Trick or Treat Economy 

By John Mauldin

To Jerome Powell and the Fed:

It’s a lesson too late for the learning,
Made of sand, made of sand.
 In the wink of an eye, prices are rising
 In your hand, by your hand.
 Are you going away with no word of farewell,
 Will you leave your inflation behind?
 You should have tightened sooner, don’t mean to be unkind.
 I know tightening was the last thing on your mind
 You’ve got reasons a-plenty for waiting—
 This I know, this I know—
 Yet, the weeds of inflation have been growing.
 Please, don’t wait, don’t be Burns.

—Inspired (sort of) by Tom Paxton, 1964

The nice thing about Halloween is we can act scary without actually being scary. 

The vampires and zombies who knock on your door are just dressed-up kids having fun. 

We adults play along and give them candy. 

Everyone has a good time. 

The hardest part is staying away from the Snickers before the kids come.

The vampires and zombies knocking on the economy’s door are quite real. 

Sugary treats won’t make them go away, either. 

They have plans to complete, whether we like it or not. 

There’s almost no chance it will end well for us mortals.

Last week, I gave you my nutshell opinion: We are facing demand-driven inflation as a consequence of misguided monetary policy and misdirected fiscal stimulus.  

Those aren’t the only problems by any means, but they are the main ones. 

We may face the worst policy-induced economic calamity since the Smoot-Hawley tariffs triggered the Great Depression.

But even if not calamitous, it will be bad. Those in power have slowly but surely painted the economy into a corner. Every option is bad. All tricks, no treats.

Today, I’ll describe what I think will happen over the next year or so. 

I rarely make short-term forecasts because I’m usually early. 

Reaching the major turning points takes longer than we think.

This time may be different.

Policy Changes

The Federal Open Market Committee meets next week, and many expect it to announce the end of its COVID-era asset purchases. 

The Fed has been buying $120 billion in bonds every month, composed of $80 billion in Treasury bonds and the rest, mortgage-backed bonds. 

The committee will likely taper those amounts gradually, reaching zero by mid-2022.

Possibly, the FOMC won’t start tapering next week. 

That would be a mistake of major proportions, on top of the mistakes they have made every meeting this year. 

We know they watch employment closely, and the last two reports weren’t great until you look at job openings and the quit rate. 

Then you see employment is extremely tight. 

Practical unemployment is in the 2% range. 

They may still decide to wait another month or two, hoping for better- looking data that mutes criticism.

There’s also the curious failure to either renominate Jerome Powell as chair or nominate someone else, with only three months left in his term. 

(Referring to the Tom Paxton song, will he really go away? 

If Biden does that, it is yet another mistake.) 

Something must be happening behind the scenes. 

Maybe it relates to getting enough senators aboard. 

But it comes at a terrible time. 

The Fed doesn’t need a leadership vacuum while it is also trying to make a major policy shift.

Regardless, I think Fed officials will at least try to start tapering within a few months. 

It will still be too late. 

They are behind the curve—“a lesson too late for the learning.”

On the fiscal side, Congress is wrangling over the twin infrastructure/social spending bills. 

I assume they will both pass in some diminished form, though that’s not guaranteed. 

As a longtime observer of the political process, I find the lack of cooperation among Democrats entertaining. 

How can I be so callous? 

Because the same has been standard for Republicans for 40 years.

Back to the real world. 

Because the new spending will be spread over time, it probably won’t be as immediately stimulative as the COVID relief funds. 

It will add unnecessary fuel to the fire, but the debt will keep growing in any case. 

The new taxes, depending on the particulars, will no doubt have some effect, but we don’t yet know when or how much.

So, we have both the Federal Reserve and Congress on the cusp of major turns away from the post-COVID status quo, which the same Federal Reserve and Congress helped create. 

But there’s a third player: COVID itself.

With vaccines and treatments, we are on the way to managing (though not eradicating) the virus. 

Yet, we have barely begun to process the changes it brought to personal habits, consumer attitudes, and business practices. 

All these will have an economic effect, which means policymakers are trying to restore an economy quite unlike the one they knew before.

This complicates their efforts… but probably won’t stop them. 

It’s not a brave declaration, but we are not going back to the economy as it was in 2019. 

The economy of the Boring ‘20s will be much different.

Trapped Money

We know policy changes are coming, though not exactly when. 

We know broadly what they will look like. 

The next question is how they will affect the economy.

Let’s begin by recognizing the obvious: The forthcoming changes will build on previous policy changes that were ineffective at best and probably outright harmful.

A year and a half of QE (plus assorted other programs) tangentially helped business formation and employment, but COVID changed the entire zeitgeist. 

It was a massive kick in the head, and people simply changed their minds about what they thought was important in their lives. 

And that was one of the “reasons a-plenty” that the Fed should have stayed out of the way.

Their asset purchases served mainly to pump up stock prices, often the preexisting winners with near-monopoly status in their industries. 

Similarly, Fed-generated higher home prices helped homeowners who sold their homes, something not everyone is in a position to do. 

But everyone’s imputed values rose, as did their property taxes and maintenance costs.

That raises an important and often-missed point. 

The Federal Reserve is not the main cause of the inflation we see right now. 

Yes, they’ve pumped up the money supply, but most of the new money is trapped in the financial markets. 

It can’t escape unless banks lend it to someone. 

Their willingness to do so has been shrinking, not growing.

Source:  FRED

Worse, much commercial lending (and corporate bond issues) went to businesses that didn’t really need the cash but were incentivized by low rates to borrow it anyway. 

They are either keeping it in reserve or using it for non-growth purposes like stock buybacks.

The Fed’s stimulus created asset inflation in the segments it targeted. 

This has helped investors but done nothing to spur GDP growth. 

The broader price inflation emanates more from the fiscal stimulus, which, as I said last week, shouldn’t have been “stimulus” at all. 

Instead of helping those who lost jobs and income get through the crisis, it generated new demand, mainly for goods, which are now clogging the supply chains. 

The resulting shortages mean higher prices, i.e., inflation.

Now we see 5% inflation, improperly measured. 

If we measured actual housing prices, inflation would be in the high single digits at a minimum. 

Anybody that says inflation is not as bad as in the 1970s is comparing apples to oranges. 

Jerome Powell is in danger of being Arthur Burns, who kept saying that all the inflation data coming to his desk was transitory until it was +10%.

Ironically, this suggests the Fed’s forthcoming policy change will have little or no effect on CPI inflation. 

They didn’t drive it up, nor will they make it go down. 

But that doesn’t mean it will have no effect. 

The taper may remove some of the froth from stock and real estate prices. 

How quickly and to what extent will depend on their exit schedule.

Meanwhile, the goods inflation will likely ease as the demand-generating stimulus (hopefully) fades away. 

The extra unemployment benefits ended in the remaining states last month. 

New spending from the infrastructure packages won’t start for a few more months. 

So I suspect the supply chain problems will ease fairly soon. 

Here’s a note from Dave Rosenberg last week:

“Well, if a picture can tell a thousand words, then I have 3,000 words here below. Watch the “bottleneck” narrative soon die down. 

Always bet with US ingenuity, not against it. 

These photos come courtesy of a valued client and show the same thaw in the supply chain’s squeeze that has become evident of late in the expected supplier delivery delays from the various manufacturing diffusion indices.”

Source: Rosenberg Research

Walmart seems better stocked with bicycles now than it was in January, though, of course, that’s just one department of one retailer. 

Shortages are real. 

I was just reading about magnesium, which is essential to aluminum production. 

Most magnesium comes from China, where energy issues are causing a slowdown. 

Nonetheless, we learn to work around such problems. 

Microchip production seems to be on the upswing, which will help the automotive industry.

I often see the term “normalization” used to describe what the Fed is doing. 

It raises questions. 

First, do we really know what “normal” is? 

As noted, this economy is structurally different from the one we left behind in early 2020. 

Normal is a nebulous target. 

But even if we could go back, the previous normal wasn’t great.

And this reveals the real problems that are coming.

Modified Stagflation

Back in December 2019, I ended the year with a letter called Prelude to Crisis

I didn’t know anything about COVID-19 or the economic turmoil that would begin weeks later. 

I saw a crisis coming in 2020 for entirely different reasons. 

The Fed’s half-hearted effort to exit from QE had sparked a repo market crisis and large liquidity injections to stabilize the markets. 

Their “two-variable experiment,” as I called it, ended badly.

Even back then, before COVID, the fiscal authorities weren’t helping matters. 

Here’s part of that letter:

“Just this week, Congress passed—and President Trump signed—massive spending bills to avoid a government shutdown. 

There was a silver lining—both parties made concessions in areas each considers important. 

Republicans got a lot more to spend on defense, and Democrats got all sorts of social spending. 

That kind of compromise once happened all the time but has been rare lately. 

Maybe this is a sign the gridlock is breaking. 

But if so, their cooperation still led to higher spending and more debt.

As long as this continues—as it almost certainly will, for a long time—the Fed will find it near-impossible to return to normal policy. 

The balance sheet will keep ballooning as they throw manufactured money at the problem because it is all they know how to do and/or it’s all Congress will let them do.

Nor will there be any refuge overseas. 

The NIRP countries will remain stuck in their own traps, unable to raise rates, and unable to collect enough tax revenue to cover the promises made to their citizens. 

It won’t be pretty anywhere on the globe.”

At that point, the federal debt was about $23 trillion, not counting off-the-books borrowing. 

I was concerned it would keep growing, which at the then-current trend would have brought it to around $25 trillion by now. 

Instead, it is approaching $30 trillion due to the unexpected pandemic-related programs.

In 2019, it was clear ballooning federal debt would prevent the Fed from “normalizing” policy. 

The federal debt had almost tripled since the beginning of the last recession, under presidents and Congresses of both parties. 

“Spend more money” was seemingly the one thing everyone could agree on. They differed mainly on how to spend it.

Federal Reserve policy enabled the political folly. 

Real interest rates at or below zero made borrowing a lot less expensive for the Treasury. 

Borrowing at negative real rates made deficit spending not just feasible but turned it into another revenue source.

My friend Michael Lebowitz recently produced a fascinating chart. 

Noting that ex-Fed chair Ben Bernanke estimated every $6–$10 billion of excess bank reserves (the QE money) is roughly equivalent to lowering interest rates one basis point. 

Michael calculated a “Bernanke adjusted” Federal Funds rate.


With that adjustment, the nominal 0% Fed Funds rate was as low as -3% years before COVID and is now even lower. 

Fed Funds are effectively -5%. Adjusting for inflation would make it lower still.

Michael also showed another academic study that mirrored his analysis, using a different methodology that still pegged Fed Funds at a “mere” -2.5%.

We have been in what Mark Grant calls a “Borrower’s Paradise” for over a decade now, and politicians took full advantage of it. 

But remember what borrowing is: future consumption brought forward in time. 

Wise borrowing produces some kind of asset to replace the future consumption. 

That’s not what we have done.

COVID simply accelerated what was going to happen anyway. 

Indeed, it was already happening: Low GDP growth, high living costs, flat wages for many workers—general malaise, but not disaster.

Lately, many talk about “stagflation,” which in the 1970s was the combination of high unemployment and high inflation. 

Reagan ran on that theme and called it the “misery index.” 

When he ran in 1980, it was in the 19% range. 

I think something like that will be the next stage, but it will be our own variation, at least for the next few years: high inflation and low growth.

This will be a modified stagflation, though. 

Price inflation will vary tremendously as global trade patterns adjust to the post-COVID world. 

Some goods will be scarce in some places, driving their prices higher, even as others are abundant, also in varying places. 

Broad inflation measures will be less and less meaningful to everyday life. 

And that is even more so when they use the now increasingly irrelevant “owner’s equivalent rent.”

That may not sound so bad. 

The problem is it will also aggravate social and political tensions, with unpredictable results. 

In January 2020, I said we were entering the Decade of Living Dangerously

That’s proving to be an understatement.

That being said, if you looked at my portfolio (and you can), you would see that I am not bearish. 

I am fully invested, but not in long index funds. 

Some would say I’m way too aggressive for my age. 

I will admit to trying to dial back a little, but I keep running into so many great transformational, new technologies. 

I almost can’t help myself. 

I encourage you to call my friends at CMG and see what investments are in the “Mauldin Kitchen.” 

There is one particular private investment I really like that will be going away soon, so there is a little bit of time sensitivity here. 

Click the link and talk to my friends at CMG, and join me in what I hope will be a pleasurable experience.

New York, Dallas, and Dinners

I will be in New York November 6–11. 

The schedule is starting to get packed, but the thing I enjoy most about New York is the dinners. 

I have gotten my good friend and the greatest raconteur I know, Art Cashin, to tentatively commit to a dinner with all the usual suspects. 

Good times. 

New York always costs me about three pounds, but they are worth it. 

Of course, flying to Dallas and then Thanksgiving will cost another three pounds. 

And then, there is the Puerto Rican season of parties from early December to January 8 (Puerto Ricans take the 12 days of Christmas seriously). 

I will need to double my workouts and get serious after the beginning of the year.

Tom Paxton wrote “The Last Thing on My Mind“ in 1964. It was covered by almost everybody, though my favorite version is probably from The Seekers

It came out at the tail end of the Folk Era as we progressed to rock. 

I will probably offend younger readers, but the ‘50s through the ‘70s did, in general, produce the greatest music of my life (of course, I know there are major exceptions).

I will admit a personal addiction. 

There are some evenings that I spent several hours randomly hitting YouTube videos of music. 

Besides the obvious, I particularly enjoy a cappella quartets (I grew up on gospel) and chorales, Celtic music, and Gregorian chants. 

As a youth, I sang high tenor with the Fort Worth Opera chorus and got to be on the stage with Beverly Sills and Placido Domingo. 

I sang the solos for Handel’s The Messiah

I could hit the high C and above with a little bit of power. 

My music career went downhill after that. 

And then I had nasal surgery and now can’t carry a tune and am a low baritone. 


But I can listen and remember….

As you read this, I will be getting ready to go to a Halloween party in downtown San Juan with the theme of gangsters and molls. 

I randomly happen to have a pinstriped double-breasted Italian suit that I’ve not been able to wear since I bought it. 

Shane will, of course, look fabulous. 

You have a great week and just have some fun.

Your getting quite concerned about “transitory” inflation analyst,


John Mauldin
Co-Founder, Mauldin Economics


A very big balancing act

Creating the new hydrogen economy is a massive undertaking

It is also a delicate one

Today’s hydrogen business is, in global terms, reasonably small, very dirty and completely vital. 

Some 90m tonnes of the stuff are produced each year, providing revenues of over $150bn—approaching those of ExxonMobil, an oil and gas company. 

This is done almost entirely by burning fossil fuels with air and steam—a process which uses up 6% of the world’s natural gas and 2% of its coal and emits more than 800m tonnes of carbon dioxide, putting the industry’s emissions on the same level as those of Germany.

The vital nature of this comes from one of the subsequent uses of the gas. 

As well as being used to process oil in refineries and to produce methanol for use in plastics, hydrogen is also, crucially, used for the production of almost all the world’s industrial ammonia. 

Ammonia is the main ingredient in the artificial fertilisers which account for a significant part of the world’s crop yields. 

Without it, agricultural productivity would plummet and hundreds of millions would face starvation.

Tomorrow’s hydrogen business, according to green-policy planners around the world, will be vital in a different way: as a means of decarbonising the parts of the economy that other industrial transformations cannot reach, and thus allowing countries to achieve their stated goal of stabilising the climate. 

But for that vital goal to be met everything else about the industry has to change. 

It can no longer stay small. 

Morgan Stanley, an investment bank, reckons that, if governments take their green commitments seriously, today’s market could increase more than five-fold to over 500m tonnes by 2050 as these new applications grow (see chart 1). 

And it has to become clean, cutting its carbon-dioxide emissions to zero.

Clean hydrogen is quite plausible. 

The current method of making it from fossil fuels could be combined with technology which separates out the carbon dioxide given off and stores it away underground, an option known as carbon capture and storage (ccs). 

Alternatively, fossil fuels could be taken out of the process altogether. 

Electricity generated from renewables or some other clean source could be used to tear water molecules apart, thus liberating their constituent hydrogen and oxygen, a process called electrolysis.

One way to make these technologies cheap quickly would be with a carbon price high enough to make the current industry adopt them. 

That looks highly unlikely. 

In its absence governments are trying to spur demand for clean-hydrogen capacity through industrial policy and subsidy, rather as they spurred the growth of renewables. 

As the European Union’s hydrogen strategy puts it, “From 2030 onwards and towards 2050, renewable hydrogen technologies should reach maturity and be deployed at large scale to reach all hard-to-decarbonise sectors.” 

Forcing the industry to the level of maturity which will allow that deployment is set to soak up $100bn-150bn in public money around the world in the decade to 2030. 

Some $11bn of that will be spent this year, according to Bloombergnef, a data company.

The problem with all this is that hydrogen is not like renewable electricity, the green transformation it seeks to build on. 

Green electricity helps the climate simply by replacing dirty electricity. 

For the most part hydrogen helps the climate only when used for new purposes and in new kit. 

For companies to build or purchase that kit, they need to be sure there will be plentiful and affordable clean hydrogen. 

For companies to produce clean hydrogen in bulk, they need to know that there will be users to sell it to. 

That is the rationale for public money being pumped in to prime both supply and demand.

The Hydrogen Council, an industry consortium, reckons some 350 big projects are under way globally to develop clean-hydrogen production, hydrogen-distribution facilities and industrial plants which will use hydrogen for processes which now use fossil fuels (see map). 

They will have electricity demands in the tens and hundreds of gigawatts, on a par with those of large countries, and are slated to receive $500bn of public and private investment between now and 2030. 

That expenditure could end up embarrassing governments and enraging shareholders if today’s high expectations do not pan out.

Hydrogen had its enthusiasts long before climate change became an issue. 

Its appeal was threefold.

It is very energy-dense: burning a kilogram of it provides 2.6 times more energy than burning a kilogram of natural gas. 

When burned in air it produces none of the sulphates or carbon monoxide through which fossil fuels damage air quality both outdoors and in, though it does produce some oxides of nitrogen; when used in a fuel cell, a device that uses the reaction between hydrogen and oxygen to produce electricity without combustion, it produces nothing but water. 

And because it can be made by electrolysis, or from coal, it was held to free its consumers from the tyranny of oil producers—an advantage which, after the oil shocks of the 1970s, accounted for the first serious spurt of interest in hydrogen on the part of governments, as opposed to maverick visionaries.

The fact that the enthusiasm dates back so far, though, has become an energy industry joke: “Hydrogen is the fuel of the future—and it always will be.” 

The problem is that there is no natural source of hydrogen; on Earth, most of it is bound up with other molecules like those of fossil fuels, or biomass, or water. 

The laws of thermodynamics dictate that making hydrogen from one of these precursors will always require putting more energy in than you will get out when you use the hydrogen. 

That is why hydrogen is today used for processes where chemically adding hydrogen atoms to things is of the essence, such as the manufacture of ammonia for fertilisers and explosives. 

Only in very niche applications, such as the highest-performance rocket motors, is it burned as a fuel.

Two paths you can go by

The reason that the old joke now looks set to lose its punchline is that even with lots of clean electricity—a huge challenge in itself, but also a sine qua non for deep decarbonisation—there are parts of the economy which currently look likely to resist electrification. 

Windmills and Teslas alone are not enough to save the world.

Energy pundits have taken to describing the emissions-free hydrogen industry they imagine meeting these very-hard-to-electrify needs with the help of a conceptual pantone chart. 

Today’s high-emissions hydrogen is known as grey, if made with natural gas, or black, if made with coal. 

The same technologies with added ccs are known as blue. 

The product of electrolysers running off renewable energy is deemed green; that of electrolysers which use nuclear power is pink. 

Hydrogen produced by pyrolysis—simply heating methane until the hydrogen departs, leaving solid carbon behind—is turquoise.

At present, grey hydrogen costs about $1 a kilogram—the cost depends largely on the natural-gas price. 

Add colour, and you add a premium. 

No one is yet making blue hydrogen at scale, but when they start doing so the costs will probably be double those for the grey. 

Green hydrogen, meanwhile, costs over $5/kg in the West. 

In China, which typically uses alkaline electrolysers, cheaper but less capable than those preferred in the West, prices can be lower.

In June America’s Department of Energy unveiled a “Hydrogen Shot” initiative that aims to slash the cost of green, pink, turquoise or blue hydrogen by roughly four-fifths to $1/kg by 2030—a decline similar to those seen in the solar panel and battery businesses. 

It will benefit from a number of following winds.

The first is the continuing decline in the cost of renewable electricity. 

This matters because electricity typically makes up most of the cost of electrolysed hydrogen. 

The second is that electrolysers are getting better and cheaper.

Bloom Energy, an American company which first came to prominence in the abortive hydrogen boom of the 2000s, recently unveiled a solid-oxide electrolyser which it reckons could be 15-45% more efficient than rival products, in part because it operates at a very high temperature. 

Technology based on proton-exchange membranes (pems) is also getting better. 

The promise of big hydrogen projects has also made it plausible to design and build much larger electrolysers than have been seen before, which brings down the cost per kilogram.

Prices will fall as a result of growing experience, just as they have in the solar sector. T

oday the world has about three gigawatts (gw) of electrolyser capacity—a gigawatt being the power output of a nuclear plant or a very large solar farm. 

McKinsey, a consultancy, expects that to grow to over 100gw of capacity by 2030. 

Bernd Heid, one of the company’s experts in the field, reckons this scaling up could in itself cut the cost per gigawatt of capacity by 65-75%. 

In short, a grown-up and dynamic industry is emerging out of a business which until recently bordered on the artisanal.

itm Power, a British maker of electrolyser equipment, has seen its tender pipeline more than double in the past year. 

The firm raised £172m ($226m at the time) last year to expand capacity to 2.5gw per year. 

Graham Cooley, its boss, says his firm “now has a blueprint for a gigawatt factory, we can cut and paste”. 

His firm is involved with Siemens Gamesa, a turbine-maker, in a big “hydrogen hub” to be built on the shores of Britain’s Humber estuary.

A sign on the wall

As a result of these forces, the price of hydrogen made from renewable sources is plunging, and seems likely to keep doing so. 

Bloombergnef predicts the price of green hydrogen using pem electrolysis could fall to just $2 per kg by 2030, making it competitive with blue hydrogen (see chart 2). 

Morgan Stanley goes significantly further, arguing that at the very best locations for renewables in America, green hydrogen will be able to match grey hydrogen’s $1/kg “in 2-3 years”.

The markets that will matter for green, blue and pink hydrogen will be those where they offer a clear advantage over other non-fossil-fuel-based approaches, most notably renewable electricity. 

One of those is in the electricity sector itself. 

This month the New York Power Authority, a utility, is starting a pilot project in which green hydrogen made from hydroelectric power is blended into natural gas, in concentrations up to roughly 30%, to generate electricity from a normal gas turbine.

This looks like thermodynamic nonsense, as the amount of electricity produced by burning hydrogen in a turbine can never be as much as the amount that was used to make it; feeding the energy used to power the electrolyser directly into the grid would provide more kilowatt-hours. 

But not all kilowatt-hours are equal. 

Sometimes renewables produce electricity in excess, driving its price down to zero or even, on occasion, below—there are some situations when people get paid to take electricity off the grid, or charged for producing it. 

In a system with a carbon price it could make sense to use green hydrogen produced when electricity is cheap to lower the cost of meeting supply with gas turbines when electricity is dear.

The same also holds if the hydrogen is grey but the hydrogen producer does not have to pay the price of its emissions. 

That provides no environmental benefit—the net emissions are higher, even though the emissions from the power plant are lower. 

Nevertheless some argue, possibly sincerely, that it is a way of increasing demand for hydrogen and thus priming the market for a greener future.

Hydrogen is not the only way to balance the times and places where electricity is in surplus with those where it is in high demand; large interconnected grids help a lot, as does battery storage and smart-grid technology that reduces loads when necessary. 

But for long-term storage that can deal with differences from season to season and even year to year, hydrogen looks better than any of its competitors.

An intriguing project under way in Utah involving the American arm of Mitsubishi, a Japanese conglomerate, will make hydrogen from local renewables, store it in nearby salt caverns and use it as a fuel to power a giant turbine producing clean electricity that will ultimately reach Los Angeles. 

Longer term, pure hydrogen could be sourced from far away. 

Marco Alverà, boss of Italy’s Snam, one of the world’s largest pipeline operators, and author of a recent book on hydrogen, believes green hydrogen can be shipped from Tunisia to Bavaria economically using a mix of existing and new pipelines. 

Australia and Chile are hoping to export hydrogen made from abundant local solar energy by ship.

Another market where hydrogen has an apparent edge over renewable electricity is steel. 

Coking coal is integral to today’s steelmaking, which accounts for about 8% of greenhouse-gas emissions; it provides not just the heat needed for the process but also the chemically necessary carbon. 

An alternative process, called direct-reduction, uses hydrogen to do much of the chemical work that carbon does in current smelters. 

ArcelorMittal, a European steel giant, recently committed $10bn to slashing greenhouse-gas emissions and is looking to hydrogen as a way to do it. 

US Steel has formed a partnership with Norway’s Equinor, an oil and gas company which is a ccs pioneer and now moving into blue hydrogen. 

Hybrit, a Swedish industrial coalition, delivered the world’s first batch of green steel to a customer in August.

Industrial processes like chemical reactors, cement kilns and glassmaking also require high temperatures, a requirement not always easily provided by electricity. 

In a recent report on the hydrogen economy the International Energy Agency (iea), a think-tank operated by rich-world governments, notes that hydrogen can directly replace natural gas in some processes already. 

Ammonia can also sometimes be “dropped in” as an easy substitute.

Crying for leaving

When it comes to aviation and shipping the role of hydrogen is a matter of intense debate. 

For short trips batteries might suffice. 

But planes using fuel cells could give battery-electric alternatives a run for their money. 

ZeroAvia, a startup backed by British Airways and Jeff Bezos, Amazon’s billionaire founder, completed the first fuel-cell-powered flight in a commercial-sized aircraft in Britain a year ago. 

Ferry operators in Norway and on America’s west coast are now experimenting with short-haul ferries powered by hydrogen fuel cells.

Airbus, a European aeroplane-maker, is giving hydrogen its full-throated support. 

In September, it confirmed a plan to power planes using hydrogen by 2035. 

Guillaume Faury, the company’s boss, extolled its virtues: “Hydrogen has an energy density three times that of kerosene…[it] is made for aviation.”

On the basis of weight, that is true.

On the basis of volume, alas, it is not. 

At room temperature and pressure, hydrogen is the least dense gas in the universe. 

So although by the kilogram it may carry three times more energy than kerosene, by the litre it carries 3,000 times less. 

The gas can be pressurised, which helps, especially for applications where big tanks are not a problem. 

But to get to within a factor of three of kerosene’s performance per litre hydrogen has to be liquefied. 

That requires chilling it down to -253°C (-423°F).

Little surprise, then, that Boeing, Airbus’s American rival, is more guarded. 

Its boffins agree that “hydrogen is fundamental to all sustainable aviation fuels”. 

But they reckon that flying a 747 across the Atlantic using liquid hydrogen would require filling all its passenger and cargo space with fuel. 

That is why for longer journeys, planes may end up using clean-hydrogen-based ammonia (as many large ships may do, too) or, more likely, synthetic hydrocarbons. 

In aviation, those synthetic fuels will have to be able to compete with advanced biofuels, the obvious alternative.

Michael Liebreich, a clean-energy guru, notes that, as one moves away from applications where hydrogen has clear benefits over renewable electricity, it becomes harder to see serious markets for the gas. 

To illustrate his point he has developed a “hydrogen ladder” which ranks uses from indispensable to unaffordable (see diagram).

An intriguing borderline case is afforded by domestic heating. 

On an efficiency basis, electrically powered heat pumps beat domestic boilers fired by hydrogen quite handily. 

But retrofitting urban housing already equipped with boilers to burn hydrogen may be more attractive in some places than trying to fit heat pumps on to every building. 

Britain is likely to be a test case for this trade-off. 

In August, its government unveiled plans for 5gw of low-carbon hydrogen production capacity by 2030 to replace natural gas in domestic and industrial applications.

Stairway to heaven

Near the bottom of Mr Liebreich’s ladder are fuel-cell electric vehicles (fcevs) used as cars. 

Toyota, a Japanese automobile giant, has longed to build them since the early 1990s, investing billions in the technology. 

Official visitors were ferried around Tokyo in such vehicles during the recent Olympic games, and the Japanese government has plans to expand the country’s fleet of fcevs, which numbered just 3,600 in 2019, to 200,000 by 2025. 

The Chinese government says it wants 1m of the things by 2030.

But as Mr Liebreich and many others point out, this does not seem sensible if the competition is a battery-powered electric car. 

Fuel cells add to an electric car’s price and complexity while offering no benefit in performance. 

They are also inefficient. 

About four-fifths of the power fed into a battery-powered electric vehicle gets used; conversion losses mean that an fcev is likely to manage only half that level of efficiency. 

A veteran Japanese utility executive whispers that Toyota’s stance makes no sense: “Millions of fuel-cell cars won’t happen. 

Even Honda gave up. 

Pride is why Toyota is sticking with it.”

That does not rule out other forms of road transport. 

Many of the world’s big lorry-makers, including Europe’s Volvo and Daimler, are racing against startups like Hyzon to bring hydrogen-fuelled heavy lorries to market on the basis that the weight and recharging time of batteries means they are not able to be used. 

According to dhl, a logistics company, when lorries with heavy loads need to travel farther than 200km (120 miles) batteries become unattractive.

America’s Cummins, known for decades for its conventional engines, is betting big on hydrogen, having acquired firms making electrolysers, fuel cells and hydrogen tanks. 

Tom Linebarger, its chief executive, says he is highly confident that hydrogen lorries will be “even money” with diesel lorries on total cost of ownership by 2030. 

Customers, he says, are worried about the reliability of vehicles with batteries. 

“If I am a distribution company and have fuel-cell vehicles using hydrogen, I don’t need to depend on the grid.”

As on road so, perhaps, on rail. 

France’s Alstom, the biggest rail manufacturer outside China, is already running hydrogen-powered trains in Germany. 

Compared with diesel trains, these whizzy locomotives emit no local air pollution, make very little noise and offer a ride as smooth as that of conventional electric trains. 

The firm thinks many of the 5,000 diesel trains to be retired in Europe by 2035 could economically be replaced by hydrogen trains. 

By 2030, hydrogen trains could make up a tenth of those not already electrified.

The Boston Consulting Group (bcg) reckons that hydrogen could be competitive on price with other ways of fuelling trains by 2030 even with no carbon pricing. 

The other big early market it sees is in construction equipment and other applications where the high torque provided by electric motors is useful and the long charging time for batteries a frustration (fork-lift trucks have proved to be one such niche). 

bcg expects heavy lorries, ships and applications in the chemicals industry will be close behind, and predicts an annual $200bn market for hydrogen-related machinery and components by 2050.

But this makes sense only if supply and demand grow in tandem. 

A business-as-usual approach in which supply was not stimulated would lead companies to double down on incumbent dirty technologies, particularly in industrial applications, as they update ageing capital equipment, leading to a pernicious lock-in of legacy equipment. 

But stimulating supply will generate resistance, both from incumbents in other fields and from finance ministries, unless demand is visibly increasing alongside it and delivering things which people want.

Comparing it to the renewables industry, which could feed in to existing grids, Mr Heid of McKinsey likens the hydrogen economy to a heavy flywheel: “It takes more to get it spinning, but once it’s going it really goes.” 

He might also add that spinning up a flywheel is a tricky business; let it go even a little off balance and you risk having it tear apart.

The dawn of the quantitative tightening era?

Central banks have rattled bond markets, but fears of a radical new regime are overdone

Robin Wigglesworth 

© Financial Times

Late last month Turkey’s central bank delivered the 1,000th global interest rate cut since the collapse of Lehman Brothers. 

The predictably contrarian Turkish move is likely to cap a remarkable era of easy monetary policy, with “quantitative tightening” the new market zeitgeist.

Bank of America, which tallied all those post-crisis rate cuts, estimates that central banks have also bought $23tn of financial securities over the same period through an array of quantitative easing programmes. 

But its analysts now expect this “liquidity supernova” to finally fizzle out next year.

The Bank of Canada last week became one of the first central banks to break ranks, unexpectedly ending its bond purchases entirely and signalling that it will lift interest rates sooner than expected in 2022. 

The Reserve Bank of Australia has also turned surprisingly hawkish. 

But the big event will come later this week, when the US Federal Reserve is expected to start trimming its $120bn-a-month bond-buying. 

Could we truly be seeing the beginning of a new era for monetary policy?

Many analysts and investors think so. “Central bank policies are on a one-way train toward less accommodation,” argues Matthew Hornbach, Morgan Stanley’s global head of macro strategy. 

In a classic case of investment analyst verbal contortion, he has dubbed the looming market regime TNT — which stands for “taper, inflation, tighten”.

In other words, many major central banks are expected to taper, eventually end and ultimately unwind their bond purchases. 

Some think that accelerating inflation will force them to further tighten monetary policy and actually raise interest rates aggressively. 

Given how frothy financial markets are, the result could well be as explosive as Hornbach’s acronym indicates.

Some investors seem positively gleeful about the prospect, sensing epic trading opportunities. 

Inflation is “probably the single biggest threat to certainly financial markets and I think to society just in general”, hedge fund giant Paul Tudor Jones recently told CNBC. 

Twitter’s Jack Dorsey apparently found this too understated, and predicts that global “hyperinflation” is coming.

The bond market has taken note. 

After long being relatively sanguine about the dangers of faster inflation and more hawkish central banks, shorter-term government debt — the slice of the fixed income market most sensitive to interest rate changes — has sold off hard this autumn.

For sure, the direction of travel is clear. 

Inflation has indeed jumped higher and stayed elevated for longer than many central bankers predicted earlier this year. 

There is a risk that disorderly supply chains ripple through the global economy and cause inflation to run uncomfortably hot.

Most of all, the economic recovery from the coronavirus has been wonderfully strong. 

So it makes sense that central banks start scaling back emergency stimulus, and in some cases even start raising interest rates cautiously.

However, the current narrative feels a little too elegant. 

As if it has sprung fully formed from the fevered dreams of long-frustrated hedge fund managers or crypto utopians that have been wrongly predicting runaway inflation for years. 

Fears of serious, durable inflation, aggressive central bank action and subsequent financial market chaos are still wildly premature.

The violence of the recent short-term bond sell-off looks like it has been exacerbated by hedge funds being forced to liquidate trades. 

Notably, longer-term government bonds remain sedate. 

That reflects the view that inflation is accelerating but will still ultimately settle back down to the low levels seen over the past few decades.

After all, the forces that have battered down inflation since the 1980s — such as globalisation, technology, demographics, debt burdens and the weakening bargaining power of labour — are unlikely to reverse.

The bond market’s overall message is that the real danger is central banks losing their nerve and overreacting to something that they in practice have little control over. 

Raising rates will not fix congested ports, logistical bottlenecks, selective labour shortages or under-investment in energy infrastructure. 

But doing so prematurely could hamstring the economic recovery.

A few notable exceptions aside, such a mistake still seems unlikely. 

The three central banks that actually matter are the Fed, the European Central Bank and the Bank of Japan. 

None is likely to slam on the brakes soon, even if inflation does not immediately begin to subside. 

A new monetary regime is starting, but the reality is that it will probably look uncannily much like the last one.

The Real Rot at the IMF

The “Doing Business” controversy has shaken confidence in the World Bank and the IMF. But it must not obscure the real problems with the Bretton Woods institutions: the disproportionate power of the US, the IMF’s deeply procyclical approach, and G7 economies’ unwillingness to enable multilateral bodies to address global problems.

Jayati Ghosh

NEW DELHI – There are many reasons to be critical of the International Monetary Fund and the World Bank, but the legitimacy crisis now confronting both institutions is not based on any of them. 

Instead, it has arisen for the wrong reasons, and this is serving to reinforce the real problems that have plagued the Bretton Woods institutions’ functioning.

The current controversy stems from the World Bank’s alleged manipulation of its annual Doing Business index in order to improve the rankings of China and Saudi Arabia. 

It threatens to claim the scalp of IMF Managing Director Kristalina Georgieva, who was the World Bank’s chief executive officer at the time of the alleged improprieties.

The World Bank appointed a US law firm, WilmerHale, to investigate the matter. 

But its report relies on innuendo rather than evidence, prompting the Nobel laureate economist and former World Bank chief economist Joseph E. Stiglitz to describe it as “a hatchet job” and part of an attempted coup against Georgieva. 

The investigation also conveniently focused primarily on China, thereby underplaying the possible role of World Bank President David Malpass in influencing the ranking of Saudi Arabia, which was surprisingly declared the world’s top reformer in the 2020 Doing Business report.

The WilmerHale report is manna from heaven for Republicans in the US Congress, who are demanding that Georgieva resign. 

But the current moralistic fervor about data manipulation overlooks the fact that the Doing Business index – which has now been discontinued – was deeply flawed and overtly political from the beginning. 

Unfortunately, it became hugely influential in driving investors’ perceptions and policymakers’ choices.

The problems were legion. 

For starters, the indicators it used emerged directly from an orthodox “Washington Consensus” economic-policy approach, irrespective of its validity or applicability in different contexts. 

As the Columbia University historian Adam Tooze has noted, Doing Business was always “a rickety and unpredictable construction shot through with discretion and complex judgments.” 

My own critique centered on how the index viewed any government regulation as costly and undesirable, and treated taxation only as a cost rather than as a means of ensuring the infrastructure, institutions, and educated workforce that businesses need in order to function.

In 2018, Paul Romer, then the World Bank’s chief economist, said that right-wing ideology at the Bank played a critical role in methodological changes that altered countries’ rankings, and apologized to Chile’s left-wing government for the artificial lowering of its rank. 

A more recent independent academic evaluation pointed out that the index measures only de jure rules rather than their de facto implementation, and “sometimes rewards policies that benefit business at the expense of broader social objectives.”

Georgieva’s fate will be decided at this month’s annual meeting of the IMF Board. 

But even if she remains in her post, the Doing Business controversy has damaged her stature and influence (which may have been the point). 

More important, this episode must not be allowed to obscure the real problems with the functioning of the Bretton Woods institutions: the disproportionate power of the United States; the IMF’s deeply procyclical approach to countries that seek its support, which contradicts its original mandate; and the G7 advanced economies’ unwillingness to enable multilateral institutions to address global problems.

When the IMF was established in 1944, it fell far short of John Maynard Keynes’s vision of an international clearing union that would treat all countries equally. 

Instead – and unsurprisingly – the institution reflected countries’ relative power at the time. 

The US secured a decisive share of voting rights and quotas, and, together with Western European countries, could determine the IMF’s policies, programs, and allocations.

Despite significant changes in the global economy since then, that internal power structure has remained essentially unchanged. 

Even after the most recent reallocation, in 2016, the US retains a 16.73% voting share, while the OECD countries have a combined share of more than 60%. 

During Donald Trump’s presidency, the US blocked a fresh quota allocation that, among other things, would have increased China’s share. 

The US and the European Union can exercise veto power over any IMF decision. 

And under a longstanding transatlantic “gentleman’s agreement,” the World Bank chief is appointed by the US, while the head of the IMF is from a European country.

But perhaps the most damning criticism of the IMF relates to how its programs function. 

The Fund’s loans not only remain inadequate for countries facing balance-of-payments problems, but also come with so many adverse conditions, including severe budget cuts, that most countries seek to avoid them. 

Despite this, the IMF even imposes interest surcharges on countries that are forced to borrow heavily from the Fund over a prolonged period, thereby worsening economic outcomes.

The IMF’s focus on fiscal austerity has been much criticized, including by its own economists, but has persisted during the COVID-19 crisis. 

This betrays the IMF’s original raison d’être: providing countercyclical lending to countries in distress so that their economies could recover with less harm to their people.

To her credit, Georgieva has sought to increase the IMF’s non-conditional financing through a new $650 billion allocation of special drawing rights (the Fund’s reserve asset). 

She has also called for less austerity in recovery packages and for reform of the international debt architecture. 

Perhaps this is why those who are trying to remove her also happen to oppose any progressive change at the Bretton Woods institutions.

Such efforts are not only unjust but also short-sighted. 

If an international organization like the IMF cannot deliver basic global public goods or address global public bads like the pandemic and the climate crisis, then it is not fit for purpose. 

The G7 has already shown itself to be unequal to the task of global leadership, and yet its leaders are trying to subvert the use of multilateral institutions to address the enormous transnational challenges we face. 

Future historians will wonder why today’s rich countries shot themselves in the foot in this way.

Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission for the Reform of International Corporate Taxation.