Monthly Archives: July 2013

Global Warming Update

We just came across the data compiled by Dr. Roy Spencer in a June 6, 2013 article titled STILL Epic Fail: 73 Climate Models vs. Measurements, Running 5-Year Means. He plots predictions from 73 climate models showing their mean prediction. He also plots 6 data set s on observations made by satellite and balloons. The result is shown in Figure 1 taken from his blog.

Figure 1. Temperature data, model predictions versus real observations.

If we drew a linear regression line on the observed data, we would get a temperature rise of about 0.4° versus a mean model increase of about 1.1°. What is more significant is that ALL models begin to diverge from observed data around 1998. None are predictive.

Trying to tie the scale labeling to the scale making is tricky but looking at the observed data, we see peaks at 1981, 1989, 1996, and 2004. Although the data set is small it appears to have a periodicity of about 8 years. This may represent a short-term climate cycle. This in turn begs the question of what are the possible longer-term cycles? And then the grand daddy of them all, the roughly 100,000 year cycle of glaciation revealed by the Vostock ice core data: What Is Your Carbon Foolprint?

Anybody who attempts to model economic data on markets knows that it is absolutely crucial to back-test their models, preferably on 100 years worth of data. Indeed, failure to do so resulted in the collapse of Long Term Capital Management in 1986, an event that almost brought down the global financial system. So with much more riding on it, we would expect climate modellers to back-test their models at least 400,00 years in order to replicate the Vostok data and validate their assumptions.

Update 20151217

An article posted on Judith Curry’s website by Pat Michaels and Chip Knappenberger titled  Climate models versus climate reality, reviews over 100 climate model runs and compares them to observed data. Figure 2 provides a graphical representation of the comparison.

Figure 2. The forecast and observed temperatures for the middle troposphere.

As they explain:

The troposphere is the earth’s active weather zone, and it extends from the surface to around 40,000 feet. It’s deeper where the atmosphere is warm, as in the tropics, and shallower at higher latitudes. All significant storms, from massive winter cyclones to gullywashing summer thunderstorms are in the troposphere.

The authors further state:

Rain and snow are largely dependent upon the temperature difference between the surface and the mid-troposphere. When there’s little difference, air in the lower atmosphere does not rise, meaning that the vertical motion required to form a cloud is absent. When the difference is large, moisture-laden surface air is very buoyant and can result in intense rain events.

If modellers can’t get the mid-troposheric data right, they cannot correctly model cloud cover and precipitation which has a major effect on surface temperature. There is extensive discussion of surface temperature with references to a number of r4ecewnt papers which together place the rate of warming due to CO2 emission near the lower bound of the IPCC estimates.

They have a lengthy discussion of model test results which may be summarized with their statement:

This is a devastating indictment of climate model performance. For periods of time longer than about 20 years, the observed trends from all data sources fall beneath the lower bound which contains 95 percent of all model trends and in the majority of cases, falls beneath even the absolute smallest trend found in any of the 102 climate model runs.

The authors conclude that:

Based upon these and other lines of evidence (laid out in our numerous scientific publications, books, blogs articles, social media (see publications listed here and here for example)), we conclude that future global warming will occur at a pace substantially lower than that upon which US federal and international actions to restrict greenhouse gas emissions are founded.

This Is How It’s Done!

The Fed has been desperately trying to goose the US economy for years with various forms of quantitative easing, largely without success. As we have argued, there is no way of separating the effect of QE on recovery from the last recession from normal economic forces that have lead to economic recovery from every recession in history. Now, we have a new and measurable way of creating economic growth independent of QE.

Courtesy of the Commerce Department, we find that simply by revising the way GDP is calculated – cooking the numbers – we can achieve instant economic growth. The following chart from MarketWatch illustrates this achievement:

This result is even more remarkable than at first appears. Looking carefully at the two bars covering the period 1959 to 2007, we find there is essentially no revision to the growth numbers. It all occurs since 2007. Keeping in mind that the last recession started in 2007 and recessions are normally marked by negative GDP numbers, the significant difference in growth between the two methodologies for the recent period shown is actually compressed into the recession recovery since 2009.

As we said, if you can’t create economic growth by dumping tons of liquidity onto the market, simply cook the numbers to get the growth you want.

How Effective Has QE Been?

under construction

We have written a number of essays on quantitative easing (QE) as practiced by the Fed. We also have just finished our series on Understanding Money with the publication of Understanding Money: Part 5 – It’s All Money. As we were finishing we realized that a number of questions in our mind about QE might be tidied up using our ideas on money. This essay examines the monetary mechanics of QE and attempts to quantify its impact on the money supply and hence the economy.

A Brief Note on Gold As a Currency

With the refinements our ideas on money in Understanding Money: Part 5 – It’s All Money, we decided to apply them to a topic we have addressed in the past, that of the return to a gold standard.

There is an audience for the idea that the change from a gold standard to a pure fiat paper currency is a root cause for the current financial crisis. In particular, a paper currency allows for the expansion of the monetary base in an undisciplined fashion. We suggest that a pure fiat currency and a gold-backed currency both represent MZMc or the currency component of money with zero maturity whose composition or nature is irrelevant to the money creation process. To understand our thinking, refer to the series of articles on “Understanding Money” at the end of this essay.

A Brief Note on the Velocity of Money

Mathematicians understand the simple fact that in an equation containing a number of variables, at least one has to be a dependent variable. That is, when you have a number of properties you are measuring independently and try and relate them mathematically, you need a dependent variable to make the equation work. A classical relationship in economics is GDP = MV where GDP is just that, M is a measure of the money supply, and V is the velocity of the money being referenced.

As Wikipedia describes velocity, V:

The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time.

We would add spending to buy debt to the above definition. Velocity can be considered to be a function of the amount of our cash we intend to spend and the length of time we hold it before we spend it. It is inversely related to the duration of ownership of money based on whatever definition of ‘money’ is used.

Velocity increases when the economy is growing faster than the money supply. The inverse relationship also holds. Generally, V is viewed as an indication of the health of the economy. When V is decreasing, we are holding money in reserve longer and economic activity is slowing. The economy may be headed for a recession. If V is increasing, the economy is growing because we are spending our money faster.

We discuss the current state of V in our economy below and examine some aspects of its changes. Click on any graph to enlarge in a new window.

Western Foreign Policy Success Updated

Recall how in our efforts to overthrow evil tyrants and bring peace and democracy to the oppressed, we invaded Iraq, deposing the murderous Saddam Hussein. We thought you might like a current measure of the fruit of our labour. From NightWatch yesterday:

On Friday, 84 people were killed and 77 wounded in attacks in 12 towns. Most of them were shooting intermixed with a few bombings. On Saturday, 46 people were killed and 106 were injured in 17 towns. Most of the attacks were bombings, with a few shootings and clashes. On Sunday, 77 people were killed and 223 injured by bombings and shootings in 18 towns.

That’s 207 dead and 406 injured in 3 days. Not bad! The Iraqi people are so much better off now. Right? And now that we are just about finished bringing peace and democracy to Afghanistan, think of how bright their future will be for Afghanis, especially for those who collaborated with the allied forces. They’ll be paraded through the streets as heroes, right? Surely Syria is about ready for Western intervention and salvation. And Egypt is just warming up. Such exciting times ahead for Western foreign policy wonks.

The Banks Are Not Lending ….

We began a note on this a year ago (Are Banks Afraid to Lend? unfinished), mainly to document our thoughts and correspondence on the issue. At least as far back as 2009 we were considering the possibility that lending was not occurring, a common critique of the system at the time, because there was lack of demand or lack of willing credit-worthy borrowers. This was certainly not a common viewpoint. Unfortunately, the ignorance that produces this viewpoint remains. We summarize the issue below.

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