The Key Reason Electric Vehicles Matter

While most of a recent Seeking Alpha article titled 'Plug-in Vehicles and Their Dirty Little Secret' with 444 comments and counting is correct, there's a lot more to the electric vehicle story than the author's focus on emissions would lead the reader to believe.

EV Emissions and the Present and Future Grid

From an emissions perspective, running your car on electricity is about 25% cleaner than a standard car that gets about 25 mpg. But compared to a hybrid that gets more like 45-50 mpg, electric cars produce more emissions (e.g., carbon).

It's also true that more charging will likely occur at night, when the power produced is more heavily coal-weighted. However, while charging at night is worse from an emissions perspective it is much better from a grid stability and grid transmission perspective.

It's also worth noting that the mix of generation sources that provide power to the grid is changing - it is getting cleaner. Coal's share of the gird (in the U.S.) has gone from ~55% in the late 1980s to ~45% today. This trend will continue, especially as the U.S. continues to retire many of its older coal plants and replaces them with natural gas power plants, and more wind/solar.

The Environmental Protection Agency continues to tighten emissions regulations on power plants, so even newer coal plants (the few that will get built) are much cleaner and more efficient than the current ones. So using today's grid mix in assessing EVs ignores the improvement in emissions we'll be seeing in the future as the grid becomes cleaner.

How Much Do Electric Cars Really Cost?

There is one misleading remark the author makes on cost: in many cases running your car on electricity is actually cheaper than gasoline. $3.00/gal gasoline for a car that gets 30 mpg = $0.10/mile. If that car ran on electricity, it would get about 3 miles / kWh, and so for an electricity cost of $0.12/kWh (the US average), that works out to only $0.04/mile, or 60% less.

But this is only one example. Californians pay a lot for electricity, so it could be more expensive to run the car on electricity. Note: PG&E is working on rate structures that make it cheaper to charge at night, thus helping improve the economics for electric cars.

However, the cost of battery packs is expensive, so if you amortize the cost of the battery pack over the lifetime mileage of the pack, then that cost/mile obviously goes up for EVs. But is it really fair to do that? Do we similarly amortize the cost of a gasoline engine, fuel system, tank, etc? No. But without question, these battery packs are expensive, so the costs of the cars will be higher.

Why Electric Vehicles Truly Matter

So what's really behind all this fuss about rechargeable cars? If it's not about saving money, and not about reducing emissions, then what's left?

Energy security.

The biggest challenge our worldwide energy system faces is the near complete monopoly that oil has on the transportation sector. We heat our homes using a variety of energy sources. We make electricity using a variety of energy sources. But when it comes to the 3rd category of energy consumption (transportation) it is essentially all oil.

And making things worse is the fact that the U.S. imports about 2/3 of its oil, and 40% of those imports come from OPEC. This is not a very encouraging situation for whole host of reasons and warrants a separate article.

Hybrids help reduce oil consumption, which is obviously good for reducing emissions, fuel costs, and it helps reduce dependence on oil imports. But it does little to break oil's monopoly on the auto and overall transportation sector.

We need to find alternatives to oil, and the longer we wait the more painful it will become.

(Note: for more information on electric vehicles check out MIT's EV team page here and this recent report from the MIT Energy Initiative.)

Bravo Sir John Vickers, the 'Too Big to Fail'-Slaying Hero

Sir John Vickers

As so often has been the case Great Britain is once again leading the way.

Sir John Vickers, head of the U.K.'s commission on banking reform, is making it clear that Too Big to Fail's days are numbered.

And the change can't come soon enough. Following Iceland's financial collapse, Britain's economy arguably became the world's most overbanked and vulnerable to an even greater systemic financial crisis than the most recent one.

The City of London is home to three of the world's five largest banks by assets (Royal Bank of Scotland, HSBC, and Barclays), and the total assets of the U.K.'s banking sector are approximately 5X the size of the nation's GDP (Iceland's banks' were 10X before its banks collapsed).

We wish Vickers luck with his efforts to put a stake through the heart of what I call 'Too Bigger to Fail' as it won't be easy sailing. Encouragingly, Sir John has proven himself to be capable of driving controversial and difficult institutional change; previously he was responsible for eliminating the notorious three hour exam on a single word at Oxford's ultra traditional All Souls College.

And we further hope that England's former compatriots across the Atlantic are taking note, for Britain can't do this alone. International cooperation and solidarity are crucial to solving this problem.

U.S. Debt Interest Payments to Surpass Defense Expenditures Within Decade

The Congressional Budget Office is estimating that annual interest payments on federal debt will more than double over the next decade to $778 billion.

Put another way, the U.S. will soon be paying federal debt interest (much of it to Asian and Middle East creditors) equal to the U.S.'s annual defense budget.

What assumptions lay behind the CBO's estimates? From the WSJ:

In 2010, it (the U.S. federal government) paid an average of about 0.1% interest on 3-month Treasury bills, and 3% on ten-year notes. Total net payments amounted to $197 billion, or 1.4% of annual economic output. That’s a bit more than what the government spent on unemployment insurance.

Low interest rates, however, won’t last forever — assuming the U.S. economy doesn’t succumb to long-term, Japanese-style stagnation. The CBO estimates that interest rates on 3-month bills and 10-year notes will reach 5.0% and 5.9%, respectively, by 2020. That, together with a rapidly rising debt load, would cause annual net interest payments to more than double by 2020 — to $778 billion, or a record 3.4% of GDP.

As bad as that sounds, I believe the CBO could be painting an overly optimistic scenario.

Whether the U.S. will actually be able to borrow long-term at a (historically) relatively low 5-6% interest rate in a decade's time is pure speculation by the CBO.

I'd also like to better understand why the CBO is projecting that U.S. interest rates across the yield curve will dramatically flatten? Right now the U.S. pays an interest rate of roughly 0.15% on 3-month borrowings, while the 10-year note is yielding 3.32%, for a difference of over 3% between short-term and longer-term borrowings. That's a pretty significant difference compared between the current level and the 0.9% difference the CBO is projecting in 2020.

If the U.S. continues its current debt trajectory is it reasonable to assume that it will be able to borrow long-term at a mere couple percentage points higher than today's levels?

Professor Barry Eichengreen is predicting that emerging financial powerhouses, such as China, will be able to offer a reserve currency alternative to the U.S. Dollar by 2020. The U.S. is undoubtedly realizing lower interest rates right now due to the European sovereign debt crisis, and the lack of any real alternatives to the U.S. dollar as the world's primary reserve currency and the unparalleled liquidity of the U.S. treasuries market. What will happen when (not if) the situation changes?

Interest rates can certainly rise faster and/or higher than the CBO is projecting. A recalculation by the bond market of the U.S.'s credit worthiness can occur suddenly, as we saw last year with Greece. Professor Niall Ferguson for one is predicting that a U.S. fiscal crisis, similar to the one experienced by Greece last year, will occur within 2-4 years.

Graphic of the Day: The U.S. Fiscal Crisis

Accompanying article at the FT.

Quote of the Day: Jim Rogers On Why He's Long Cotton

From legendary investor Jim Rogers:

“Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

More from Rogers, including his thoughts on gold, can be found here.

Ken Rogoff Forecasts "Currency Chaos" in 2011

Continuing the 'chaos' theme, thoughts on how various currencies will fare in 2011 can be found here from Ferguson's Harvard colleague Professor Ken Rogoff, author of This Time is Different.

Note to U.S. dollar bears: Rogoff points out that the U.S. dollar's "purchasing power is already scraping along at a fairly low level globally – indeed, near an all-time low, according to the Fed’s broad dollar exchange-rate index. Thus, normal re-equilibration to “purchasing power parity” should give the dollar slight upward momentum."

Video: Niall Ferguson -- Empires on the Edge of Chaos

Featured on FORA.tv, broken out in subject chapters in the links below. Be sure to check out the Q&A.


01.    Introduction    09 min 09 sec
02.    Niall Ferguson Opening Remarks    01 min 40 sec
03.    Historical Cycles of Empire Decline    07 min 07 sec
04.    Complexity Theory    08 min 20 sec
05.    Implications for the United States    06 min 22 sec
06.    Interest Payments as a Share of US Revenue    01 min 56 sec
07.    Failure of Perception    02 min 43 sec
08.    Debt Payment Overtaking Defense Spending    06 min 58 sec
09.    Q1: Healthcare Reform    04 min 10 sec
10.    Q2: China's Military Sustainability    02 min 38 sec
11.    Q3: Gold Investing    01 min 24 sec
12.    Q4: Political Stability of China    02 min 42 sec
13.    Q5: Children Teaching You About Debt / Radical Islam    03 min 57 sec
14.    Q6: Advice to Obama    02 min 40 sec
15.    Q7: Limits of Keynesian Stimulus    03 min 46 sec
16.    Q8: Better Leadership in the West    03 min 27 sec
17.    Q9: Fear of Hyperinflation    05 min 09 sec

Above the Law? All Quiet in the U.S.-U.N. Spy Scandal

U.N. Secretary General Ban Ki-Moon and Hillary Clinton

Some time has passed since the disclosure that U.S. Sate department diplomats apparently engaged in illegal spying on U.N. officials. I say 'apparently' because it does not appear that any further investigation or legal charges are forthcoming.

To recap, State Department Secretaries Hillary Clinton (Democrat) and Condoleeza Rice (Republican) both instructed U.S. foreign service personnel and diplomats to obtain a wide variety of information about U.N. officials, including the following:

• DNA
• Fingerprints
• Iris scans
• Computer passwords
• Credit card numbers
• Personal encryption keys

What Precisely Constitutes 'Spying'?

While I'm not a legal expert on what constitutes 'spying' (which is banned from being performed against the U.N. under international treaty and law), the above laundry list (which once collected by State's 'diplomats' was handed over to the CIA's HUMINT department) sounds an awfully lot like 'spying' to me.

The Formers: U.S. and U.N. Secretaries Rice & Annan

Clinton and Rice signed off on orders instructing diplomats to obtain this type on information "on key UN officials, to include undersecretaries, heads of specialised agencies and their chief advisers, top SYG [secretary general] aides, heads of peace operations and political field missions, including force commanders".

Another angle here is that the U.N. human data collection project, rather than having been carried out by CIA clandestine ops, appears to have been performed by State's foreign service officers and other diplomatic personnel. One of the purported goals of U.S. diplomats is to build relations and trust among foreign nations. What impact has the disclosure that these individuals are engaged in the gathering of the DNA samples of foreign diplomats had on this important function?

Where's the Followup?

I've been waiting to hear an announcement of an investigation, or perhaps at least rumors of an internal State department review. But so far there has not been one peep of anything like this.

Is it possible that the reason behind why no further investigation is that international treaty only outlaws spying agains the U.N. and its officials on U.N. premises? In other words, all U.S. State department spying on U.N. officials took place offsite?

Or, in a perhaps somewhat more conspiratorial vein, is the lack of follow-up due to the fact that the source of the spying information is WikiLeaks? One way to limit the credence of all WikiLeaks disclosures and move the leaks out of the headlines is to not pursue any of the potentially illegal activity disclosed by WikiLeaks. This may also serve as a disincentive to future prospective leakers.

One of the most interesting elements of the the recent WikiLeaks disclosures was the near uniform international condemnation of WikiLeaks and, as far as I could tell, almost complete lack of criticism directed at the U.S. by foreign sovereigns. Perhaps this is simply a case of the pot not wanting to call the kettle black; I have little doubt that Putin's Russia, for example, engages in similar espionage.

Walking the Rule of Law Talk

There are many unanswered questions, but the bottom line for me is this: if the U.S. wants to lay claim to the moral high ground or simply preach the importance of the rule of law to countries such as Russia, China, Iran, etc., then the U.S. needs to 'walk the talk'. 

Keeping mum about whether illegal spying on U.N. officials occurred only hurts the U.S.'s international standing and credibility. Instead there should be some type of investigation so that U.S. citizens, and the world at large, can be confident that U.S. leaders and diplomatic staff respect and uphold agreed upon laws.

Wall St. & Obama's $1 Billion Presidential Re-Election Fundraising Goal

News came last month of the unprecedented amount of money President Obama will seek to raise for his 2012 reelection campaign.

And now with Obama's recent appointments of officials drawn from 'Too Big to Fail' institutions like Bill Daley of JP Morgan Chase and Gene Sperling of Goldman Sachs to key posts in his administration, we can see where Obama expects to raise that $1 billion.

Wall Street is home to perhaps the biggest pile of campaign contributions. As Inside Job Director Charles Ferguson explains, while Obama's decision to give in to Wall Street is depressing it's entirely rationale in terms of his re-election fundraising goals.

In fact it's a pretty safe bet that both Democrats and Republicans will be aggressively courting Wall Street and the now 'Too Bigger to Fail' banks for massive 2012 presidential campaign contributions.

And I'm sure there will be no strings attached to any such contributions, right Lloyd and Jamie?

Timing the Inevitable Decline of the U.S. Dollar

One of the most heavily debated macro topics is the future of the world's reserve currency, the seemingly almighty U.S. Dollar.

Neither the fact that scores of prognosticators have been predicting its demise for decades, nor that when the financial going gets tough (as it did during the 2008-2009 financial crisis) everyone wants it, has dissuaded today's dollar bears from taking a dim view of the greenback's future.

America's Exorbitant Privilege

Barry Eichengreen

Berkeley Professor Barry Eichengreen’s new book, Exorbitant Privilege, explains the U.S. Dollar's historic rise from international monetary obscurity prior to World War I, to surpassing British pound sterling in importance by 1924-25, to its dominant post-World War II position which it continues to occupy today.

Professor Eichengreen opens with the point that while we now live in a multi-polar economic world the financial system and monetary order still revolve around a single currency (the U.S. Dollar).

Some might be surprised to learn that approximately 75% of all $100 bills circulate outside the United States. The reserve currency holdings of the world's central banks are largely in U.S. Dollars or U.S. Dollar denominated assets (e.g., U.S. Treasuries).

What precisely is the 'Exorbitant Privilege' conferred on the United States by the special role its currency plays in the global financial system?

Professor Eichengreen calculates that the U.S. dollar’s status as the world's reserve currency is worth 3% in U.S. national income per year. In other words, having the world’s dominant reserve currency allows the U.S. to run an annual $500 billion current account deficit.

Some may remember Vice President Cheney's quip that "deficits don't matter", or Nixon Treasury Secretary Connally's response to foreign governments, critical of the U.S.’s profligate Vietnam and Great Society spending, on how the U.S. Dollar was "our currency, your problem". It is this 'Exorbitant Privilege', a term coined by French leaders in the 1960s who railed against the fact that American paper currency could be exchanged for "real stuff", which Professor Eichengreen views as unsustainable.

Are Reserve Currencies Analogous to Computer Operating Systems?

Economists explain the U.S. Dollar's rise and dominance through a principle called 'network externalities' (or 'network effect'). Similar to how significant interoperability advantages in computing can be achieved through the adoption of a single operating system (e.g., Microsoft Windows), the widespread use of a single currency (the U.S. Dollar, and previously British pound sterling) can lead to mutually beneficial economic efficiencies.

However, in a world where 'Currency Converter' is one of the Top 10 most downloaded smartphone apps, determining exchange rates and making currency conversions can now be performed quickly and simply by a vast number of people. Just as the computing world is moving towards multiple operating systems (i.e., Windows, Mac, Linux, Google, iOS, etc.), Eichengreen believes the world will transition to three principal reserve currencies: the U.S. Dollar, the Euro, and the Chinese Renminbi (Yuan).

The Euro and the Renminbi: Assessing the U.S. Dollar Bridesmaids

On the currency topic du jour, Eichengreen believes that "euro gloom and doom is overdone". Just as a default by Los Angeles County won't spell the end of the U.S. Dollar, a default by Greece and/or Ireland won't bring about an end to the euro.

Germany is the one country, in Eichengreen's view, which could afford to abandon the euro without suffering catastrophic economic consequences. However, Eichengreen sees this as unlikely. Germany's next generation of leaders, while not having been around for the birth of the EU, are nevertheless heavily wedded to the European Project. Further, Germany benefits from a weaker euro via more competitive exports. If Germany were to leave the euro then the reintroduced Deutsche Mark would shoot up in value and risk choking off the German export led economic renaissance currently underway.

When it comes to the Chinese renminbi becoming a reserve currency, Eichengreen acknowledges that China needs to make significant changes. For starters, the renminbi will need to become freely convertible. China will also need to develop deep, liquid capital markets and make fundamental changes to its overall development model.

However, these and other changes may come quicker than many expect. A short time ago there were basically zero Chinese companies settling international transactions in renminbi; now 70,000 do so. Two U.S. multinational companies, McDonald's and Caterpillar, have issued renminbi-based bonds. Currently most of these changes are occurring in "China's financial petri dish" (Hong Kong), but China has set a target of making Shanghai a preeminent world financial center by 2020.

Timing the Decline of the U.S. Dollar?

Eichengreen assigns a very low probability to a sudden collapse of the U.S. Dollar. But could it happen? In short, the answer is yes.

A spat over Taiwan or rising tensions in the Asia Pacific over China building its first world class navy in 600 years could cause China to suddenly stop funding U.S. deficits. A more confident and assertive China is likely to continue to flex its newfound muscles, a subject I previously covered in more detail here.

However, what Harvard’s Larry Summers termed "The Financial Balance of Terror" is likely to prevent a catastrophic scenario from unfolding. Similar to how President Eisenhower threatened to dump the U.S.'s vast British bond holdings during the 1956 Suez crisis if British forces didn't leave the peninsula immediately (which they did), Eichengreen believes that China and U.S. officials will attempt to work out their differences through diplomatic back channels as opposed to openly fighting it out in financial markets.

A more likely scenario would be a sudden loss in investor confidence, like the one experienced by Greece last spring, in the U.S.'s ability to get a handle on government spending. Eichengreen notes how the ratio of U.S. federal debt (a relatively high 75% of GDP) vis-à-vis tax revenues (a relatively low 19% of GDP) is rapidly approaching the danger zone.

From an investment perspective, investors should continue to expect currency volatility under the current U.S. dollar dominated international monetary system. Further, the U.S. Dollar will continue to be the world's safe haven currency in times of crisis for the foreseeable future. However, according to Eichengreen a change in the international monetary order is all but inevitable within a decade.