to 1980. For the US and UK, this torched debt at a rate of 3 to 4 per cent of output a year."}],[{"start":176.66,"text":"Allowing inflation to drift higher is another ruse, as is letting growth run hot — or, better yet, both. This approach was successful in lowering America’s postwar debt position. Changing the rules is another classic. In 1933 and 1971, US bondholders were “paid in full” but without the gold they were promised. Sorry!"}],[{"start":199.56,"text":"Then we have the printing presses. But these are only good if you want to stay solvent in your own currency. To avoid a real default in extremis requires getting your hands on resources such as commodities, precious metals or someone else’s cash."}],[{"start":213.98,"text":"From Emperor Trajan seizing Dacian gold to Saddam Hussein’s invasion of Kuwait to avoid paying back money lent for the Iran-Iraq war, this trick is as old as they come. Norway has a $2.3tn wealth fund and not even 25,000 troops. That may look pretty tempting for some teetering nation before the century is out."}],[{"start":233.98,"text":"Hopefully it won’t come to that. And if it doesn’t, the most likely reason is technological progress. Underestimating this is the fourth mistake the climate and debt doom-mongers make. Just as the cost of solar electricity has fallen more than 90 per cent since 2010, AI has the potential to ignite the denominator in debt-to-output ratios."}],[{"start":254.62,"text":"And if AI wipes us off the planet instead, the world’s debtors win regardless. Which brings me to the last common error of judgment in my view: the single-minded obsession with future generations, whose wealth, size, habits and desires we can never know. Putting their needs ahead of ours — by sacrificing growth and investment on the altar of distant goals — is not de facto good policy."}],[{"start":276.7,"text":"Who knows if indebted governments are about to pop? It’s happened plenty of times before. Just be mindful of the arguments for why they will — and how recently we’ve heard the same ones for another prediction that failed to materialise."}],[{"start":292.38,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1790566863_5009.mp3"}