Getting the Social Cost of Carbon Right

US President Joe Biden's administration must put a high enough price on carbon pollution to encourage the scale and urgency of action needed to meet the commitments that it has made to Americans and the rest of the world. The future of the planet depends on it.

Nicholas Stern, Joseph E. Stiglitz

LONDON/NEW YORK – US President Joe Biden deserves congratulations for committing the United States to rejoin global efforts to combat climate change. 

But America and the world must respond to the challenge efficiently. 

Here, Biden’s January 20 executive order establishing an Interagency Working Group on the Social Cost of Greenhouse Gases is an especially important step.

The group’s task is to devise a better estimate for the dollar cost to society (and the planet) of each ton of carbon dioxide or other greenhouse gases emitted into the atmosphere. 

The number, referred to as the social cost of carbon (SCC), gives policymakers and government agencies a basis for evaluating the benefits of public projects and regulations designed to curb CO2 emissions – or of any project or regulation that might indirectly affect emissions.

If the working group settles on a low number, many emission-curbing projects and regulations won’t go ahead, because their price tags will exceed the estimated climate benefits. So, it is vital to get the number right – and by right, we mean higher than it has been in the past.

Broadly speaking, there are two ways to figure out this cost. One method, employed by President Barack Obama’s administration, is to attempt to estimate directly the future damage from emitting an extra unit of carbon.

Unfortunately, implementing this technique well is extraordinarily difficult. The way the Obama administration did it was deeply flawed, which led to an estimated SCC that was too low, at $50 per ton by 2030 (in 2007 dollars). 

Even before Donald Trump became president, therefore, the world – and the US in particular – was on track to do too little about climate change.

The problem was the Obama administration’s use of integrated assessment models, which, as the name suggests, integrate economics and environmental sciences to calculate the course of the economy and climate over the next century or more. 

Integrating economics and the environment makes eminent sense, but the devil is in the details. These models have shown themselves to be unreliable, generating widely varying ranges of estimates that are highly sensitive to particular assumptions.

For example, a prominent result from one popular version of these models is that we should accept global warming of 3.5 degrees Celsius relative to pre-industrial levels. 

This is far higher than the 1.5-2°C limit that the international community adopted in the 2015 Paris agreement. In fact, the Intergovernmental Panel on Climate Change has emphasized that the risks associated with global warming of 2°C are much greater than at 1.5°C, so the risks at 3.5°C obviously are far greater.

The 3.5°C temperature increase results from the assumptions made in the model, including the dangerous failure to take seriously the extreme risks that unmanaged climate change poses to our environment, lives, and economy. 

Moreover, integrated assessment models don’t adequately recognize the potential role of innovation and increasing returns to scale in climate action.

Another problem with the Obama methodology is that it disadvantaged future generations. Much of the benefit of curbing emissions now lies in avoiding the risk of dangerous climate change decades in the future. 

That means we have to ask how much we care about our children and grandchildren. 

If the answer is “not a lot,” then we need not do too much. But if we do care about them, that has to be reflected appropriately in our calculations.

Formally, the Obama-era methodology addressed this issue by making assumptions about discounting, showing how much less a dollar will be worth next year (and the year after) compared to today. 

The Obama administration used an annual discount rate of 3%, implying that to save $1 in 50 years, we would be willing to spend only 22 cents today; to save $1 in 100 years, we would be willing to spend less than five cents.

There is no ethical justification for giving so little weight to future generations’ welfare. But there is not even an economic rationale once we take risk into account.

After all, we pay insurance premiums today to avoid losses tomorrow – in other words, to mitigate risk. We typically pay, say, $1.20 to get back $1 next year on average, because the insurance company delivers the money when we need it – like after a car accident or a house fire. 

With spending that lowers future risks, the appropriate discount rate is low or can be negative, as in this example, when the potential effects could involve immense destruction.

Spending money today on climate action is like buying an insurance policy, because it reduces the risk of future climate disasters. So, risk translates into a lower discount rate and a higher carbon price.

Now that the Biden administration has committed itself to the international goal of limiting global warming to 1.5-2°C, it should embrace a second, more reliable way to calculate the SCC. It is simply the price at which we will be able to reduce emissions enough to prevent the world from heating up dangerously.

This is the price that will encourage the low-carbon investments and innovations we need, and help to make our cities less congested and polluted. Many other complementary policies will be necessary, including government investments and regulations. 

As the international carbon-pricing commission that we co-chaired emphasized in its 2017 report, the more successful these policies are in curbing CO2 emissions, the lower the carbon price could be in the future. But the likely SCC would be closer to $100 per ton by 2030 than the $50 per ton estimated by the Obama administration (with a 3% discount rate). 

An SCC at the upper end of the $50-100 range we suggested in 2017 is entirely appropriate, given that the Paris agreement’s targets have rightly become more ambitious – a 1.5°C limit on warming and net-zero emissions by 2050.

These may seem like technical matters best left to the experts. But too many experts have not sufficiently accounted for the scale of climate risks, the well-being of future generations, and the opportunities for climate action given the right incentives.

The Biden administration must put a high enough price on carbon pollution to encourage the scale and urgency of action needed to meet the commitments it has made to Americans and the rest of the world. The future of our planet depends on it.

Nicholas Stern, a former chief economist of the World Bank (2000-03) and co-chair of the international High-Level Commission on Carbon Prices, is Professor of Economics and Government and Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000) and chair of the US President’s Council of Economic Advisers, was lead author of the 1995 IPCC Climate Assessment, and co-chaired the international High-Level Commission on Carbon Prices.

The future of money is gold

 By Alasdair Macleod

This article explains why the successor money to failing fiat is gold, not cryptocurrencies. 

Cryptos can only act as stores of value so long as fiat exists. 

I describe how a world transacting with monetary gold and properly constituted gold substitutes works. 

It explains how and why unbacked bank credit expansion, which in natural Roman law was ruled to be fraudulent 1,800 years ago, can and should be eliminated in a post-fiat world, thereby ending destructive credit cycles.

Gold exchange standards, which are comprised of gold-backed money administered by the state, worked extremely well when properly implemented, and it is the siren songs of inflationism that are at the root of the current crisis. 

If the transition from worthless fiat back to gold standards is handled properly, an initial recovery to fully functioning economies need not take more than a year or so.

The pressure on future governments to reject inflationism in favour of free markets and sound money should not be underestimated. It is not rocket science. All we need are politicians in whose interests it is to see the light and have the determination to take their electorates with them. 

It will require them to hand back to individuals the responsibility for their own actions, enabling the requisite cuts in government responsibilities and expenditures to be made.

That child of fiat money, the welfare state and all the government actions to protect it will have to end, with the exception of the absolute basics.

The politicians to facilitate these changes do exist, though their voices are not heard. 

But the moment fiat collapses, we have good reason to believe they will re-emerge from under the misguided consensus they had been elected to deliver. It will be in their clear interest to do so, and monetary collapse giving birth to civil disruption can be avoided.


While there is a growing consensus that the days of fiat currencies are finally drawing to a close, the debate about their successor is misinformed due to a lack of understanding about the qualities required of money. 

This growing consensus is still a minority view, triggered by cryptocurrencies and bitcoin in particular, with enthusiasts claiming bitcoin to be the money of tomorrow.

To be long-lasting, stable and practical, the choice of money should be down to its users. But governments have imposed state money on their populations for over a century now, half of which time they pretended their currencies were gold substitutes. 

That was until President Nixon ended the fiction by suspending the Bretton Woods agreement, and the unbacked dollar fully replaced the dollar notionally backed by gold as the international standard.

Bitcoin hodlers now like to claim that people will choose bitcoin to replace fiat, ignoring the impossibility of a completely inflexible settlement medium acting as money.

In recent months bitcoin and other distributed ledger cryptocurrencies have acted as effective stores — even enhancers — of wealth at a time of developing hyperinflation of fiat money quantities. 

Assuming governments do not act to squash this upstart rival to their own currencies, bitcoin’s price could continue to rise. 

But make no mistake, the bullish argument is no more than one of a comparison between a restricted and capped issue of bitcoin against an ever-increasing issue of fiat. 

As long as fiat exists, so will the differential between rates of issue.

But a store of wealth is not the same as a medium of exchange. Bitcoin’s success as a store of wealth discourages its circulation as money. 

In a world of fiat, who in their right mind would want to use bitcoin to acquire goods and services, when on a mathematical projection its value measured in fiat would be greater tomorrow? 

And following the demise of fiat, the argument against the circulation of bitcoin as the world’s medium of exchange would then apply directly to its exchange value for goods and services. 

Any propensity for economies to grow would then be hampered by rapidly falling prices. 

Furthermore, its circulation as a medium of credit, vital for entrepreneurial innovation, would prove to be impossible.

These are the practical reasons why cryptocurrencies, backed by nothing more than their strictly limited issuance, cannot act as money. To this we must add a further impediment. Central banks do not possess bitcoin, but they do possess gold. 

Their last resort is to replace their fiat money not with a bitcoin standard but with their gold reserves. 

Only then can their governments pay their essential bills in a post-fiat world.

It is difficult to justify the existence of cryptocurrencies following the demise of fiat, except, perhaps, in the form of central bank digital currencies fully exchangeable into gold coin. 

In monetary terms, that would be little different from converting existing fiat into gold substitutes. 

But distribution of money in this form becomes radically different, removing commercial banks from being intermediaries between the central bank and the public.

Necessary changes in the role of commercial banks are addressed later in this article. 

Meanwhile, of one thing we can be certain, and that is the state will do everything in its power to retain control over money. 

It knows of nothing else, and both politicians and economists take government control over money for granted, after decades of so-called progress following the abandonment of classical economic theory.

Having dismissed distributed ledger cryptocurrencies, and specifically bitcoin, from becoming the replacement for fiat currencies, we know that gold must return as the core of future money. 

Even if the immediate statist reaction to a fiat collapse is to clamp down on the freedoms inherent in society in a last-ditch attempt to retain control over prices, these restrictions will fail. 

But the collapse of fiat currencies will be so traumatic for nearly everyone, that attempts to return to unbacked fiat will obviously not be an option and can be ruled out. 

Bitcoin’s pretence to be a store of value ceases when a transition from fiat to gold-backed currencies emerges.

For everyone, it will be back to the classroom to learn the basics of money.

The basic function of money

Money’s basic function is to facilitate the exchange of goods and services, its role always being temporary. 

Both parties in a transaction must have faith that the money is readily accepted by everyone with whom they transact, and that means that all those counterparties must have faith that their extended counterparties will accept it as well. 

This has always been gold’s strength. It is a considerable disadvantage for fiat money, whose acceptance is confined by national boundaries.

We exchange goods and services because it is infinitely more efficient to buy from others that which we cannot easily provide for ourselves. It is the basics behind the division of labour, which extends beyond national boundaries and upon which international trade is based. 

We specialise in our own production, maximising the quality and volume of our output and selling it for money so we can buy those other things we do not provide for ourselves. 

It means we must keep a float of money, or at least retain a facility to access it at short notice, in order to satisfy our daily needs and wants. And who sets that amount? Well, we each do as transacting individuals.

When we have a temporary surplus of money, such as from the sale of an asset, we reinvest or spend it. We might buy another asset or lend it to someone else (usually through an intermediary) for interest. But other things being equal, we always return our balances to a customary level of money liquidity, informed by our preceding habits.

The general level of prices is set by the purchasing power of the money in which it is measured. 

The two most important variables are changes in the quantity of money in circulation, and changes in the preferences that people have for holding money relative to goods. 

Of the two, changes in relative preferences can have the greater immediate impact on prices. 

If people decide as a whole to reduce their preference for money, then the general level of prices measured in their money will rise. 

Indeed, hyperinflation, conventionally described as a catastrophic rise in prices, is the visible symptom of a widespread flight out of money. 

In other words, it occurs when preferences evolve towards not holding any money at all and to get rid of it as quickly as possible.

Alternatively, if there is an increased preference for holding money, prices will fall. 

This additional preference for money can be expressed in two ways. 

It can be held as physical cash, but as we have seen above people tend to retain a level of spending liquidity, deploying any excess. 

More commonly, in this case people increase their savings. An increase in savings generates a shift in production methods to compensate for the lower prices of consumer goods which are the consequence of an increased preference for money. 

The greater supply of capital for investment tends to reduce interest rates and alters the businessman’s calculations in connection with his production. 

Lower interest rates will increase his deployment of monetary capital, investing in machinery and other cost-saving factors at the expense of other forms of capital deployment, such as labour costs.

These are the considerations behind the deployment of money in a community, whether it is fiat money or gold. It is the way economic actors make best use of the various forms of capital available. 

In free markets, which have proved to be the most consistently progressive of systems, production does not need the stimulus of additional money to that already in circulation. 

That is a Keynesian myth.

But the basic function of money is to act as the objective value in all transactions, for which it must be widely available both for day-to-day transactions and in capital markets. 

And it is the loss of the certainty of its objective value that is now leading to the end of fiat.

Trading with gold as money

As a circulating medium, gold and its properly established and exchangeable substitutes have proved to be the most effective lubricant for economic progress. 

It behoves us to take a moment to understand why this is the case, and why its circulation as money was central to the rapid and unprecedented improvement in living standards in the nineteenth century.

People in a community, town, city or even a nation set their own monetary requirements and the level of their trade. Let us assume that in doing so, the general price level differs from that of a neighbouring population. 

The conditions then exist for an arbitrage to take place, whereby gold payments will flow to the community with the lower prices when economic actors in the community with higher prices take advantage of them. 

Price differentials will tend to close to a level that reflects transaction and transport costs, so the purchasing power of gold in the two communities converge. This understanding in classical economics is the basis behind purchasing power parity theory.

Additionally, savings in gold will seek out the higher investment returns between the two centres. It is likely that the centre with lower costs will offer the greater attraction to capital flows, but this is less certain. 

However, the quantities of gold held as savings are always significantly less than the quantities spent in consumption in an economy that uses monetary capital efficiently. 

The arbitrage takes place both through the trade of goods and also by the deployment of capital exploiting interest rate and opportunity differentials, so that a convergence in both prices and interest rates is achieved. 

And what applies between two communities using gold as money applies between them all, so that across all unfettered, free market economies which maximise the benefits of the division of labour, the benefits of gold as money are enjoyed by all.

It is therefore easy to see that in a commercial world with effective transport and communications, whatever the local preferences for holding money relative to goods may be, multi-centre arbitrage tends to produce a common price level and a common level for interest rates. 

These adjustment factors are conducive to trade, not only between communities but between nations. And trade priced and settled in gold is, all else being equal, far more efficient than when individual fiat currencies are involved, because with gold as the common money national boundaries are no longer barriers to payments and trade is truly global.

Given gold’s ubiquity as money, the effect of localised changes in general preferences for holding gold relative to goods can be regarded as minimised. An additional but unrelated factor is the inflation of above-ground stocks of gold through mine supply, but this is broadly offset by population growth. 

And a substantial element of gold usage is non-monetary, mainly for jewellery, which becomes a flexible source of monetary gold if markets demand it.

Technological innovation and improvement in production methods as well as competition all tend in the long run to reduce the general price level of goods and services measured in gold. 

So, while there is little change in the general level of prices from the money side, there can be a significant reduction in prices over long periods of time from the goods side. 

The effect is to enhance the purchasing power of savings, leading to stable, low interest rates and improved living standards for all but the indolent.

In summary, when gold is the basis of all transaction settlements, economies become self-regulating and self-correcting. Successful economic activity is rewarded with profits and the opportunity to accumulate wealth. In every respect, government intervention and regulation results in the opposite.

The role of bank credit

In our sound money ideal, Schumpeter’s process of creative destruction ensures that all capital resources tend to be deployed efficiently. Failing projects are abandoned and capital reallocated to those that promise better returns. 

And those returns are only achieved by entrepreneurs who realise that to achieve profitable sales to consumers they must regard the customer as king. It may seem utopian, but it is not a fantasy and it contrasts with the current fiat dystopia.

A common source of economic disruption comes from the expansion of bank credit, which always results in a destabilising business cycle. Along with central bank fiat money, the ability of commercial banks to create credit money out of thin air has no role in a sound money environment. 

Under Roman, or “natural” law, the practice of taking in deposits and lending them out in the bank’s name conflated two separate functions. The Roman jurist, Ulpian (130—233AD), commented that “To loan is one thing and to deposit is another”, drawing the distinction between property upon which no interest is paid and property upon which it is paid.[i] 

Today, the distinction has shifted. Now it is made between custody under licenced contract, and with all other banking deposits, including cash balances upon which no interest is paid.

This elision of practice away from natural law has shifted further to the creation of loans by banks without having interest bearing deposits to back them. 

Instead, banks rely on the drawing down of loans to create those deposits, including additional cash balances which Ulpian deemed to be fraudulently deployed. 

This use of funds was enshrined in the English Bank Charter Act of 1844, upon which today’s global banking practices are based.

It is variations in this form of unbacked money which lies behind the business cycle. 

When business conditions appear to be improving, bankers naturally wish to increase their loan business. 

They do this not by deploying their own capital, but those of their depositors and would-be depositors, with any mismatches addressed through the interbank money markets. 

Hence the term, fractional reserve, being the ratio of balance sheet liabilities to the bank’s own capital.

Additional bank credit leads in time to increases in the general level of prices and higher interest rates. Higher interest rates undermine business calculations, which results in bankers’ concerns about the security of their lending. 

They then withdraw circulating capital upon which businesses rely for the circularity of their cash flow, leading to a business slump.

This description of the flow and ebb of bank credit is deliberately simplistic, but the disruption to the process of Schumpeter’s concept of creative destruction becomes obvious, with the credit crunch taking down viable businesses along with the zombies. 

Central banks then attempt to support the economy to offset the depressing effects of bank credit being withdrawn, calling a halt to the process of creative destruction. 

All they succeed in doing is to encourage even more bank credit creation in subsequent credit cycles, keeping the zombies afloat, and leading to a series of increasingly destabilising credit contractions as the quantity of debt increases over the cycles.

As an essential part of the return to sound money, waves of unbacked bank credit must be stopped. Already, this appears to be a long-term objective of central banks with their proposed digital currencies, which will bypass commercial banks entirely. 

But where this concept fails is CBDCs are seen by policy makers as an efficient and targeted means of more monetary expansion. 

Instead of this inflationary course, Ulpian’s words should guide us, splitting the deposit function from lending, turning banks into either pure custodians or arrangers of loans — and never should the twain be mixed.

An alternative and perhaps more practical alternative is to encourage banks to reform on these lines by removing the limitation on banks’ corporate liabilities. 

The tendency for bankers to get carried away with gearing up their balance sheets in the good times would be moderated by knowing that in doing so they personally risk losing everything. 

With unlimited liabilities, the oft-used shelter of limited liability incorporation is removed. And many banks can be expected to evolve back to partnerships, arranging loans and lending partnership capital in the manner of earlier investment banks, but without taking in deposits.

Pricing in gold

In order to understand how prices are set in markets where gold is money, we must assume there are strict rules put in place so that circulating currency is gold and not fiat masquerading as gold. 

First among these is that the central bank can only issue fully backed gold substitutes, and the mints provide gold and silver coins. 

For every additional unit of currency issued it must acquire gold to cover. 

Secondly, as described above the licence given to banks to create money in the form of credit out of thin air must be rescinded: it is this facility that has led to the boom-and-bust cycle, mistakenly attributed by Keynes to businesses and not to fluctuating credit.

The starting point for the relationship between gold reserves and circulating currency need not be total, the key being that further issuance of currency must be fully backed by additional gold reserves, while sufficient gold is held as a base to give the markets confidence that the ratio of currency units to gold weight will be easily maintained. 

What would otherwise be fiat becomes a gold substitute, and to seal the deal it must be convertible into gold coin at the public’s option.

When gold is money and if unbacked bank credit is eliminated, persistent trade imbalances cannot arise. This is because the credit is not available to finance cross-border purchases, other perhaps than self-extinguishing trade finance specifically for the purpose of facilitating a payment settlement chain. 

Imports, including oil and other commodities, have to be paid for on an aggregate basis by exports, except when there is an arbitrage between centres to adjust price levels, as described above. 

Trade imbalances cannot persist between nations because net importers will suffer a drain on their gold reserves, reducing domestic prices. Government spending is restricted to being financed by taxation and genuine savings, otherwise in time markets will force it to devalue its currency against gold. 

The inflationary financing of government deficits will no longer be an option.

Without the dominating presence of commercial banks in regulated and unregulated financial markets (which finance their trading positions by the expansion of bank credit), gold-backed money means commodity speculation becomes restricted to matching settlements between commodity producers and speculators. 

Therefore, hedging for agricultural products in futures markets still function, but the suppression of other commodity prices by expanding their paper representations to soak up speculator demand will cease.

Commodities priced in gold will therefore be more stable because destabilising trends set in motion by credit flows disappear. 

Instead, it is the shifting patterns of genuine demand and their effects on supply that set individual prices for raw materials and the various sources of energy required for an economy to function.

Government finances

When the principles of sound money are understood and accepted by a reformed government, it follows that they have no option but to discard inflationism and the policies of monetary cranks. 

There will be a better appreciation of the difference between productive private sector activity and the distorting effects of government intervention, which by their nature do not satisfy the needs and wants of consumers, but those of special interest groups. 

And we must hope that those who understood sound money and free markets before they were elected remember them despite denying them subsequently while in office.

We observe the return to free markets and sound money as the prospective future from our current standpoint. 

Today, we have only intrusive statist intervention with its propaganda and find it hard to imagine a state motivated to travel in the opposite direction from the increasing suppression of individual freedom. 

States will have to discard widespread welfarism, other than to a strictly limited extent, which is inconceivable to all who have grown up with it. 

But we are talking about a future where the principal means of financing welfarism — debilitating taxes on the fruits of production and destructive inflationism —have been proved to be disastrous and must be abandoned.

A new financial environment will exist with all the consequences and benefits that flow from it. 

Any relapse into the old ways of believing in mythical money trees will be punished. 

In the past, the reversion to sound money has always led to prosperity relative to the previous economic condition. 

We may not get there in one bound: the socialists will continue to push for their policies of failure. 

They will be a minority threatening to grow again once the monetary situation is stabilised. It will take leadership to ignore these siren voices and argue a convincing case for sound money. 

Many nations will doubtless fail in this quest; but the success of those states which return freedom to their peoples and oversee sound money is likely to place limitations on socialistic ideals elsewhere.

Historians have concluded that monetary and economic failure lead to revolutions and wars. 

That is a mistake. 

More correctly, it is the subsequent mishandling of the aftermath that leads to civil strife. 

Reading Hayek’s The Road to Serfdom, this becomes clear. 

It is the failure of the post-crisis government which leads to cries for strong leadership, likely to end with a dictatorship. 

But the principal difference between the rise of the Nazis, upon which Hayek’s analysis was based, and that of the collapse of a worldwide currency system is that everyone is in the same boat. 

There is no offset of stable foreign currencies to rely on for economic activities during and following the collapse, which has the effect of creating a division between big business and foreigners on the one hand and domestic citizens living entirely with a collapsing currency on the other. 

The division will hardly exist — billionaires and speculators will be levelled along with everyone else.

The political class worldwide will be forced to relearn its craft very quickly. Politicians will have the advantage of starting with a blank sheet of paper and the opportunity to carry their electorates with them. 

It will allow them to tackle today’s economic and monetary fallacies head on, particularly the belief in the existence of a magic money tree. 

With that taken away, it becomes clear to all that welfare obligations will have to be radically cut to an affordable level, returning responsibility for the consequences of their actions to individuals. 

The size of the state administration also must be cut by ruthlessly examining which governments functions are necessary and which are not. 

Crony capitalism ends, as does pandering to the unions. 

A state which reduces its financial burden on the economy to 20% or less will see a rapid recovery under sound money, with new and existing suppliers of products freely demanded by consumers driving it.

[i] See de Soto; Money, Bank Credit, and Economic Cycles, Chapter 4 for a fuller description of the evolution of Roman law with respect to irregular deposits.    


What market break-evens do and don’t tell you about inflation fears

The closely watched gauges are too volatile to be a reliable guide

If you had to pick an emblem of the wild ride that financial markets have been on, it would be Carnival. 

When the pandemic took hold, its cruise ships were regarded as floating petri-dishes. 

Yet last April it was able to raise capital, as the corporate-bond market thawed. 

More recently it raised $3.5bn at half the interest rate that it paid last year. 

Now all the talk is of pent-up consumer demand and the inflation that will unleash. 

Carnival’s bookings for the first half of 2022 are above their level in 2019. 

The company has captured the market zeitgeist once again.

If you can marvel at the speed of the firm’s change of fortune, marvel too at another turnaround. 

The yield gap between ten-year Treasury inflation-protected bonds (tips) and conventional bonds of the same maturity is widely seen as a measure of long-term inflation expectations. 

These inflation “break-evens” have soared to 2.2% from a low of just 0.5% last March.

Serious people are talking of a return to 1970s-style inflation. In America bumper fiscal-stimulus packages seem to arrive like overdue buses, one after another. 

They are layered on top of unprecedented monetary easing and a pledge by the Federal Reserve to tolerate inflation above 2% for a while. 

The case for higher inflation seems more persuasive than it has for years. But break-evens will not tell you a lot about whether it might be sustained. 

They are too volatile to be a reliable guide.

A jump in annual inflation seems assured. 

Last spring, when cruise liners were beached, there was a glut of crude oil in storage and in seaborne tankers. The month-ahead price of oil briefly turned negative. 

A year on, inventories are falling. 

The price of a barrel of Brent crude has surged past $60. The trend is mirrored in the rising prices of other commodities. That will push up year-on-year comparisons of prices and thus annual inflation. 

Commodity markets offer a template of what could yet happen in the wider economy: a surge in demand meets constrained supply, leading to inflation.

In the central-banking model, expectations are self-fulfilling: businesses set prices and wages in accordance with the inflation they look ahead to. 

Yet it would be unwise to put too much faith in break-evens. 

They often reflect market influences that are only tangential to future inflation. Look at Britain, for instance. 

Legislation in 2004 obliged pension funds to match their assets to their long-term promises. This in turn spurred demand for long-dated index-linked bonds, and the debt-management office issued lots more of them. 

Despite this issuance, the demand for inflation protection has over time driven real yields down to unusually low levels and pushed up break-evens.

In America, the oil price appears to have an outsize influence on break-evens. A simple model based on the oil price and the dollar tracks market measures of expected inflation quite closely, according to a recent note by Steven Englander of Standard Chartered, a bank. 

His model, based on data from 2006 to 2016, predicts the recent rise in break-evens pretty well. Sharp rises in the oil price tend to push up inflation, but the effect is temporary. They ought not to influence medium-term break-evens, but in practice they do.

Bonds respond to changes in risk appetite in ways that have implications for implied break-evens too, says Eric Lonergan of m&g, a fund manager. The ten-year Treasury is the quintessential safe asset. It is liquid (unlike tips) and investors use it as protection against extreme moves in share prices. 

When the stockmarket falls hard, as it did last March, the price of a ten-year Treasury typically rallies, and the yield collapses, as investors seek safety. But as risk appetite returns, the effect unwinds. 

The yield curve has steepened—which is to say, yields on longer-dated bonds have risen relative to those on shorter-dated bonds—as it tends to at the start of an economic recovery. A corollary is that break-evens have also risen. But this is mostly the outcome of shifting attitudes to risk, rather than forecasts of inflation.

For all their shortcomings, inflation break-evens are closely watched. The whole edifice of asset prices, from shares to homes, rests on rock-bottom interest rates, and thus on quiescent inflation. 

Before the pandemic, financial markets were prone to periodic growth scares (trade wars, an over-zealous Fed, and so on) that spooked stockmarkets. 

Now we seem to be set for a series of inflation scares. And Carnival’s cruise liners are not even at sea yet.

Sleep research

Lucid dreamers may be able to talk to the outside world

Sometimes they can even answer questions

Dreams are clearly important. 

All humans have them, as do animals from cats to elephants. 

Neuroscientists believe they are involved in the processing of memories. 

Yet studying them is limited by the fact that dreamers themselves cannot talk to anyone while they are asleep. 

Researchers must rely on the unreliable recollections of people who have woken up. 

Now, though, a team of scientists led by Ken Paller, a neuroscientist at Northwestern University, think they may have found a way around that problem.

Dr Paller's starting point was the fact that lucid dreams—in which sleepers are aware they are dreaming—seem to be associated with only one kind of sleep, known as "rapid eye movement" (rem) sleep. 

During rem sleep, brain activity looks similar to that seen during waking hours. 

Past research has shown that it is possible for people to be influenced by events taking place in the outside world during rem sleep. 

So Dr Paller speculated that it might be possible to reach out to people in such states, and to get answers back.

As described in Current Biology, Dr Paller, along with colleagues in France, Germany and the Netherlands, gathered 35 volunteers. 

All were trained to be mindful of their mental state, and to analyse whether they thought they were awake or in a dream. 

In some labs (though not all) that training was accompanied by a distinctive sound. 

That same sound was repeated, as a cue, while the participants were in rem sleep. 

Participants were also trained to make distinct left/right eye movements to indicate they were aware they were dreaming, and in response to questions. 

They practised interpreting numbers conveyed as flashes of light, taps on their arm, or even as spoken words.

Thus prepared, the volunteers were wired up with electrodes and sent back to the land of Nod. 

Sometimes the researchers would initiate contact with their dreamers by playing the sound cue and waiting for an eye signal in response. 

At other times, the participants themselves sent an eye signal of their own accord. 

Once it was clear that contact had been made, the researchers asked their questions, and waited for answers.

Interviewed upon waking, the participants reported that the questions had been incorporated into their dreams. 

One said an audio question was heard through a car radio; another that flashes of light sent by the researchers manifested as a flickering light. 

One of the numerical questions even manifested as the street number of a house. 

Intriguingly, participants occasionally “remembered” a mathematics problem different from the one they had been asked—despite having given the correct answer, via eye movements, at the time.

The method often did not work. 

Participants signalled that they were engaged in lucid dreaming in just 26% of the sessions. 

Of that group, 47% answered at least one question put to them correctly. But it proves a point. 

Dr Paller and his colleagues say their findings refute the notion that attempting communication with dreamers is pointless. 

And that, in turn, may help researchers shed some light on what dreams are for, and how they work.