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[00:00:00] We have bought 80% of our jet fuel requirements, John, out to March 2027 at $67 a barrel. So we're sitting, you know, we're in great shape. Great position. Great position. But nobody really believes that the Straits 4 Moves are going to stay closed until March of next year. It's just we don't know when they're going to reopen. Iran is going to starve if they don't get it ready. You know, the Straits 4 Moves reopen in the next couple of months. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.
[00:00:28] Well, that's Michael O'Leary, the CEO of Ryanair, talking about how they're not paying the inflated prices of oil because they bought their oil supply at a price set before the war. And it's all going to be over in a couple of months, he says, well before they need to renegotiate prices. But there is a difference, isn't there, between the price you pay and physically having the oil available. And could hedging like this actually hide the risk of a big downturn in supply?
[00:00:54] After all, gamblers on polymarket put the odds of the Strait of Hormuz being opened by the end of June at just 31% and still just 46% by the end of July. So is hedging clouding the enormity of the problem? That's this week on the Debunking Economics podcast. So the money markets are all about pricing risk, of course.
[00:01:24] And so much of what we pay for, for anything basically, is based on how people perceive the price. Not now, but what it's going to be in the future, including, for example, the price of oil. But pricing is basically, pricing of risk is a financial solution, which can assume that things are going to get bad, but also can assume that things are going to get better. But it can misprice this assumption of the future, because how do we know what's going to happen in the future?
[00:01:54] You've said that so many times, Steve. But if we take oil as an example, it's very expensive now. In fact, the price right now is lower than if you actually said, I want to get oil this second. But the futures curve, which show prices based on the future, is progressively getting lower because everyone is assuming that the issue in the Strait of Hormuz will go away.
[00:02:20] So if you wanted to buy oil now and you needed it straight away, then you'd probably be paying $150, $160 right now. But sign a contract saying, I want oil in September, and you'll probably only pay $100, maybe even a little less. And it gets lower from that point on. So, Steve, this future pricing, I mean, it gives wriggle room, I guess, for speculators. It allows companies to hedge.
[00:02:46] So, you know, if you think something's so expensive now and it's going to go down, you settle a contract to take that at the future price only. If it goes up, then you win. If it goes down, you lose. I mean, that's what hedging is all about. It's sort of unavoidable, isn't it? It is unavoidable. But the trouble is we glorify it as if those guys actually do know. Guys and girls do actually know what's going to happen in the future. And as you're saying about the oil market, they haven't got an effing clue.
[00:03:15] And, in fact, I mean, I'm not following these price details that closely because I'm doing a whole lot of other stuff at the same time, attacking economists on global warming at the moment. That's my main research focus. But it's come back to me that there's the gap there. Now, if they think the price is $150 now, it's going to be $100 in the future. Anybody who takes that bet is going to get wiped out.
[00:03:39] But it's absolutely, in my opinion, no chance of the oil price falling from the current situation. It's going to become so scarce that the price is going to rise. So if anybody's taken that contract and thinks they're going to be buying oil for $100 in the future and they've signed a contract to do that, they're going to be bankrupt. This is another reason to expect a giant financial crisis. Well, no, surely it's the reverse. If they're saying, right, I'm going to get oil in September and I'm going to pay $100 for it now.
[00:04:08] And it's worth $200. Somebody's taken the other side of that trade and said, we're going to deliver it $100. Though they deliver it $100, they're going to lose $80. Yes. Okay, they're going to go bankrupt. So whoever takes the other side of that contract is – can I use a French term here? You always do. They're fucked. Yeah. They're completely and absolutely fucked. But then that's the oil supplier who's going to get fucked, isn't it? Yeah, I know. I know. And that's just what you need. They'll shut down production. And we're going to force majeures going to turn up. And that's already happened a bit.
[00:04:37] And this is a catastrophe of truly epic – what did he call it? Epic fury? Yeah, that's what he called the whole operation. It's epic fucking stupidity. That's what it's going to be known as in history. Yeah. This is going to destroy – not completely, but it's going to be a taste of what global warming is going to do. Because there's going to be so many businesses that go bankrupt because they've committed themselves to contracts they can't deliver on.
[00:05:04] They don't have the goods and service to sell output in the first place because they're not getting the inputs. The financial contributions they have committed themselves to will be unable to meet them. People will be laid off as well. So it's going to affect workers who find that their job that relies upon 10% more oil that's coming in. Food – more food that's produced than is actually being produced. More computer chips that can no longer be made because the helium is not there.
[00:05:33] Industrial processes involving sulfuric acid, which is right across the board. There's a huge range of industries that need that as a fundamental component of refining and massively important chemical. The supplies are going to plunge. And therefore, any financial commitments based on the presumption you will have that physical supply are going to be broken. So we're in for the – I don't normally stick my neck out on this front, as you know, unless I'm extremely certain. That's why the last book I wrote – second last book.
[00:06:02] You're always sticking in a cat. Yeah, okay. The second last book I wrote was Can We – like I read, Debunking Economics is the book that I made my name out of. And then I did a second edition of that in 2011, launched by Paul Mason, I might add. I think Paul wasn't – he may have been involved in the next book. He certainly helped launch one of my books. So that's Debunking Economics, second edition.
[00:06:27] Then I was approached by Apology Press, and they're the ones I'm writing this new book for, How Economists Will Destroy Capitalism. But they asked me to write a book in a series they called Can We Avoid or Can We Something? And they said, can we? And my answer was, avoid another financial crisis. And my basic answer in 2017 was, yes, we can. Not for good reasons, but because having had a financial bubble and burst back in 2007,
[00:06:53] the preconditions for another crisis like that weren't there because you need both a high level of private debt, and we still have that, but you need a high rate of growth of private debt as well. And we didn't have that because in the aftermath to the global financial crisis, both borrowers and lenders were relatively conservative about the amount of leverage they'd take on. So though there's still credit-based demand, it was nowhere near as high as it reached in 2007. And you need to have a high level of credit demand to go to a low level of credit demand
[00:07:23] and have that jumping off a cliff effect. It's like what we might have had was you go down a couple of steps, you don't fall off a cliff. Now, this time round, and that's still the condition we're in, we're still in the aftermath of too much private debt at the time of the global financial crisis. But now, it's not the financial system that's doing the damage, it's Donald F. Trump and destroying the physical inputs that are needed to produce GDP itself.
[00:07:52] Yeah, but isn't the problem also, isn't this just exaggerated by the fact that we have this complete focus on trying to hedge prices for anything? Yeah, yeah. Because it's just a, I mean, you know, for those economic students looking at their supply and demand curves, which, you know, you've sort of debunked that many times on this podcast. But just the idea of any sort of, you know, the fact that conventional economics is built around this idea of equilibrium,
[00:08:22] and yet there's no price. Because everybody is looking at a whole series of prices based on a whole series of points in the future. I don't know whether that's healthy. I don't really quite understand. It's not healthy. Yeah, why would the people selling oil be saying, well, we'll give you it at a different price in the future based on what we think where the market's going to be? This is where the speculators come in, because there's an entire financial industry, which you've worked for, you know the scene,
[00:08:50] and these are people who are making money by shuffling pieces of paper, fundamentally. So they're not people actually making stuff. They're people making bets on stuff. And they convince themselves that the market, the economic theory convinces them they're doing the right thing. And this is, again, this is why I see economic theory as being responsible for the disasters we find ourselves in the practical world. Because economic theory has said those forecasts are right.
[00:09:18] It said the future price of the equilibrium of the future market will be based on rational expectations and will accurately predict the future. So theory tells them you're doing the right thing. It gave them the Black-Scholes equations to actually do a huge part of the pricing of futures in the first instance. And this is all based on ideas of equilibrium and taking ideas of diffusion and heat processes from physics and thermodynamics
[00:09:45] and saying that's what the stock market and the find futures market do as well. So equilibrium concepts that are presumed that you have an equilibrium system subject to exogenous shocks, and the system will distribute through the economic system in the same way that if you heat a part of a metal plate, it distributes through the whole metal plate over time. All this stuff is what the traders get fooled to do. So they're using the options pricing model from Black-Scholes and so on.
[00:10:14] And they're convinced they're getting it right. Now, and therefore, because politicians have been conned by the same nonsense, they let these futures markets expand. And everything's about the stock market. We're all talking about speculation about the future as if that's going to improve the present. And it's not. And we're going to see that absolutely large this year. Because if there's that level of divergence at the moment between the current price for oil and the futures price for oil,
[00:10:41] and people are signing contracts to do delivery at the futures price, they're not going to be able to. And that will go bankrupt. And then those bankruptcies will run through the rest of the system. And this, I mean, I don't think we have... But the bankruptcies, those people doing the supply, I mean, they've got quite a lot of money. But I guess it's the oil refiners and people like that. The oil refiners, the whole supply chain, okay? So as well as losing the physical oil, they're going to go bankrupt in the process.
[00:11:09] Which means at the time you need the physical supply to come through, the companies that are going to make that physical side, if they've signed these on their other side of these futures deals, they're going to be unable to meet it. They'll declare force majeure probably. But even... I don't think anybody who's signed a futures contract, can you declare force majeure on the contract? I'm not sure. You certainly can just declare force majeure on delivering the physical thing. So in terms of physical delivery at all, that's already happened a couple of times.
[00:11:38] It's going to go through the roof as this crisis runs through. So the problem with all of this is, of course, that because it's calculated as a risk, I mean, a bad risk might be 90%. You know, it's like priced at 90% of whatever. Yeah. But the ultimate bad solution is 100%, you know, like a 90% cut in oil, for example. Well, let's talk in standard deviations. Yeah.
[00:12:08] Because this is where the problem actually comes up. Because all the calculations for risk, you know, Black-Scholes equations and all the other equations of finance presume that you've got what they call a Gaussian process going on causing fluctuation around equilibrium, basically a random number system. And in terms of random numbers, you can say, well, what, you know, what percentage of changes around the equilibrium occur to say, what's one standard deviation?
[00:12:37] What's two? What's three? What's four? What's five? When you're working with a normal distribution, a five-standard deviation event does not happen. It is so rare that if you wanted to look for a five-standard deviation event in a genuinely random process, if you're doing this process once a second, you'd probably need to wait somewhere between the age of the Earth and the age of the universe before you get a five-standard deviation event.
[00:13:04] So, therefore, what the mental framework that all these traders have and conventional economists as well rules out anything that extreme. Now, when you have chaotic processes, and that's the world that I work in, where you have nonlinear processes and one process causes another and you have endogenous fluctuations, you get what's called a power law distribution. And with a power law distribution, you can get stuff that is 25 standard deviations away from the mean.
[00:13:31] And their probability declines as you move further away, but it's a linear decline, not an absolute collapse in the probability. So, I'm not quite sure I'm totally getting you, but, I mean, the point I was trying to make... What it means is they don't think big changes can occur. Yes, yeah. And so, even if we had something that was about to hit the Earth, you know, a bit like in the movie Don't Look Up, we'd probably...
[00:14:00] The risk of it hitting would probably be calculated at 90% rather than 100%, even though we knew it was going to hit. Because... And I've heard this in finance markets where there's a really bad scenario and I talk to people about how's that priced in and they say, well, it's not priced in because nothing is ever 100%. And in any case, if that was to happen, the scenario would be so bad, like the whole destruction of the economic system or whatever,
[00:14:28] that it's too big to contemplate. So, we just ignore it. Yeah. And that's what the mathematics encourages them to do. Yeah. Because all this stuff is based on mistaking risk for uncertainty. And that's one of the cardinal sins of mainstream economics, that they say uncertainty means risk. Now, and this is... I had one of my students here back at Western Sydney when I taught here, a wonderful Filipino girl,
[00:14:59] was... In the History of Economic Thought courses, I used to get the students to give a presentation over some topic and she was given the topic of the difference between risk and uncertainty. And this is a really hard thing for people to get their minds around. Now, risk is, you know, tossing a coin, will it be heads or tails? You know the outcomes. Picking a card out of a pack, there are 52 options, et cetera, et cetera. And that means that you can use probability to say what are the odds of a heads or tail,
[00:15:27] what are the sequence of heads or tails and so on. That's calculable. And when you say what's uncertainty, Keynes, when he's with the main person, has said economics ignores uncertainty. And I'll bring you back to this if I get distracted, but he's had a wonderful line in the general theory where he said, I accuse the classical economic theory, by which we call neoclassical, of being one of those pretty polite techniques designed for a well-paneled boardroom,
[00:15:56] which tries to deal with the present by ignoring the fact that we know very little about the future. And his examples of what uncertainty were, were negative examples. So he said, uncertainty is not the probability of a toning cost. Uncertainty is not the prospect of a war in Europe. He's writing just before the Second World War. He said, these are things about we simply do not know. But he only gave negative examples. Now, this student of mine, and she tells me that the idea occurred to her while she was making the presentation.
[00:16:26] She was both definitely physically attractive, but her personality was off the scale. And she's dancing across the stage, talking about everybody is focused on this girl, gay, straight, male woman, totally had her attention. And she then says, it's hard to understand what is the difference between risk and uncertainty. And said, just imagine there's somebody you're really attracted to. Now, everybody's thinking her at this time. And you know that she's accepted one in five dates that she's been asked upon in the past.
[00:16:53] Do you think your chances of her accepting your invitation are one in five? I don't think so. And you could feel the belly punch for everybody in the room because, you know, everybody in the room wanted to ask her out on a date. And nobody had the courage because Jesus, what if she turns me down? It's not a one in five. If it was a one in five, you'd all give it a try and 20% would be successful. He said, it's no. He said, each case of individual attraction is totally independent
[00:17:23] of any other case of individual attraction. And she would, the fact that there's, you know, 20% had success in the past. If there were 20 people in the room asking, it's not the case that four are going to be successful. They'll get, you know, she could reject the whole lot. And the fear, the uncertainty, the fact you don't know, that's why you don't ask in the first place. Right. So uncertainty is something you, that cannot be reduced to risk. And yet what the mainstream economists said, we're going to use risk as a proxy for uncertainty. Yeah.
[00:17:52] But except in the modern finance system, there'd be someone in that classroom who'd be taking bets as to what your chances of success would be if you addressed that girl out. Oh, they'd be doing it. But the thing is, they're doing it. I wouldn't mind if they did that. They just lose money gambling about who she'd take. But that's it. Wherever there's an opportunity to gamble, another layer of speculation comes in. And this encourages gambling. And that's another wonderful comment from Keynes about what happens if you let the finance markets rule your economy,
[00:18:21] where the development of an economy is the byproduct of the activities of a casino, the job is likely to be all done. Now, we're even worse than that. Okay. At least in a casino, you know the odds. This is, you don't know the odds at all. And this is why that particular futures example you gave to begin this discussion with is so crucial because people are saying, you know, what's the past, they're probably doing calculations about what's the past volatility of oil? What are the odds of the price moving this much? Oh, that's five standard deviations and all that won't happen.
[00:18:51] And he said, well, so we're going to see 25, 30 standard deviation event and these people will be wiped out. But why do it at all? And, yeah, and it's got to be because there's money to be made from that speculation. So, yeah, even though they're saying, oh, the price is going to come down, they presumably think it's going to come down more than it's been quoted because someone will be clipping the ticket, taking a slice of that, that price or buying it up and reselling it. I mean,
[00:19:20] that's obviously what's going on as well. People are buying and selling based on the future prices. There's, you know, that's the, that's what commodity trading is all about. Hard commodity trade if you haven't got that future care for you to buy forward on. So, it's the whole paper trade in commodities rather than actual physical trading commodities. The West is relying upon paper trading. China is relying upon physical buffers. Yeah. And that's the difference. What we should be doing to hedge volatility in commodity markets is to have large stocks
[00:19:49] of the actual product in case you can't do physical delivery at the time. And that's difficult and expensive and no private organisation will do it because the costs of doing it are enormous. That's why you need to have buffers. Now, I'm down in Auslis at the moment. You're in the UK. Australia is supposed to have 90 days of oil in reserve. It's had 32. So, it's going to run out. UK has none at all. You guys are completely exposed when the local supply runs out.
[00:20:19] That's the end unless you can buy extra stuff from ships. So, that's going to be really critical there. China has a lot of saying at least 150 days of oil supply at current consumption levels and the Chinese will tell Chinese people to consume less oil, be frugal. They'll do carpooling for internal combustion engines, cars, they're going to reduce the, so they're going to make the 150 days last longer. The Western countries that have relied upon
[00:20:49] the markets to price this sort of stuff and say the price is what matters, they're going to not have the supplies and then get it wiped out by the physical and also the futures markets. That's why China's in the rush to see the Straits of Hormuz open because they're going to see everyone else struggling with that problem. But see, we're going to take a break. Just a point, and I might have mentioned this before, it's a point I picked up from talking to an oil trader on my podcast for the bank. Yeah. Australia didn't hold 90 days. Actually,
[00:21:18] Australia's been increasing its reserves during this, but it's paid for it, but they've increased their reserves. But the reason they didn't hold 90 days, because of course the IEA, the International Energy Agency, insists that everybody who's a member holds 90 days as reserves, and Australia's get-out clause for that was because they don't have the refineries. So actually, they've bought the crude. They've bought 90 days of crude, but a lot of that is sitting in refineries in Singapore,
[00:21:48] for example, where Singapore is contracted to supply the other 60 days. So the argument for Australia is we did have 90 days in reserves. It's just sitting in the country. Well, exactly. That's the danger, isn't it? It doesn't get supplied because there's not enough to supply based on that, which is why the Australian Prime Minister has been gracing around the world saying you are going to honour this contract, aren't you? That's precisely why it's been doing that. We'll come back and have a look at a bit more of this as to what behaviour it engenders. Does it make us consume less or consume more?
[00:22:18] I can argue each way on that. So we'll do that when we come back in just a second on the Debunking Economics podcast. This is the Debunking Economics podcast with Steve Keane and Phil Dobby. So Steve, Adam Smith, you might be familiar with his work. He said speculators are important. So he said corn merchants, for example, serve society
[00:22:46] by dividing the inconvenience of scarcity as equally as possible throughout the year. So by raising prices during a harvest failure, for example, or perhaps expectations of harvest failures, which is perhaps a point he wasn't making, but if you're looking at a point of harvest failure, then speculators encourage consumers to conserve food earlier. So because prices go up, if there's a market failure, you consume less, therefore you do have
[00:23:16] those reserves building up so you've got, you know, you've got enough food to prevent a more severe famine later. that's sort of the work of speculators, except he was talking about at the point where you knew that there was going to be that harvest failure. I guess what we're talking about is speculators saying, well, there might be a harvest failure next year, so let's speculate on the price based on that. But by his argument, it's a good thing. Is he right? Yeah. No.
[00:23:45] He's right when situations are normal. A bit of fluctuation, you can cope with that. When it becomes systemic, then it's a complete failure. And again, this is Keynes' argument that you don't want to have speculators setting the price because they will destabilise. They'll push you. Even if there is such a thing as an equilibrium price, they're going to be moving you away from it. And they cause some of the volatility, which makes it hard to make the supply over time. But also, it doesn't help you
[00:24:14] to speculate about the price when you can't get the physical supply. So when there's something like what we're going through right now with oil and all those other essential commodities, then forget about paying a higher price for it. There's physically less of it. The economy is going to decline for that reason alone. So any financial commitments you enter into based upon the assumption that physical supply is going to be there will fail. And rather than being a slight deviation around equilibrium, the argument being that speculators
[00:24:43] seeing a deviation between the equilibrium price and the current price, if the current price is above the equilibrium price, then they're going to buy up to be able to sell later. You know, that their hedging actually stabilizes the system. No, it doesn't. It destabilizes. Yeah. And so... Yeah. Exactly the opposite of what Adam Smith was describing, actually. There's an allowance of both, but the more extreme the stress, the more likely
[00:25:12] it will destabilize rather than stabilize. The more hedging because what he was talking about was at a point in time saying, okay, it's a bad harvest. So now, the price is right now because the harvest has been bad, the prices are high. So people go, okay, we're not going to buy as much because it's too expensive so we won't eat as much. Therefore, there's more available when people really get hungry down the track. But because of the hedging, all of that goes out the window, doesn't it? So I spoke to a guy who works in the airline industry this week.
[00:25:42] And I said, you know, aren't the airlines going to be heading through all of this? And he says, well, they've hedged. You know, so right now, it's not on. They're paying prices that they've organized a long time ago when prices were much less. And I guess it means that if prices are coming down in the future, then they'll say, so we'll buy all our future stuff at the lower price. So there's no need to buy at this inflated price right now. So that means that the consumption continues at a very high level because people say, well, we've bought it. I don't care.
[00:26:11] There's not much around. We've bought it. We're going to get paid. We'll get it supplied at that price. Why change our behavior? So this hedging is actually stopping behavior changing based on the price indicator. Exactly. And this is like, you know, I've got my issues with Nassim Taleb, but this is his point about a black swan. What he means by a black swan is that you get something that's well outside the expected variation range that's built into mistaking uncertainty for risk. So if you play, you know,
[00:26:40] toss coins till the cows come home, you're still going to get a binomial distribution which approximates a normal distribution over time. You're not going to get a five standard deviation event. So you're not going to get 10 or 20 heads in a row no matter how long you spend tossing a fair coin because that's outside the five standard deviation probability. It will not happen. Okay. And that means that you therefore say there's only a defined range we need to worry about the extreme stuff we can forget because it won't even happen
[00:27:10] in the first place. Now, the real world is chaotic and those processes, one process causes another and you go, in fact, there is no standard deviation for a genuinely chaotic process. You can do a measurement of what the data you've got and then you can do a standard deviation calculation out of that. But technically speaking, for a genuinely chaotic system, there is no mean and there is no standard deviation. Now, because economists have bullshitted themselves to mistake risk,
[00:27:40] uncertainty for risk, they're mistaking chaotic dynamic processes for deviations rather than equilibrium given by random change. So they rule out anything more than five standard deviations. Yeah. So therefore, you cannot, if you did, you couldn't pay it. The prices would be so high for a futures contract with that much deviation, you couldn't do it in the first place. So you can't hedge for the big stuff. We're in the middle of the biggest big stuff possibly in human history given what Trump has done at the Strait of Hormuz.
[00:28:11] Yeah. And no sign of it going away. No sign of it going away. Anybody who's got that gamble, you... So market pricing, even before we looked at futures market pricing is mispriced because it's ignoring that worst case scenario. Yeah. Which is, and we're in the worst case scenario. And futures pricing is, just gets worse because it assumes that worst case scenario increasingly as we go on that worst case scenario is not going to happen. Yeah. Whereas a sensible person might be going,
[00:28:39] the longer this goes on, the worse it gets. Exactly. But the market is priced the complete opposite way. Go figure. That's right. And that's again why China's, I mean, having a Marxian foundation is now showing to being extremely sensible because whatever Marx else got wrong, and you know, I know a lot about Marx on that front, we should actually talk about that one day. But in this case, it made them sceptical of speculation, sceptical of the finance sector. So one of my favourite phrases in Marx is where he talks about the roving cavaliers
[00:29:09] of credit describing the financial sector. And he also says periodic economic crises give this class, the big money lenders and usurers and the parasites surrounding them, that's literally a quote, the capacity to interfere with real production. And this gang knows nothing about production and should have nothing to do with it. Well, now we're going to find out what Marx means on that front. Now, if you read Marx and that was your background rather than Marshall, then you're aware of that, you're sceptical of the finance system,
[00:29:38] you try to constrain it. And that's what the Chinese have actually done. And therefore, rather than relying upon futures markets and so on, they've got huge buffers. They have, as I said, at least twice what the IEA replies for oil. According to one of my old students, Dom Tweed, who's working over there now, they've got one and a half years of grain so they can survive six bad harvests, similar amounts of fertiliser. So they can ride out these disturbances. And all the arguments
[00:30:08] about what Trump has done, strong-arming China and really being designed to cripple China, China was already prepared because they don't trust the West and they have every reason that we're now finding out ourselves not to trust the West. So the physical buffer approach based on a Marxian attitude that you can't rely upon the finance sector to drive the economy means that that economy is going to be robust when this shock hits. It still will have problems, but it's going to have far less than ones that relied upon pricing systems
[00:30:37] as the West has done to try to cope with these deviations. Right. Final question, which I know you'll like. So does this mispricing of anything at all through markets and particularly futures markets, does this misprice and the fact that it can't cope with the worst case scenario, is that why we have underplayed the risk of climate change? Yes. One of the fundamental reasons. I told you you'd like that question. Yeah, I do. I'm like, actually,
[00:31:07] I've got my old cartoonist friend, Miguel Guerra, who did the Econ Comics and the Funny Money cartoon with me. He's currently doing a set of illustrations where I want to show what these idiots did, these dangerous idiots have done. And what they said is, well, we don't know, we can't know the future, but we know the present. So let's assume the future is going to be an extrapolation of the present. And what they've done, and I'm getting Miguel to do this illustration, is that you can imagine the temperature range we're living in right now
[00:31:36] is called the Holocene. And that is a temperature level which is about six degrees warmer than the last ice age. And so what you have is, if you imagine the shape of this hill, if you actually convert your temperature into a geography, temperature and time into geography, then the Holocene is like a hill, very steep, going from an average temperature for the planet of eight degrees plus eight degrees Celsius was the average during the last ice age to plus 14 as the average.
[00:32:06] But then when we get to the Holocene, we have an average temperature of 14 degrees across the entire planet. But people live in Alaska at minus 10 degrees and they live in Polynesia at plus 30. So we've got this very gradual shape of the hill, but very steep climbing up to the top of it. What economists have said, well, we have this data across space from minus seven to plus 33. And we know the slope
[00:32:35] so we can measure that. And all we have to do is assume that the slope over time is the same as the slope over space. So we grab what we measure across... Is there a logic behind that being? They're a bunch of fuckwits who don't understand the real world. That's the logic. They've set us up for the destruction of human civilization. It's completely false. But it's just... They've got the data, they can measure the data, and they're junkies for doing statistical work with existing data. So that's what they've done. They've measured
[00:33:04] the variation of GDP across space where you get the range from minus seven to plus 33. And they then assume the same thing will occur through time. And so it's like being advised that you can walk down this gradual hill and you take one step and you fall to your death. This speculation, of course, though, is what insurance companies do as well. Obviously, they're making money out of risk. And they are starting to respond to climate change because it affects them first. Oh, they're going to get screwed. Yeah.
[00:33:36] So, again, like I've had some... Because they have underpriced. They have mispriced. They've priced... You know, they've priced something like five standard deviations and 33 standard deviations are coming their way. They've used the wrong data. There is no data. You've got to... If you're going to talk about what's going to happen through time, you've got to have, as best you can, accurate models of what happens in change over time to civilization. That's what the climate
[00:34:05] scientists have done. Imperfectly, my mate Craig Tyndale has pointed out various ways in which the climate models are underestimating the impact of changes because of the fact that they don't integrate all the models properly and they get the wrong base levels and so on. But nonetheless, climate scientists looking at the impact of temperature increase on the economy, there's a classic paper which I think is publicly available. The authors of Zoo, Exu,
[00:34:35] and Ramanathan, but it's just for Exu and the year of 2017 and you'll find that paper. And in that paper they say, they redefine the categories of what's going to happen to the economy through temperature rise over time and they said 1.5 degrees is dangerous. Now we're already at 1.5. Three degrees is catastrophic and five degrees or more is beyond catastrophic including existential risks. That's what the
[00:35:04] climate scientists are selling us. Now economists were asked in the aggregate, all the economists who work on climate change, were asked in a survey a few years ago. What's going to be the impact of a trajectory towards seven degrees of global warming in two centuries hence, 2220? And the average prediction they made was that the GDP would fall by 25%. Now that sounds big, but it's even more trivial. But there's no one left. So yeah. Well they're telling us they're going to be the economy,
[00:35:34] what they're telling us the rate of economic growth for the next two centuries will be 0.14% below the current rate of economic growth because of seven degrees of warming. The trajectory towards that level. Climate scientists are saying if we hit five degrees it's basically all over for humanity. Now because the politicians and the journalists don't know that this is the bullshit basis on which economists have made those predictions, they're equally underpricing the risk of what's going to climate change is going to do. And this is beyond catastrophic
[00:36:03] its trajectory we're on. Even at one and a half degrees it's likely that we're going to lose the landing radio and over-tuning circulation. The planet is going to be vastly different. Large people and people are going to die because of global warming and the economists are the blame. It does feel like doesn't it? I mean that is atrocious and obviously deeply concerning and very worrying. Yeah. but it does feel like right now all pricing is out. So the pricing of commodities
[00:36:32] because of the stray of form use is clearly underplayed. Yeah. The pricing of shares and investments in AI clearly the fact that we are on the verge of a massive economic crisis and share prices keep on hitting new highs based on what? You know it's just bizarre that we're heading in these directions which don't seem to make any sense but I guess that's the beauty
[00:37:02] for those people who play in this game is they thrive on this volatility don't they? They don't care if it's mispriced. If it's mispriced then there's got to be a correction and it's getting ahead of the game. The more volatile it is the better it is for them. One of my sisters when she came back from living in England at some time this is decades ago but I still remember the story she's working in a trading firm and highly intelligent woman she's working as a secretary just because coming back she didn't have training in arts she didn't have training in
[00:37:33] finance or physical sciences but she asked one of the traders what they thought would be the announcement of some price change or I've forgotten what it actually was and the trader said I don't care so long as it's big and my sister's reaction was that's immoral she's right. Yeah. Oh yeah. Well yeah. Funny isn't it? Nobody ever said anyone working on a trading floor had any scoples and morals so of course not. That's why they're there. Anyway very good Steve. Maybe we'll look
[00:38:02] at Mark's next week. Yeah that'd be fun. Yeah. Alright we'll talk to you then. Okay mate. Bye. The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics even if you haven't you might also enjoy The Y Curve. Each week Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively it's fun it's informative what more could you want? So search The Y Curve in your favourite
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