Transitioning

This is a story of institutional investors stepping forward to accelerate the shift to a net-zero carbon economy. It is surely an encouraging development, demonstrating that not all, or even most, of the funding for economic adaptation to a greener world needs to come from governments. Individuals and companies can act on it too.

Canada’s Brookfield Asset Management Inc. announced this morning significant funding of its Global Transition Fund, a partnership whose mandate is to invest in entities that modify their operations so as to reduce greenhouse-gas emissions, decrease energy consumption, or increase low-carbon energy capacity. The Fund is co-managed by Mark Carney, former Governor of first the Bank of Canada and then the Bank of England, and Connor Teskey, CEO of Brookfield Renewables.

Brookfield’s funding goal for its Transition Fund is US$12.5 billion, which would make it the world’s largest pool of private money addressing climate change. About $7 billion is now committed, principally from Ontario Teachers’ Pension Plan Board, and Temasek, Singapore’s sovereign wealth fund, both of which will also invest directly along with the Fund, and both of which have pledged to achieve zero emissions in their holdings by 2050.

In a statement, Mark Carney clearly described the strategy and challenge of the Fund. “Enabling the transition will require global reach, large-scale capital, and deep operating expertise in renewable energy and decarbonization.”

No doubt Mr. Carney will have much more to say as he prepares, in his other role as United Nations Special Envoy on Climate Action and Finance, for November’s United Nations climate summit in Glasgow.

Global Pandemic Response

In a new blog out this morning, Geoffrey Okamoto, First Deputy Managing Director of the IMF, summarizes the financial response by governments since the pandemic began in March 2020. Policymakers’ actions have been unprecedented.

Thus, fiscal support (government expenditure and tax policies) is estimated to have totalled $16 trillion globally. Central banks, through their combined policies of quantitative easing (the buying of government bonds to increase the money supply and lower bond yields) have grown their balance sheets by some $7.5 trillion. Government deficits (measured as a percentage of GDP) are at their highest since the second World War, and central banks’ infusion of liquidity this past year alone exceeds that of the past ten years combined.

The IMF notes that this was “absolutely necessary”. In its absence, the 2020 recession, the worst since the Great Depression of the 1930s, would have been three times worse. As it is, global output has dropped some $22 trillion as a result of Covid-19, relative to what the Fund expected in January 2020.

Looking forward, the IMF notes that policymakers must now transition from saving economies from collapse to strengthening economies with growth-oriented reforms. A “growth-reform tailwind” would contribute to repaying the debts incurred, providing room for critical private investment and reducing the need to raise taxes. For emerging countries, where policy space is depleted, growth-oriented reforms can be sufficiently robust to at least avoid harsh short-term fiscal austerity.

Recovery will take years. But as the urgency to vaccinate diminishes, there is now a perhaps unique opportunity for policymakers to seize the challenge by introducing albeit difficult growth reforms across financial and labor markets.

Market Evolution

Here’s a “gotta love the free market” story.

Amazon Marketplace, through which $300 billion of product was sold in 2020 by third-party retailers, would rank as the forty-second largest economy in the world by GDP. There are now so-called “roll-up” companies that are buying these mostly small third-party Amazon sellers, aggregating them into larger entities, thereby providing financial heft to further their growth. One such company, Acquco, is giving away $10 million worth of Teslas, one to anyone who refers a company that they end up buying.

Plan Now

Tragically, the pandemic remains front and centre in the hourly, daily and monthly news. It’s a fast-changing reality: more infectious mutations of the virus have emerged, the roll-out of vaccinations remains sluggish at best, and lockdowns of entire economies have resumed or are imminent as hospitalizations and deaths continue to climb and overwhelm healthcare workers.

Thus, and rightly so, the world is focused on approving, manufacturing and distributing vaccines. There is little if any discussion, however, pertaining to what the long-term effects of these new vaccines might be, including the duration of their effectiveness. And similarly, the extraordinary fiscal and monetary measures, taken by policymakers in response to the pandemic, have been introduced then expanded with scant regard to how the resulting massive government deficits and bloated central bank balance sheets can eventually be unwound.

Fo example, look at central bank balance sheets, swollen by years of purchases of government debt, an exercise designed to lower long-term interest rates (so-called “quantitative easing” or QE). The issue here is not efficacy - long-rates were indeed lowered and have been kept so. The question is how and when this exceptional monetary easing should be relaxed then reversed post-pandemic.

The risk associated with QE lies with the prospect of a resurgence of inflation. Low inflation underpins virtually all economic policy and financial markets, explaining why central banks can cut short rates to near zero or even negative, and buy massive amounts of government debt. Rich world public-sector debt of 125% of GDP is barely spoken of, and the hunt for yield has sent stock market indices to record highs, despite a raging pandemic.

A majority of economists think the odds of a sustained era of inflation emerging after the pandemic are low (though a short burst is possible - even likely - with aggregate demand jumping as economies re-open). But since the policy consequences of even some acceleration in price increases above the common 2% target are serious, governments should act now to mitigate the risk. Issue long-term debt, not the currently cheaper short-term variety, and begin an orderly reversal of QE now, even if that means taking short rates negative. If the pandemic has proven anything, it is that not planning for rare events can be catastrophic. A resurgence of inflation, which would require painful policy adjustments, should be no exception.

ASEAN +5

Even before the Covid pandemic, and even before the Trump administration’s “America First” trade wars, globalization - the ever-more-open system of trade, foreign direct investment and the flow of people that emerged in the 1990s - was slowing. The share of trade in world GDP had risen between 1990 and 2008 from 39% to 61%. As these flows expanded, real GDP per person in emerging countries began to rise dramatically, doubling from 1995 to 2019. But this contribution from trade began to falter after the global financial crisis, and by 2019 was still well below its 2008 peak. This year, global trade will fall even further. It is forecast to drop by perhaps 9-12%. as the pandemic has slammed world growth, massively increased unemployment, and encouraged governments to protect and foster what they identify as their own strategic industries, even reviving, in countries such as China and India, interest in the old development strategy of import substitution. It would seem reasonable, then, to ponder an end to something akin to a golden age of trade and emerging market growth.

All the more remarkable, therefore, is a (virtual) signing ceremony that happened today in Hanoi. The trade ministers of ASEAN (the Association of Southeast Asian Nations) - a 53-year-old, 10-nation regional economic and political group, frequently rife with internal disagreement, and at times not far from the brink of irrelevance - joined with their counterparts from China, Japan, South Korea, Australia and New Zealand to form what will be the world’s largest free-trade bloc. The China-backed deal, called the Regional Comprehensive Economic Partnership (RCEP), noticeably excludes India (which had pulled out of RCEP negotiations but is apparently still welcome to join) and the United States. Readers will recall that the Trump administration exited the Obama-led Trans-Pacific Partnership in 2017, thereby creating a big-power vacuum in the world’s fastest-growing region. That vacuum appears now to have been filled by China, thus re-emphasizing the broader question of America’s role in Asia. RCEP will “soon be ratified by signatory countries…accounting for 30% of the global economy, 30% of the global population, and reach 2.2 billion consumers”, said Vietnamese Prime Minister Nguyen Xuan Phuc . Tariffs will be eliminated within the group, some immediately, others over 10 years, with the Agreement marking the first time the regional powers of China, Japan and South Korea are in a single free-trade bloc.

The incoming Biden administration will be rightly focused on slowing the spread of the pandemic and distributing new vaccines. However, it would be short-sighted indeed for whomever becomes the new Secretary of State to ignore Washington’s engagement in Asia, and for whomever becomes the new Commerce Secretary to ignore the perils of protectionism.