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	<title>Europe &#8211; Alpha Strategy Consulting</title>
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	<item>
		<title>Three Risks For European Banks</title>
		<link>https://alphastrategyconsulting.com/three-risks-for-european-banks/</link>
					<comments>https://alphastrategyconsulting.com/three-risks-for-european-banks/#respond</comments>
		
		<dc:creator><![CDATA[Daniel Rodríguez]]></dc:creator>
		<pubDate>Fri, 05 Jun 2020 22:11:01 +0000</pubDate>
				<category><![CDATA[Finance & Markets]]></category>
		<category><![CDATA[banks]]></category>
		<category><![CDATA[Daniel Lacalle]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[european banks]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[on the cover]]></category>
		<guid isPermaLink="false">https://alphastrategyconsulting.com/?p=7114</guid>

					<description><![CDATA[The measures implemented by governments in the Eurozone have one common denominator: A massive increase in debt from governments and the private sector. Loans lead the stimulus packages from Germany to Spain. The...]]></description>
										<content:encoded><![CDATA[<p>The measures implemented by governments in the <strong>Eurozone </strong>have one common denominator: <strong>A massive increase in debt from governments and the private sector</strong>. Loans lead the stimulus packages from Germany to Spain. The objective is to give firms and families some leverage to pass the bad months of the confinement and allow the economy to recover strongly in the third and fourth quarter. This bet on a speedy recovery may put the troubled European banking sector in a difficult situation.<span id="more-7114"></span></p>
<p>Banks in Europe are in much better shape than they were in 2008, but that does not mean they are strong and ready to take billions of higher risk loans. European banks have reduced their non-performing loans, but the figure is still large, at 3.3% of total assets according to the European Central Bank. Financial entities also face the next two years with poor net income margins due to negative rates and very weak return on equity.</p>
<p>The two most important measures that governments have used in tis crisis are large loans to businesses partially guaranteed by the member states, and significant jobless subsidy schemes to reduce the burden of unemployment. Almost 40 million workers in the large European nations are under a subsidized jobless scheme, according to Eurostat and Bankia Research. Loans that add up to 6% of the GDP of the Eurozone have been granted to let businesses navigate the crisis. So, what happens if the recovery is weak and uneven and the third and fourth quarter growth figures disappoint, as I believe will happen? First, the rise in non-performing loans may elevate the total figure to 6% of total assets in the banking sector, or 1.2 trillion euros. Second, up to 20% of the subsidized unemployed workers will probably join full unemployment, which may increase the risk in mortgage and personal loans significantly.</p>
<p>Banks may face a tsunami of problems as three factors collide: rise in non-performing loans, deflationary pressures from a prolonged crisis and central bank keeping negative rates that destroy banking profitability. We estimate a rise in net debt to EBITDA of the largest corporations of the Stoxx 600 soaring to 3x from the current 1.8x. This means that banks may face a wall of delinquencies and weakening solvency and liquidity in the vast majority of their assets (loans) just as deflationary pressures hit the economy, growth weakens and the central bank implements even more aggressive but futile liquidity measures and damaging rate cuts.</p>
<p>This combination of three problems at the same time may generate a risk of a financial crisis created by using the balance sheet of banks massively to address the bailout of every possible sector. It may undo the entire improvement in the balance sheet of the financial entities achieved slowly and painfully in the past decade and destroy it in a few months.</p>
<p>Weakening the balance sheet of banks and hiding larger risk at lower rates in their balance sheets may be an extremely dangerous policy in the long run. Governments have pushed banks to give loans to businesses and families with very challenging financial conditions and this may come back like a boomerang and hit the European economy where 80% of the real economy is financed by the banking sector, according to the ECB.</p>
<p>Governments should have taken more prudent measures and address the covid-19 crisis with tax cuts and grants and not so much through massive loans, even if those are partially guaranteed by the states. If the sovereign debt crisis starts to creep again, there will be a fourth risk that may damage banks and the financing of the real economy.</p>
<p>The response of banks in this crisis has been positive but may be too much too soon and clearly, they are taking too much risk at too low rates. So far, financial entities are being prudent and have made large provisions to strengthen the balance sheet. However, these provisions may need to be doubled in the next quarters.Taking measures to avoid creating a financial crisis from these extreme policies will be critical to avoid a larger problem in 2021-2022.</p>
]]></content:encoded>
					
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			<slash:comments>0</slash:comments>
		
		
			</item>
		<item>
		<title>To Avoid European and Japanese Economic Stagnation, U.S. Should Adopt More Disciplined Fiscal and Monetary Policies</title>
		<link>https://alphastrategyconsulting.com/to-avoid-european-and-japanese-economic-stagnation-u-s-should-adopt-more-disciplined-fiscal-and-monetary-policies/</link>
					<comments>https://alphastrategyconsulting.com/to-avoid-european-and-japanese-economic-stagnation-u-s-should-adopt-more-disciplined-fiscal-and-monetary-policies/#respond</comments>
		
		<dc:creator><![CDATA[Daniel Rodríguez]]></dc:creator>
		<pubDate>Mon, 26 Aug 2019 06:00:47 +0000</pubDate>
				<category><![CDATA[Finance & Markets]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[US]]></category>
		<category><![CDATA[world economics]]></category>
		<guid isPermaLink="false">https://alphastrategyconsulting.com/?p=7019</guid>

					<description><![CDATA[The eurozone continues to demonstrate worrying signs of economic stagnation—due not to a lack of stimulus, but rather the opposite. Since the creation of the European Union, EU economic policies...]]></description>
										<content:encoded><![CDATA[<p>The eurozone continues to demonstrate worrying signs of economic stagnation—due not to a lack of stimulus, but rather the opposite. Since the creation of the European Union, EU economic policies have been defined by a never-ending series of fiscal stimulus measures accompanied by accommodative monetary policies.<span id="more-7019"></span></p>
<p>Now, in the United States, some politicians on the left are demanding that the U.S. government implement similar measures. In this context, it is important to analyze the risks to the American economy inherent in such policies by examining the impact they have had on the eurozone and Japan, where they have been implemented.</p>
<p>Evidence shows that centrally planned investments by the EU and Japanese governments and the politically directed stimulus spending by large private companies guided by those governments have resulted in their economies becoming generally less dynamic—with stubbornly high unemployment—while productivity growth and innovation have been stifled.</p>
<p>To avoid that fate, U.S. policymakers should take the opposite tack: On fiscal policy, budget discipline should be reestablished to reduce deficits and tackle out-of-control entitlements. Meanwhile, monetary policy should eschew discretionary measures aimed at short-term political or economic gain and, instead, adopt a rules-based approach that focuses solely on price stability.</p>
<p>&nbsp;</p>
<h3>Ten Years, €3 Trillion: Little Return</h3>
<p>&nbsp;</p>
<p>Since the 2008 crisis, the balance sheet of the European Central Bank (ECB) has soared to 40 percent of eurozone gross domestic product (GDP), interest rates are below the zero bound, and the ECB has purchased up to 20 percent of the major eurozone economies’ debt as well as billions of euros of <a href="https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html (accessed July 30, 2019)" target="_blank" rel="noopener">corporate debt</a>.</p>
<p><i class="tooltip__arrow"></i>According to Eurostat, government spending remains elevated at <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php/Government_finance_statistics" target="_blank" rel="noopener">45.6 percent of GDP</a>.<span class="annotation__highlight" style="font-family: 'gotham a', 'gotham b';font-weight: 400;font-size: 0.6875rem;line-height: 0.6875rem;color: #0093d0;vertical-align: super"><span class="annotation-link annotation__label"><a id="_ftnref2" name="_ftn2"></a>2</span></span></p>
<p>Additionally, since 2008, several government-sponsored investment plans have been implemented. The €200 billion European Economic Recovery Plan of 2008 was designed to create “<a href="http://ec.europa.eu/economy_finance/articles/eu_economic_situation/article13502_en.htm" target="_blank" rel="noopener">millions of jobs in infrastructure, civil works, interconnections, and strategic sectors</a>.</p>
<p><i class="tooltip__arrow"></i>The Juncker Plan, also known as the Investment Plan for Europe, rolled out in 2014, tacking on another €360 billion euros to incentivize growth.</p>
<p>Meanwhile the European Union’s “<a href="https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32009L0028" target="_blank" rel="noopener">renewable energy directive</a>”of 2009 created the equivalent of a Green New Deal, with generous subsidy schemes to support investment in renewables and create green jobs. All told, since 2009, the eurozone has implemented a series of fiscal and monetary stimulus programs totaling more than <i>€4 trillion</i>.</p>
<p>The results of all that spending have been disappointing, to put it mildly. Eurozone growth estimates have been slashed numerous times, and the current ECB forecast is nearly 50 percent lower than the forecast presented <a href="https://www.ecb.europa.eu/pub/pdf/other/ecb.ecbstaffprojections201803.en.pdf" target="_blank" rel="noopener">just one year ago</a>—a weak growth rate of 1.2 percent for 2019 with 1.4 percent growth forecast in <a href="https://www.ecb.europa.eu/pub/projections/html/index.en.html" target="_blank" rel="noopener">2020 and 2021</a>.</p>
<p>Unemplyment ismore than double U.S. unemployment. According to the European Commission, the percentage of people at risk of poverty is <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php/People_at_risk_of_poverty_or_social_exclusion" target="_blank" rel="noopener">still above the 2008 level</a>. And median household income statistics in the EU compared to the poverty line show that a person at 60 percent of median income in the U.S. enjoys a larger income than the median household of <a href="https://mises.org/wire/poor-us-are-richer-middle-class-much-europe" target="_blank" rel="noopener">many eurozone countries</a>.</p>
<p><i class="tooltip__arrow"></i>Massive, politically directed energy initiatives have also burdened EU countries with electric and natural gas prices that are more than double those in the United States. In 2016, household electricity prices averaged 26.6 cents per kilowatt hour (c/kWh). in the euro area versus 12.7 c/kWh in the U.S.</p>
<p>&nbsp;</p>
<h3><i class="tooltip__arrow"></i>Hidden Stimulus Spending</h3>
<p>&nbsp;</p>
<p>Before the eurozone can heal from this economic stagnation, the disease must first be correctly diagnosed. Part of that diagnosis means examining how EU governments have disguised some of their stimulus efforts through their demands for ever more monetary stimulus from the ECB to finance bloated public expenditure budgets at unsustainably low interest rates. The majority of eurozone countries’ five-year bond yields are negative. This has become a hidden subsidy to finance inefficient government spending on the backs of those bondholders.</p>
<p>Furthermore, this borrowing has generated a significant crowding-out effect. While governments finance their deficits at negative rates and their debt-to-GDP ratios remain elevated, new credit extended to households and corporations <a href="https://www.oecd.org/cfe/smes/Highlights-Financing-SMEs-and-Entrepreneurs-2018.pdf" target="_blank" rel="noopener">remains weak</a>.</p>
<p>A high tax wedge in the private sector to finance large budget deficits is also a source of lost <a href="https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2019.html" target="_blank" rel="noopener">competitiveness</a>.</p>
<h3>Japan’s Economy: Long Stagnant, Same Reasons</h3>
<p>&nbsp;</p>
<p>After its real estate bubble burst at the end of the 1980s, the Japanese government decided to implement a series of misguided stimulus plans that have resulted in almost three decades of stagnation and a less dynamic economy. Additionally, the Bank of Japan has been implementing expansionary policies since 2001.</p>
<p>Between 1991 and late 2008, Japan spent $6.3 trillion on “construction-related public investment,” which significantly contributed to the country’s <a href="https://www.city-journal.org/html/if-you-build-it-14606.html" target="_blank" rel="noopener">stagnation</a>, high debt, and weaker productivity growth.</p>
<p>The International Monetary Fund places Japan again among the 20 economies with the lowest growth for 2019—and estimates for 2020 still <a href="https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019" target="_blank" rel="noopener">show very weak growth</a>.<span class="annotation__highlight" style="font-family: 'gotham a', 'gotham b';font-weight: 400;font-size: 0.6875rem;line-height: 0.6875rem;color: #0093d0;vertical-align: super"><span class="annotation-link annotation__label"><a id="_ftnref15" name="_ftn15"></a>15</span></span></p>
<p>The first problem in Japan is the enormous debt. Revenues cover only an estimated 69 percent of budgeted expenses in 2019 according to the Japanese <a href="https://www.mof.go.jp/english/budget/budget/index.html" target="_blank" rel="noopener">Ministry of Finance.</a><span class="annotation__highlight" style="font-family: 'gotham a', 'gotham b';font-weight: 400;font-size: 0.6875rem;line-height: 0.6875rem;color: #0093d0;vertical-align: super"><span class="annotation-link annotation__label"><a id="_ftnref16" name="_ftn16"></a>16</span></span></p>
<p>The rest will be financed by issuing more debt, which already exceeds <a href="https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORLD/JPN" target="_blank" rel="noopener">254 percent of GDP</a>.</p>
<p>Nearly one-quarter of the budget goes to interest payments, even though Japan’s cost of debt is very low. Constant monetary stimuli have resulted in diminishing returns and a dangerous risk. The Bank of Japan’s balance sheet now <a href="https://www.reuters.com/article/us-japan-economy-boj/bank-of-japans-balance-sheet-now-larger-than-countrys-gdp-idUSKCN1NI07Z" target="_blank" rel="noopener">exceeds 100 percent of GDP</a> and it owns <a href="https://www.reuters.com/article/us-japan-economy-boj/kuroda-defends-japan-central-banks-etf-buying-sees-no-near-term-exit-idUSKBN1O602Q" target="_blank" rel="noopener">77 percent of the country’s exchange-traded funds</a>.</p>
<p>The Japanese budget vividly illustrates the demographic and government spending challenges that Japan faces—challenges that Europeans should study and seek to avoid. Problems resulting from the combination of excessive government deficit spending and a rapidly aging population will not be solved with yet more fiscal and monetary stimulus. Pensions and health care entitlements eat up more than 40 percent of the budget.</p>
<p>Japan has a low unemployment rate, but it has been low for many decades due to a smaller working-age population and cultural barriers to immigration that keep the labor market tight. Even so, Social Security contributions fail to cover even a portion of Japanese government expenditures on public pensions. This shortfall is <a href="https://www.oecd.org/japan/PAG2017-JPN.pdf" target="_blank" rel="noopener">even more ominous since, at 40 percent</a>, <i class="tooltip__arrow"></i>Japan has one of the lowest pension replacement rates in the world (the percentage of the last salary paid as public pension). Monetary policy and government stimulus do not guarantee pensions, which have been cut in Japan numerous times due to the u<a href="https://japantoday.com/category/features/kuchikomi/beware-your-pension-is-vanishing" target="_blank" rel="noopener">nsustainability of the system.</a><button class="tooltip__close heritage-icon-lightbox_close"></button><i class="tooltip__arrow"></i></p>
<p>These dreadful statistics provide a useful rebuttal to the left’s arguments that higher taxes and additional monetary stimulus can sustain pensions.</p>
<p>&nbsp;</p>
<h3>The EU and Japan: Cautionary Examples</h3>
<p>&nbsp;</p>
<p>The evidence shows that the worst that the United States could do at this juncture is to copy the combination of high government spending, politically directed stimuli, and negative rates. The United States economy faces numerous challenges, of course, and is far from perfect, but dramatically increasing governmental and central bank intervention would solve none of its problems. Regrettably, the Federal Reserve seems to be ignoring that reality as it launches another round of more accommodative monetary policy.</p>
<p>The main warning sign for America from the eurozone and Japan is that large government-sponsored plans and other forms of state intervention do not reduce a developed country’s debt burden. On the contrary, they worsen it. Eurozone countries have saved more than €1 trillion euros in interest expense because of the ECB’s long-standing quantitative easing and loose monetary policies, but they have squandered those savings to perpetuate imbalances.</p>
<p><i class="tooltip__arrow"></i>Even a moderate rise in yields could trigger a financial crisis in Europe, just as it did from 2009 to 2012. The combination of negative rates and high spending has not delivered stronger growth, more jobs, or higher productivity. It is not difficult to reach the conclusion that the eurozone economy is less dynamic, more fragile, and less productive than the United States precisely because of the negative effects created by constant government and central bank intervention in what is effectively a cronyist scheme to transfer wealth from the productive sectors to the indebted and inefficient sectors.</p>
<h3>Back to Basics: Re-instilling Fiscal and Monetary Discipline</h3>
<p>If America wants to address its jobs, productivity, and debt challenges, its political leadership needs to study the European Union and Japan as examples of exactly what not to do. That means Congress and the Administration should:</p>
<ul>
<li><b>Balance the budget and stop using the nation’s “credit cards”</b> to fund out-of-control spending that drives deficits ever higher and sticks future generations with the bill and</li>
<li><b>Require the Federal Reserve to adhere to a rules-based policy</b> that will greatly improve the transparency and predictability of U.S. monetary policy.</li>
</ul>
<p>Disguising risk and perpetuating economic imbalances has not made the European Union stronger ahead of an inevitable downturn in the business cycle. Instead, EU policies have made Europe economically weaker. If the United States wants to continue to lead the world in prosperity and economic growth, it needs less interventionism, not more.</p>
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		<title>Greece: defeat of populism at the hands of reality</title>
		<link>https://alphastrategyconsulting.com/greece-defeat-of-populism-at-the-hands-of-reality/</link>
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		<dc:creator><![CDATA[Daniel Rodríguez]]></dc:creator>
		<pubDate>Mon, 08 Jul 2019 20:39:54 +0000</pubDate>
				<category><![CDATA[Finance & Markets]]></category>
		<category><![CDATA[EU]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[finance]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[Syriza]]></category>
		<guid isPermaLink="false">https://alphastrategyconsulting.com/?p=7002</guid>

					<description><![CDATA[The defeat of Tsipras in Greece is the loss of those who came to power promising that two plus two would equal twenty-two, of paper promises and policies that harm those that...]]></description>
										<content:encoded><![CDATA[<p id="paragraph_2"><span class="">The </span><strong><span class="">defeat of Tsipras in Greece</span></strong><span class=""> is the loss of those who came to power promising that two plus two would equal twenty-two, of paper promises and policies that harm those that they pretend to protect.</span><span id="more-7002"></span></p>
<p id="paragraph_5">The example of Greece is very useful to other European nations.</p>
<p id="paragraph_6"><strong>First. </strong>Marxist populism is not defeated by whitewashing it. <span class="">The main reason why Syriza came to power was that the social democratic and the conservative parties implemented the wrong policies for years. </span>Between 1976 and 2012, public employment multiplied by three while private employment increased by only 25%. More than 70 loss-making public companies while government spending stood at an average of 49% of GDP since 2004. Greece, faced with the failure of Keynesian policies, embraced populism that, instead of correcting previous mistakes, promised a lot more of the same.</p>
<p id="paragraph_7"><strong>Second. </strong>Populism arrives promising wealth for all with policies of misery. Syriza promised all kinds of magic solutions, from not paying the debt to threatening to leave the euro when not a single Greek citizen would accept depreciated drachmas. What they delivered was a bank run and sending the country into a deeper recession. Syriza´s fantasy and arrogance, coupled with the childish promises of Tsipras, were confronted by reality. If Greece had abandoned the euro it would have become a European Venezuela.</p>
<p id="paragraph_8"><strong>Third</strong>. They promise taxes to the rich and raise taxes to everyone. Tsipras and Syriza leave Greece with unemployment of 18.1%, a debt of 176.1% and a deficit that rise again. But, above all, they leave tax increases for average workers. Under Tsipras, the <a href="http://www.macropolis.gr/?i=portal.en.features.8250" target="_blank" rel="nofollow noopener noreferrer">tax wedge for workers has risen to the thirteenth place in the world</a>. A single worker pays 40.9% of taxes. Even the farmers of the country were demonstrating after the tax assault that the Tsipras government imposed. A farmer who earns 5,000 euros a month has to pay up to 4,000 in taxes and social security, <a href="http://www.ekathimerini.com/225215/article/ekathimerini/news/central-greece-farmers-step-up-protests" target="_blank" rel="nofollow noopener noreferrer">according to the Greek Union of Farmers</a>. The Syriza government increased income tax by 70% to farmers and raised it to 44% for those who earn 40,000 euros or more.</p>
<p id="paragraph_9">Syriza has raised taxes to the middle class to subsidize its political cronyism, something that even the finance minister ended up recognizing and <a href="https://www.thenationalherald.com/224525/greek-middle-class-faces-another-tax-hammering-in-2019/" target="_blank" rel="nofollow noopener noreferrer">led Tsipras to promise (late) tax cuts to attract investment and employment</a> and to promise not to lower pensions again.</p>
<p id="paragraph_10"><strong>Fourth. </strong>Goodbye pensions. Syriza has carried out the largest pension cuts in Greek democracy. Today the Greek pensions are between <a href="http://www.ekathimerini.com/218149/article/ekathimerini/business/pensioners-network-lists-23-cuts-inflicted-on-benefits">25% and 40% lower</a> than those before Syriza arrived … And Tsipras expected to be voted again saying that he was not going to lower them anymore.</p>
<p id="paragraph_11"><strong>Fifth. </strong>The country is fed up the populists blame everyone except themselves. A few will say that the above-mentioned policies were imposed on Tsipras yet he did not resign, he stayed in power, implemented massive tax increases and pension cuts and expected everyone to thank him for continuing to rule the country.</p>
<p>Marxist populism, as always, promised heaven and delivered hell, has devastated pensioners and the middle class and has not cut a single euro of political spending.</p>
<p>Someone will say that next time will be different.</p>
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		<title>The New Green Deal Is Just Old White Elephants</title>
		<link>https://alphastrategyconsulting.com/the-new-green-deal-is-just-old-white-elephants/</link>
					<comments>https://alphastrategyconsulting.com/the-new-green-deal-is-just-old-white-elephants/#respond</comments>
		
		<dc:creator><![CDATA[Daniel Rodríguez]]></dc:creator>
		<pubDate>Fri, 15 Feb 2019 07:39:32 +0000</pubDate>
				<category><![CDATA[Finance & Markets]]></category>
		<category><![CDATA[economy]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Green Deal]]></category>
		<category><![CDATA[USA]]></category>
		<guid isPermaLink="false">https://alphastrategyconsulting.com/?p=6967</guid>

					<description><![CDATA[What happens when politicians see that their monster stimuli have not delivered? They bring the next rabbit out of a hat. They need a new name and a new magic...]]></description>
										<content:encoded><![CDATA[<p>What happens when politicians see that their monster stimuli have not delivered? They bring the next rabbit out of a hat. They need a new name and a new magic solution to make citizens believe in the magic of demand-side policies despite the constant failure of those same plans.<span id="more-6967"></span><span id="more-9333"></span></p>
<p><strong>Take the Eurozone examples:</strong></p>
<p>A huge stimulus in 2008 in a “growth and employment plan”. A stimulus of 1.5% of GDP to create “millions of jobs in infrastructure, civil works, interconnections, and strategic sectors”. 4.5 million jobs were destroyed and the deficit nearly doubled. That was after the crisis because between 2001 and 2008, money supply in the Eurozone doubled. The Eurozone has been a chain of stimuli since day one.</p>
<p>The so-called “Juncker Plan” or  “Investment Plan for Europe” hailed as the “solution” to the European Union lack of growth was the same. It raised 360 billion euros, many for white elephants.  Eurozone growth estimates were slashed, productivity growth stalled and industrial production fell in December 2018 to three-year low levels.</p>
<p>The Eurozone’s massive “green” policy plan has made the European Union countries suffer <a href="http://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Electricity_prices_for_household_consumers,_first_half_2017_%28EUR_per_kWh%29">electricity and natural gas bills</a> for households that are more than double those of the US, and unemployment is still twice that of the United States, while growth stagnates. In 2016 household electricity prices averaged 26.6 c/kWh in the Euro area and 12.7 c/kWh in the US.</p>
<p>Let us start debunking some myths about this last rabbit out of the interventionists’ hat.</p>
<p><strong>No, it is not a New Deal, and it should not be.</strong></p>
<p>When FDR launched the New Deal the size of government, public spending and debt were nowhere close to today’s elevated levels.</p>
<p>At the height of the New Deal, federal spending never went above the 1934 level of 10.7%.  Even considering the extraordinary cost of the Second World War period, public sending went from a maximum of 43.6% down to 11.6% by 1948.</p>
<p>Not just that. The public sector had very little debt, a maximum of 45% of GDP.  Compare that with an already unsustainable annual deficit that does not fall below half a trillion dollars, and debt to GDP of close to 100%.</p>
<p>In an insightful study titled “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis”, two economics professors from UCLA, Harold L Cole and vice chair of the Economics Department Lee Ohanian determined that the anti-competition and supposedly pro-employment policies of the New Deal destroyed the possibilities for economic recovery. The two economists concluded that if these policies had not been enacted the depression would have ended in 1936 instead of 1943.<br />
In the 1930s, the unemployment rate never fell below 15%. Five years after starting his “New Deal”, Roosevelt’s economic policies had caused one in five active Americans to be without a job. In 1937 there were 6 million unemployed and by 1938 that figure was 10 million people. In the end, it was the Second World War that “ended “unemployment. How? By forcibly recruiting 20% of the active population to work in the war industry, and by spending the equivalent of 42% of GDP on the entire effort. One significant problem was that during those years inflation which rose to almost 20% and even with 1% unemployment there was rationing of basic consumer goods. The US truly emerged from the depression when, at the end of the war, it abruptly cut taxes by one-third and began paying off the debt.</p>
<p>This may begin to sound familiar to you. The New Deal was yet another example of promising freedom and delivering repression.</p>
<p><strong>It is not “Green”.</strong></p>
<p>The US is already the second top market for renewable investment according to <a href="https://www.forbes.com/sites/williampentland/2018/05/01/u-s-becomes-second-most-attractive-country-for-renewable-energy-says-new-study/#3f5a007a2223">EY</a>.</p>
<p>Renewable and green investments are already flourishing without the need for politicians to interfere. In fact,  the US is investing more than $40 billion per annum in renewables, and if we add infrastructure and energy efficiency, the US is still the top global destination of productive investment in green energy, technology, and infrastructure.</p>
<p>The US has been able to reduce CO2 emissions while the European Union with the largest subsidy plans and high tax on CO2<a href="https://reason.com/blog/2018/05/04/us-carbon-dioxide-emissions-down-europea"> increased them</a>.  The US has achieved more in developing renewables, technology and energy efficiency without massive tax and bill increases. There is nothing “green” on a central planner’s decision to inflate GDP via public spending. it is the opposite. It artificially increases energy and capital utilization to create false demand signals that end up being bubbles that hurt the economy and make it less dynamic.</p>
<p>There is no need for a Green New Deal. We are already living a  period of rising government spending, too high deficits, and debt. Innovation and technology disruption are reducing the energy intensity of GDP faster than any government can ever decide.</p>
<p>Why? Because politicians and governments do not have more or better information about the needs of the economy, consumers or about the pace of innovation and technology implementation. In fact, governments havce every incentive to inflate GDP at any cost, pass the bill to consumers and the debt to taxpayers.</p>
<p><strong>Governments of any colour or ideology do not benefit from technology innovation, energy efficiency, and substitution.</strong> Why? Because those are disinflationary factors and the short-term effect is always of creative destruction of obsolete industries… Those that they aim to preserve at any cost. If governments truly cared about the climate and environment they would shut down the most polluting industries, which are all state-owned or government concessions.</p>
<p><strong>There is only one way in which governments benefit from massive stimuli: Inflating GDP building massive construction projects. Increasing inflation by artificially pumping more capital spending and energy use. That is and has never been green, innovative or disruptive. Just plain old interventionism.</strong></p>
<p>This will not be the first or last time that we question the merits of enormous government plans. As we have shown on so many occasions, huge spending on white elephants is partially responsible for global stagnation and excessive debt. Huge pharaonic works that promise billions of dollars of growth, jobs, and benefits that, subsequently, are not achieved, leaving a trail of debt and massive operating costs.</p>
<p>Proponents of the mega-stimulus plans ignore the importance of real economic returns in favor of “inflating GDP” in any possible way. A study by <a href="http://capx.co/chinas-growth-gamble-isnt-paying-off/" target="_blank" rel="noopener noreferrer">Deepak Lal</a> , UCLA professor of international development, discusses the devastating impact on potential growth and debt of stimulus plans in China, and Edward Glaeser’s ” <a href="http://www.city-journal.org/html/if-you-build-it-14606.html" target="_blank" rel="noopener noreferrer">If You Build</a> ” analysis destroys the myth repeated by many of the multiplier effects of public infrastructure. Advocates of infrastructure spending at any cost ignore the most basic cost-benefit analysis, underestimating the cost and magnifying the estimated benefit through science-fiction-multipliers.</p>
<p>Professors <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406852" target="_blank" rel="noopener noreferrer">Ansar and Flyvbjerg</a> have also devoted a great deal of effort to <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406852" target="_blank" rel="noopener noreferrer">analyzing</a> the negative effect of large “stimulus” plans from hydraulic megaprojects to the organization of the <a href="http://eureka.sbs.ox.ac.uk/4943/1/SSRN-id2382612_%282%29.pdf" target="_blank" rel="noopener noreferrer">Olympic Games.</a></p>
<p><a href="http://www.business-standard.com/article/opinion/deepak-lal-china-s-debt-fuelled-infra-model-116092701191_1.html" target="_blank" rel="noopener noreferrer">Deepak Lal’s</a> study citing Professors Ansar and Flyvbjerg shows that the actual cost-benefit analysis compared to the “estimated returns” when projects are approved, proves to be disastrous. Fifty-five percent of the analyzed projects generated a profit-to-cost ratio of less than one, that is, they created real losses. But, of the rest, only six projects of those analyzed showed positive returns. The rest, nothing. The economy does not grow more, it makes the economy weaker.</p>
<p>The only Green New Deal that works is governments stepping aside and letting the private sector deliver the technology and innovation required. It is already happening.</p>
<p>Of course, there are infrastructure, technology and green economy investments that make sense. They are being implemented as you read this article. The rest is just plain old white elephants for the glory of politicians… with your money.</p>
<p>And no, this time will not be different.</p>
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