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Risk analyst Nassim Nicholas Taleb predicted the 2008 financial crisis, by pointing out that commonly-used risk models were wrong. Distinguished professor of risk engineering at New York University, author of best-sellers The Black Swan and Fooled by Randomness, Taleb became financially independent after the crash of 1987, and wealthy during the 2008 financial crisis.
Now, Taleb is using his statistical risk acumen to take on genetically modified organisms (GMOs).
Taleb’s conclusion: GMOs could cause “an irreversible termination of life at some scale, which could be the planet.”
Sure it does … but only because we don’t understand statistics, and so we have no handle on what’s risky and what’s not.
Taleb and his 2 co-authors write in a new draft paper:
For nature, the “ruin” is ecocide: an irreversible termination of life at some scale, which could be the planet.
Genetically Modified Organisms, GMOs fall squarely under [the precautionary principle, i.e. the rule that we should err on the side of caution if something is really dangerous] not because of the harm to the consumer because of their systemic risk on the system.
Top-down modifications to the system (through GMOs) are categorically and statistically different from bottom up ones (regular farming, progressive tinkering with crops, etc.) There is no comparison between the tinkering of selective breeding and the top-down engineering of arbitrarily taking a gene from an organism and putting it into another. Saying that such a product is natural misses the statistical process by which things become ”natural”. [i.e. evolving over thousands of years in a natural ecosystem, or at least breeding over several generations.]
What people miss is that the modification of crops impacts everyone and exports the error from the local to the global. I do not wish to pay—or have my descendants pay—for errors by executives of Monsanto. We should exert the precautionary principle there—our non-naive version—simply because we would only discover errors after considerable and irreversible environmental damage.
Taleb shreds GMO-boosters – including biologists – who don’t understand basic statistics:
Calling the GMO approach “scientific” betrays a very poor—indeed warped—understanding of probabilistic payoffs and risk management.
It became popular to claim irrationality for GMO and other skepticism on the part of the general public —not realizing that there is in fact an ”expert problem” and such skepticism is healthy and even necessary for survival. For instance, in The Rational Animal, the author pathologize people for not accepting GMOs although ”the World Health Organization has never found evidence of ill effects” a standard confusion of evidence of absence and absence of evidence. Such a pathologizing is similar to behavioral researchers labeling hyperbolic discounting as ”irrational” when in fact it is largely the researcher who has a very narrow model and richer models make the ”irrationality” go away).
In other words, lack of knowledge of basic statistical principles leads GMO supporters astray. For example, they don’t understand the concept that “interdependence” creates “thick tails” … leading to a “black swan” catastrophic risk event:
Fat tails result (among other things) from the interdependence of components, leading to aggregate variations becoming much more severe than individual ones. Interdependence disrupts the functioning of the central limit theorem, by which the aggregate is more stable than the sum of the parts. Whether components are independent or interdependent matters a lot to systemic disasters such as pandemics or generalized crises. The interdependence increases the probability of ruin, to the point of certainty.
(This concept is important in the financial world, as well.)
As Forbes’ Brian Stoffel notes:
Let’s say each GM seed that’s produced holds a 0.1% chance of — somehow, in the intricately interdependent web of nature — leading to a catastrophic breakdown of the ecosystem that we rely on for life. All by itself, it doesn’t seem too harmful, but with each new seed that’s developed, the risk gets greater and greater.
The chart below demonstrates how, over time, even a 0.1% chance of ecocide can be dangerous.
I cannot stress enough that the probabilities I am using are for illustrative purposes only. Neither I, nor Taleb, claim to know what the chances are of any one type of seed causing such destruction.
The focus, instead, should be on the fact that the “total ecocide barrier” is bound to be hit, over a long enough time, with even incredibly small odds. Taleb includes a similar graph in his work, but no breakdown of the actual variables at play.
Source: Author’s input, based on Taleb, Read, and Bar-Yam paper
Taleb debunks other pro-GMO claims as well, such as:
1. The Risk of Famine If We Don’t Use GMOs. Taleb says:
Invoking the risk of “famine” as an alternative to GMOs is a deceitful strategy, no different from urging people to play Russian roulette in order to get out of poverty.
And calling the GMO approach “scientific” betrays a very poor—indeed warped—understanding of probabilistic payoffs and risk management.
2. Nothing Is Totally Safe, So Should We Discard All Technology? Taleb says this is an anti-scientific argument. Some risks are small, or are only risks to one individual or a small group of people. When you’re talking about risks which could wipe out all life on Earth, it’s a totally different analysis.
3. Assuming that Nature Is Always Good Is Anti-Scientific. Taleb says that statistical risk analysis don’t use assumptions such as nature is “good” or “bad”. Rather, it looks at the statistical evidence that things persist in nature for thousands of years if they are robust and anti-fragile. Ecosystems break down if they become unstable.
GMO engineers may be smart in their field, but they are ignorant when it comes to long-run ecological reality:
We are not saying nature is the smartest possible, we are saying that time is smarter than GMO engineers. Plain statistical significance.
3. People Brought Potatoes from the Americas Back to Europe, Without Problem. Taleb says that potatoes evolved and competed over thousands of years in the Americas, and so proved that they did not disrupt ecosystems. On the other hand, GMOs are brand spanking new … created in the blink of the eye in a lab.
As if “ecocide”isn’t enough, there are many other reasons to oppose GMO foods … at least without rigorous testing, including decreased crop yield, increased pesticide requirements, and potentiallysevere health effects.
On the plus side? A few companies will make a lot of money.
The lessons of the Fukushima nuclear accident in 2011 seem to be the same as those from Chernobyl 25 years earlier, despite the different political settings. Apparently not much had been learned.
The two worst nuclear accidents to date — Chernobyl in the former Soviet Union (USSR) and Fukushima-Daiichi in Japan — occurred as the forces of nature combined with human error to bring about a complicated cluster of human problems that displaced much of the affected populations and left millions more trapped in contaminated areas.
On 26 April 1986, an explosion at the Chernobyl nuclear power plant in the Ukraine caused a fire that lasted for ten days and radioactive debris to spread over thousands of square kilometres. At the time of the incident, about 230,000 people in 640 settlements in the European parts of the USSR were thought to be exposed to external gamma radiation and/or internal exposure through the consumption of contaminated water and locally produced or gathered food. In the following 20 years, numerous assessments revealed an increasing number of people affected in the USSR, including people evacuated from the exclusion zone, and residents who remained trapped in radioactive ‘hot spots’.
On 11 March 2011, tsunami floods damaged four of the six power units of the Fukushima-Daiichi nuclear plant in Japan resulting in contamination of as much as 1,800 km² of land with particular ‘hot spots’.
Managing the crisis
By all accounts, the authoritarian style of governance associated with the Soviet regime and the fact that the immediate area surrounding the plant was not densely populated were beneficial in the early stages of the crisis. The relative success of an immediate response, however, was hindered somewhat by the lack of information disseminated to the public as the weeks, months and years passed.
Prior to the disaster, the USSR had policies in place for measures that should be undertaken in the event of radioactive contamination, which included instructions from medical experts on when local and central government should evacuate affected populations, depending on their level of exposure. Hours after the event, preliminary radiation readings prompted the authorities to draw a 10 km radius around the plant, from which everyone was to be evacuated within a few days. One week later, as more information was uncovered as to the scale of the disaster, a government commission established to deal with the aftermath extended the exclusion zone to 30 km.
The same day as the tsunami occurred the Japanese government instructed residents living within a 2 km radius to evacuate. As with Chernobyl, over the following weeks the zone was extended outwards to 30 km.
Around Chernobyl, roadblocks were established to prevent privately owned cars from leaving without authorisation, and buses were chartered from outside the contaminated zone. This limited the spread of contamination from inside the exclusion zone and facilitated the evacuations which started the next day, beginning with some 50,000 residents of Pripyat where power plant employees lived. Local government officials and Communist party leaders were told that people would be evacuated for only three days. The official announcement was very short, with no information about the dangers of exposure to radiation. The absence of clear instructions on evacuation led to numerous problems about belongings left behind, including personal documents. Close to 5,000 people remained in Pripyat after the evacuation. Some were left there to assist with clean-up activities, while others refused to evacuate without their farm animals, tools and equipment.
In order to reduce panic, the government increased the level of the permissible annual dose of absorbed radiation in the Ukrainian capital, Kiev, avoiding mandatory evacuation of millions. However, children between 8 and 15 years old were sent to summer camps, and pregnant women and mothers with young children and infants were sent to hotels, rest houses, sanatoria and tourist facilities, dividing many families with little consideration for the lasting social effects.
In early June 1986, ‘hot spots’ were discovered outside the 30 km zone, leading to the evacuation of a further 20,000 people. By the end of 1986, some 116,000 inhabitants from 188 settlements had been evacuated, as well as 60,000 cattle and other farm animals. Thousands of apartments were made available in urban centres, and 21,000 new buildings were constructed in rural areas to house evacuees, although people were spread throughout the USSR. The upheaval induced by the break-up of the USSR five years after the disaster cannot be underestimated, both in terms of migration implications and the impact on responding to the lingering effects of the crisis.
Following Chernobyl, the System for Prediction of Environmental Emergency Dose Information Network System (SPEEDI) computer system was designed in Japan to predict the spread of radioactive particles in order to effectively assess the situation and guide evacuations. However, most radiation dose-monitoring equipment and meteorological monitors were either damaged by the tsunami or were out of service because of the loss of power. In addition, the models did not incorporate all the variables needed to accurately calculate human external exposure and inhalation so the local authorities were reluctant to rely heavily on them in their decision-making process. There were also reports that initially the authorities did not know about SPEEDI, and later on played down the data to dismiss the severity of the accident for fear of having to significantly expand the evacuation zone, and to avoid compensation payments to still more evacuees.
In Fukushima, on 25 March approximately 62,000 residents were advised to evacuate voluntarily or to stay indoors. Orders to ‘shelter in place’ or to voluntarily evacuate were unclear and long-winded, leading some people to move into areas with high levels of radiation and eventually being evacuated multiple times. According to the Nuclear Accident Independent Investigation Commission (NAIIC), the Japanese government was slow in informing the municipal governments and the public about the accident and its severity. Many people were unaware of the crisis and did not take essential items when they were evacuated. For those being evacuated the greatest advantage was their level of connectedness to outside areas such as employment or relatives and friends outside the region. Others were at a disadvantage because their only recourse was to follow government-organised evacuation and be placed in temporary housing.
Radiation is invisible, and at first no obvious factors force people away or hinder migration into these regions. Migration back to contaminated areas of the Ukraine was reported as early as the end of 1986, only eight months later. The demographic composition of the returned population consisted mostly of the elderly who had had difficulty adapting to the new places and wanted to live out their remaining years in their homeland, and those who thought of Chernobyl-related financial benefits as their only means of survival. Poverty caused by resettlement, restrictions on agriculture, lack of rehabilitation and livelihood restoration programmes, and the effects of the collapse of the USSR, led to ever more people claiming such benefits.
Although the immediate evacuation after the Chernobyl disaster was carried out swiftly and effectively, there was no clear understanding of the far-reaching consequences, and no structured resettlement plan to deal with these consequences in the medium or long term. Determining obligations and responsibilities for offering protection to those moving is not simple, especially in the context of post-Soviet emigration where it is difficult to distinguish between migrants seeking economic opportunities and those fleeing because of health risks. The disintegration of the USSR and the difficult transition process intensified the consequences of the Chernobyl accident and the complexities around responsibilities for those affected.
Some 25 years later, the Fukushima-Daiichi nuclear accident raised questions over lessons learned and lessons yet to be learned from Chernobyl in terms of preparedness and mitigation of nuclear disasters but also in terms of normative and implementation gaps in dealing with the consequences of these crises. In the context of both crises, tens of thousands were permanently displaced from the immediate vicinities; thousands made the decision to move because of health concerns, environmental degradation and collapsed infrastructure; and millions remained in contaminated areas due to an absence of resources and/or opportunities, financial constraints and special attachment to their home.
In both the Chernobyl and Fukushima cases, strong governments responded with a heavy-handed approach that proved effective, to a certain extent, in evacuating immediate areas in the short term. Interestingly, the governments of Japan and the USSR both adopted top-down governance approaches too in how they communicated to their populations in the context of humanitarian crises triggered by nuclear disasters. However, a lack of information relayed to affected populations exacerbated long-term effects of the crisis on these populations. Indeed, one of the major, and unanticipated, consequences of these disasters has been the psychological effects that have resulted from unreliable and contradictory information, along with the anxiety induced by ill-planned medium- and long-term relocation efforts, the disruption of social ties, and lingering health concerns. An estimated 1,539 stress-related deaths occurred in the context of evacuation from Fukushima, which arguably could have been prevented by more active consultation and communication by the government with affected populations.
Nuclear Disasters and Displacement by Silva Meybatyan is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Based on a work at Forced Migration Review.
Economic and Political Quagmires
We want to briefly take another look at the situation in four of the emerging market countries that have recently been the focus of considerable market upheaval. The countries concerned are Turkey, Venezuela, Argentina and South Africa. There are considerable differences between these countries. The only thing that unites them is a worrisome trend in their trade and/or current account balances and the recent massive swoon in their currencies as foreign investors have exited their markets (this in turn has pressured the prices of securities). There is currently an economic and political crisis in three of the four countries, with South Africa the sole exception.
However, even South Africa is feeling the heat from the fact that it has a large current account deficit and the ongoing exodus of foreign investors from emerging markets. However, the country is actually used to experiencing vast fluctuations in foreign investment flows in short time periods and has the potential to relatively quickly turn its balance of payments position around. Of the four countries in question, it seems to us to be the most flexible one in this respect.
Argentina and Venezuela
Argentina and Venezuela are special cases in that their trade resp. current account positions are actually comparatively stronger, but the economic policies pursued by their governments are so utterly harebrained and repressive that everybody tries to get their money out as quickly as possible. The immediate problem is that both countries are being drained of foreign exchange reserves at an accelerating clip, inter alia a result of trying to keep their exchange rates artificially high. This is actually quite astonishing considering their considerable latent export prowess.
Both countries have governments that steadfastly deny the existence of economic laws and apparently genuinely believe that their absurd repressive decrees can ‘fix’ their economies. The markets regard Argentina as the slightly greater credit risk, as it is still fighting the so-called ‘hold-outs’ from its 2001 default. However, Venezuela is lately catching up, in spite of its vast oil wealth. The two countries currently have the dubious distinction of being the nations with the highest probability of sovereign debt default in the world – not even the crisis-ridden Ukraine comes remotely close (see chart of CDS spreads further below for details).
We have recently discussed the deteriorating situation in Venezuela in some detail and a more in-depth update on Argentina is in the works. Let us just note here that Argentina (the government of which is incidentally the fiercest supporter of Venezuela’s president Maduro at the moment) seems to be where Venezuela was about a year or so ago. Both countries are on the same path of inflationism and growing economic and financial repression.
Argentina’s balance of trade remains positive – click to enlarge.
Venezuela is a big oil exporter, but needs to import 70% of the consumer goods sold in the country. Its balance of trade is therefore deeply negative, especially as the state-run (‘very, very red’) PDVSA is being run into the ground and produces less and less oil – click to enlarge.
In spite of reporting a positive current account balance, Venezuela is losing foreign exchange reserves fast, due to trying to maintain an artificially high exchange rate even in the face of soaring inflation – click to enlarge.
In Venezuela’s and Argentina’s case, the markets are rightly worried that the situation will probably deteriorate further. The intransigence of their governments with regard to pursuing economic policies that demonstrably don’t work and the resultant growing political risks conspire to create a highly unstable backdrop. As in all such cases, one must expect knock-on effects to emerge elsewhere.
Turkey has been hailed as a shining example of how an emerging economy should grow, but as is so often the case, it has in the meantime become evident that what it has mainly done was to engage in a massive credit-financed boom, displaying all the associated bubble activities, malinvestment of capital and overconsumption. This unsustainable boom was exacerbated by the fact that the Erdogan government pressured the central bank to keep rates extremely low. Even while prices were obviously misbehaving, with the rate of change of CPI oscillating between about 6.2% and nearly 11% and the stock market rising in parabolic fashion, the central bank kept its repo rate in the low single digits (this has only very recently changed).
With his country in the middle of a serious economic crisis, Erdogan has come under fire politically because his government has turned out to be a den of corruption to boot. So what does he do? He is taking a leaf from what the Western nations have demonstrated to be de rigeur these days, since don’t you know, we’re all surrounded by evil terrorists hiding in caves in the Hindu Kush somewhere. In short, he is moving toward increasingly authoritarian rule. Just take a look at this recent press report:
“Battling a corruption scandal, Turkish Prime Minister Tayyip Erdogan is seeking broader powers for his intelligence agency, including more scope for eavesdropping and legal immunity for its top agent, according to a draft law seen by Reuters.
The proposals submitted by Erdogan’s AK Party late on Wednesday are the latest in what his opponents see as an authoritarian backlash against the graft inquiry, after parliament passed laws tightening government control over the Internet and the courts this month.
The bill gives the National Intelligence Organisation (MIT) the authority to conduct operations abroad and tap pay phones and international calls. It also introduces jail terms of up to 12 years for the publication of leaked classified documents. It stipulates that only a top appeals court could try the head of the agency with the prime minister’s permission, and would require private companies as well as state institutions to hand over consumer data and technical equipment when requested.
“This bill will bring the MIT in line with the necessities of the era, grant it the capabilities of other intelligence agencies, and increase its methods and capacity for individual and technical intelligence,” the draft document said.
The ‘necessities of the era‘ – we couldn’t have put it in a more Orwellian fashion. And guess what? The vaunted ‘defenders of freedom’ in the West probably aren’t going to object for even a millisecond.
Turkey’s economy is a shambles right now, and Erdogan wants to cling to power by any means possible – that is what the ‘necessities of the era’ are really all about. For a long time it was held that the world as a whole was moving toward more, rather than less freedom. We regret to inform you that this trend has reversed more than a decade ago, on the day the WTC towers crumbled.
Meanwhile, what is now also crumbling is Turkey’s economy. However, we would argue that Turkey’s economic situation isn’t ‘unfixable’ if the proper policies are implemented quickly. After all, there has been a very successful period of economic liberalization under Erdogan’s government as well, which has left the economy more flexible and thus better able to deal with adverse developments. A wrenching adjustment is nevertheless unavoidable at this point.
Turkey has a large current account deficit. The fact that foreign investment inflows have now dried up is putting enormous strain on the economy. Consumer confidence has plunged, as has the currency – click to enlarge.
As one analyst sagely remarked:
“From 2009 to 2013, Turkey was considered by many to be a rising star among the emerging markets, but currently it may be the triggering force for worsening the emerging-market outlook globally in 2014.”
South Africa’s case is in many ways comparable to Turkey’s – the country also sports a large current account and trade deficit for example. However, while South Africa’s CPI ‘inflation’ rate has always been high by developed country standards, it has on average been much lower and less volatile than Turkey’s, fluctuating between 5% and 6.4% in recent years. Contrary to Turkey’s central bank, South Africa’s central bank is fiercely independent and focused solely on keeping CPI in check. In fact, it may well be one of the world’s most conservative central banks. It also refuses to intervene in the currency market and allows the Rand to go to wherever market forces push it. This non-intervention policy was actually quite difficult to defend while the Rand was among the world’s strongest currencies during the emerging markets boom of the 2000d’s. A plethora of special interests in South Africa were pleading with the central bank to do something to weaken the Rand, but it remained steadfast.
While the current account deficit means that more currency weakness is probably in store, South Africa does have a vibrant export sector. During the apartheid years, it had a perennial trade surplus, partly a result of being forced to conserve foreign exchange reserves in the face of economic sanctions. Similar to Turkey, South Africa imports all the oil it uses, which is a key vulnerability of both countries. However, the weakening of the Rand already has an effect: the trade balance has recently turned positive for the first time since 2010.
South Africa’s current account is still deeply in the red – click to enlarge.
However, a trade surplus has begun to emerge on the back of the weaker Rand – click to enlarge.
Investors in emerging markets like to use the Rand as a hedge for EM currency exposure, due to its relatively good liquidity and the fact that the central bank isn’t going to intervene directly. At times this fact probably exacerbates the moves in the Rand.
The political situation in South Africa is almost always somewhat dubious, and the Zuma presidency is no exception to that rule. There is a lot of corruption and quite a few economic policy decisions appear to us to be misguided. One must keep in mind in this context that the ANC government is continually under pressure to deliver an improvement in living standards to the formerly oppressed parts of the population, which often leads to the adoption of populist positions that are not economically sensible.
However, there exist also many misconceptions about SA and the ANC’s political legacy in the West. In spite of being formally allied with the communists (SACP) and the trade union umbrella body COSATU, the ANC has for instance privatized many of the companies that used to be state-owned under the national-socialist regime of the National Party (NP) that ruled the country during the apartheid years (a funny aside to this: the NP has dissolved itself and has been amalgamated with the ANC a few years ago). One slightly worrisome development is that the government deficit has grown sharply since 2010. While the government previously ran an almost balanced budget, the annual deficit amounted to more than 5% of GDP over the past four years. Nevertheless, due to the tight fiscal policy implemented previously, the public debt-GDP ratio is still below 40% – a number most developed countries can only dream of.
Sovereign Credit Risk
As can be seen above, the markets consider Turkey the second-smallest sovereign credit risk among the four nations at the moment. Its debt-to-GDP ratio is very similar to South Africa’s, at just 36%. The budget deficit has fluctuated between 2.8% and 5.5% of GDP over the past four years. Both data points are however what we would term ‘remnants of the bubble’, as the government’s tax revenues soared along with the economic boom. With the boom faltering, a sharp deterioration in these data points should be expected.
South Africa is actually in a slightly better position in this regard, as it has not experienced comparable boom conditions. Consequently the fact that the CDS spread on its sovereign debt is actually slightly below that of Turkey makes sense.
Argentina is currently considered the worst sovereign credit risk in the world – not least due to the fact that its foreign exchange reserves have declined dramatically and the trend is ongoing.
This throws more and more doubt on the country’s ability to service its foreign debt, which in the light of the 2001 default and its aftermath has made the markets wary. 5 year CDS spreads at 2,206 basis points reflect a great deal of risk (this represents an annual default probability of roughly 17% at an assumed 40% recovery rate).
Venezuela is lately catching up – its 5 year sovereign CDS spreads have soared to almost 1,700 basis points from less than 1,200 at the end of last year. This is testament to the fact that the economy has begun to implode under the Maduro government. While Maduro himself is just as bad as Chavez was in terms of economic policy, it should be pointed out that Chavez’ policies are what laid the foundations for current events. It has taken a while for this South America-style goulash-socialism to fail, as it allowed a remnant of the market economy to operate most of the time. However, the impositions on the private sector have simply become too onerous and galloping inflation has delivered the coup de grace, as economic calculation has become extremely distorted, if not nigh impossible.
The crisis in emerging market economies vulnerable to capital flight is unlikely to be over. Note that we have picked merely four cases, but there are several other developing countries that are currently in various states of political and economic crisis as well (e.g. India, Thailand, Brazil, to name a few). We have looked the two worst cases here, one of medium severity (Turkey) and one of the better cases (South Africa) in order to present as broad an overview as possible. The fate of Argentina and Venezuela is up in the air – it will require massive political change to alter their prospects.
However, other emerging market economies are bound to eventually bounce back and exhibit strong economic growth again. The imbalances can all be overcome, but the adjustments required are liable to play out in the form of economic and financial market crises of varying severity.
One must not forget in this context that Japan continues to pursue a mercantilist currency policy, which redounds on its competitors in Asia, which in turn affects their main suppliers. We continue to believe that Japan’s decision to weaken the yen has been a major contributor to recent currency turmoil elsewhere (of course, this does not mean that many of the countries concerned have not been wanting in terms of their own policies).
Moreover, China is hanging over the proceedings like the proverbial Sword of Damocles. HSBC has just reported its latest flash estimate on China’s manufacturing PMI (pdf), which was quite weak at 48.3, a seven month low indicating a worsening contraction. In view of the enormous credit bubble which China has embarked on since 2008 (about $15 trillion in additional debt have been created since then), the danger of a larger setback being set in motion by a sharp slowdown or even recession in China cannot be dismissed.
Charts by: Tradingeconomics, Reuters, Bloomberg
It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.
The entire banking sector is based on two illusions:
1. Thanks to modern portfolio management, bank debt is now riskless.
2. Technology only enhances banks’ tools to skim profits; it does not undermine the fundamental role of banks.
The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. If you want to understand why risk cannot eliminated, please read Benoit Mandelbrot’s book The (Mis)Behavior of Markets.
Technology does not just enable high-frequency trading; it enables capital and borrowers to bypass banks entirely. I addressed this yesterday in Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated.
Unfortunately for banks, higher education, buggy whip manufacturers, etc., monopoly and propaganda are no match for technology. Just because a system worked in the past in a specific set of technological constraints does not mean it continues to be a practical solution when those technological constraints dissolve.
The current banking system is essentially based on two 19th century legacies. In that bygone era, banks were a repository of accounting expertise (keeping track of multitudes of accounts, interest, etc.) and risk assessment/management expertise (choosing the lowest-risk borrowers).
Both of these functions are now automated. The funny thing about technology is that those threatened by fundamental improvements in technology attempt to harness it to save their industry from extinction. For example, overpriced colleges now charge thousands of dollars for nearly costless massively open online courses (MOOCs) because they retain a monopoly on accreditation (diplomas). Once students are accredited directly–an advancement enabled by technology–colleges’ monopoly disappears and so does their raison d’etre.
The same is true of banks. Now that accounting and risk assessment are automated, and borrowers and owners of capital can exchange funds in transparent digital marketplaces, there is no need for banks. But according to banks, only they have the expertise to create riskless debt.
It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.
Moral hazard is what happens when people who make bad decisions suffer no consequences. Once decision-makers offload consequence onto others, they are free to make increasingly risky bets, knowing that they will personally suffer no losses if the bets go bad.
The current banking system is defined by moral hazard. “Too big to fail” also means “too big to jail:” no matter how criminal or risky the bank managements’ decisions, the decision-makers not only suffered no consequences, they walked away from the smouldering ruins with tens of millions of dollars in personal wealth.
Absent any consequence, the system created perverse incentives to pyramid risky bets and derivatives to increase profits–a substantial share of which flowed directly into the personal accounts of the managers.
The perfection of moral hazard in the current banking system can be illustrated by what happened to the last CEO of Lehman Brother, Richard Fuld: he walked away from the wreckage with $222 million. This is not an outlier; it is the direct result of a system based on moral hazard, too-big-to-jail and perverse incentives to increase systemic risk for personal gain.
And who picked up all the losses? The American taxpayer. Privatize profits, socialize losses: that’s the heart of moral hazard.
Concentrating the ability to leverage stupendous systemic bets in a few hands leads to a concentration of risk. Just before America’s financial sector imploded, banks had pyramided $2.5 trillion in dodgy mortgages into derivatives and exotic financial instruments with a face value of $35 trillion–14 times the underlying collateral and more than double the size of the U.S. economy.
In a web-enabled transparent exchange of borrowers bidding for capital, the risk is intrinsically dispersed over millions of participants. Not only is risk dispersed, but the consequences of bad decisions and bad bets fall solely to those who made the decision and the bet. This is the foundation of a sound, stable, fair financial system.
In a transparent marketplace of millions of participants, a handful of participants will be unable to acquire enough profit to capture the political process. The present banking system is not just a financial threat to the nation, it is a political threat because its outsized profits enable bankers to capture the regulatory and governance machinery.
chart courtesy of Market Daily Briefing
The problem with concentrating leverage and moral hazard is that risk is also concentrated. And when risk is concentrated rather than dispersed, it inevitably breaks out of the “riskless” corral. This is the foundation of my aphorism: Central planning perfects the power of threats to bypass the system’s defenses.
We can understand this dynamic with an analogy to bacteria and antibiotics. By attempting to eliminate the risk of infection by flooding the system with antibiotics, central planning actually perfects the search for bacteria that are immune to the antibiotics. These few bacteria will bypass the system’s defenses and destroy the system from within.
The banking/financial sector claims to be eliminating risk, but what it’s actually doing is perfecting the threats that will destroy the system from within. Another way to understand this is to look at what happened to home mortgages in the runup to the meltdown of 2008: the “safest” part of the financial sector ended up triggering the collapse of the entire pyramid of risk.
Once we concentrate risk and impose perverse incentives and moral hazard as the foundations of our financial/banking system, then we guarantee the risk will explode out of whatever sector is considered “safe.”
Once you eliminate the “risk” of weak bacteria, you perfect the threat that will kill the host.
The banking sector cannot be reformed, for its very nature is to concentrate systemic risk and moral hazard into breeding grounds of systemic collapse. The only way to eliminate the threat posed by banks is to eliminate the banks and replace them with transparent exchanges where borrowers and owners of capital openly bid for yield (interest rates) and capital.
Bankers (and their fellow financial parasites) will claim they are essential and the nation will collapse without them. But this is precisely opposite of reality: the very existence of banks threatens the nation and democracy.
One last happy thought: technology cannot be put back in the bottle. The financial/banking sector wants to use technology to increase its middleman skim, but the technology that is already out of the bottle will dismantle the sector as a function of what technology enables: faster, better, cheaper, with greater transparency, fairness and the proper distribution of risk.
There may well be a place for credit unions and community banks in the spectrum of exchanges, but these localized, decentralized enterprises would be unable to amass dangerous concentrations of risk and political influence in a truly transparent and decentralized system of exchanges.
Of related interest:
Certainty, Complex Systems, and Unintended Consequences (February 14, 2014)
Our Middleman-Skimming Economy (February 11, 2014)
Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default – specifically China Credit Trust’s Credit Equals Gold #1 (CEQ1) – and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.
For those who have forgotten, below is a quick schematic of what a WMP looks like:
And as we previously noted,
…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).
Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC’s efforts are merely exacerbating the situation for the worst companies… and as BofAML notes below, this is a major problem…
The 3bn CNY Beast Knocking
via BofAML’s Bin Gao
CNY stands for the currency, and also a beast
CNY represents China’s official currency. It also stands for Chinese New Year, the biggest holiday for the country and the occasion for family reunions and celebration. But less familiar for many, however, the Year (?) itself actually stood for a beast which comes out every 365 days and eats everything along the way from bugs to humans. The holiday tradition started as a way for people to fend off the beast by getting together and lighting up the firecrackers.
At the same time, custom dictated that people also to paid their due to avoid becoming the beast’s target. In particular, it has been a tradition to settle all debt before the New Year. From the perspective of such folk culture, the trust product Credit Equals Gold #1, referred as CEQ1 hereafter, by China Credit Trust planned poorly for having the maturing date on the New Year, leaving a 3bn CNY beast running wild.
High probability for the trust product to default
Though the term default is used quite frequently, there are actually confusions on what constitutes a default in this case when talking to investors and especially onshore investment professionals. To simplify the issue, we define a default as failing to pay the promised contractual amount on time.
The product, CEQ1, is straightforward. It is CNY3.03bn financing with senior tranches of CNY3bn and junior tranche of CNY30mn. In principle, the senior tranches are also equity investment, but the junior tranche holder pledged assets for repurchasing senior investment at a premium. The promised rate was indexed to PBoC’s deposit rate with a floor for three classes of senior tranches at 9.5%, 10% and 11%, paid annually (detailed structure is illustrated below).
In a sense, the product is in technical default already. The last coupon payment in December, with nearly all the money (CNY80mn) left in the trust account, came in at only 2.7%, falling far short of the promised yield. The bigger trouble is the CNY3bn principal payment, along with the delinquent coupon, on 31 January.
We see high probability of default on 31 January
Political or economic consideration: ultimately, given the government’s strong grip on financial institutions, default may be a political decision as much as an economic decision. From that perspective, CEQ1 would be a good candidate for default. The minimum investment in CEQ1 is CNY3mn, much more than the typical amount required for other trust investment and 75 times of per capita GDP in China. If defaults were to be used to send a warning signal to shadow banking investors, this group of rich investors may have been a good target because the government does not need to worry too much of them demonstrating in front of government offices.
Timing: there is never a good timing for deleverage because of risks involved. But the current job market situation provides a solid buffer should defaults and subsequent credit contraction slow down the economy growth. The government planned 9mn jobs last year; instead it has created more than 12mn by November. So the system could withstand a potential shock.
Financial capability: China Credit Trust has a bit over CNY10bn net assets, which some analysts cite as evidence of the trust company’s capability to fully redeem the product first and recover from the collateral asset later. However, the assets might not be liquid enough, so the net asset is not the best measure. Based on its 2012 annual report, the company has liquid asset of CNY3bn and short-term liability of CNY1.35bn, leaving liquid accessible fund of CNY1.65bn at most. ICBC for certain has much deeper pocket, but it has declared that it won’t be taking major responsibility.
Career concern: To certain extent, the timing was unfavorable for another reason, the ongoing anti-corruption campaign. It is reported that there are around 700 investors involved. On CNY3bn senior tranche investment, it averages CNY4.3mn per investor. We do not know the exact identity but with CNY3mn entry point, we know no one is a small-scale investor. Legally unjustified, if either China Credit Trust or ICBC decided to pay 100% with their capital, the decision maker would have to ensure that he does not have any business deals with any of the 700. Because if he does, his career or even his freedom could be in jeopardy in the current environment of ongoing anti-corruption campaign and strict scrutiny of shady deals/personal favors.
Questionable asset quality and uncertain contingent claim: There are cases in the past of near default, but most of them involved collateral of real estate assets, which have at least appreciated over the years. The appreciation of collateral assets makes it easier for the third party to step in by paying back investors and taking over the collateral assets. This particular product involves coal-mining assets whose value has been decreasing over the last couple of years. Moreover, there have been multiple claimants on these assets, as exemplified by the sale of Yangjiagu coal mine. Although the mine was 51% pledged through two levels of ownership structure, only 20% of the sales proceed accrued to trust investors (Exhibit 1 above). Such a low percentage would be a deterrence and concern to whoever contemplating a takeover of the collateral assets.
Other cases less relevant: In the past, one way to deal with the issue was for banks to lend to shareholders of the existing collateral asset owners for them to payback investors, with explicit or implicit local government guarantees. Shangdong Hailong’s potential default on bond was avoided this way last year. However, in the current case, the owner has been arrested for illegal fund raising, making the past precedence less applicable.
Putting all the above reasons together, we think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and backcoupon on the day.
Immediate impact would be for China rates curve to flatten
The case has been widely covered in the media. However, many still believe one way or the other the involved parties will find a last minute solution to fully redeem the maturing debt. So if the trust is not paid, we believe it will be a big shock to the market.
China rates market reaction, however, might not be straightforward. On the one hand, default would likely lead to risk-averse behavior, arguing for lower rates. On the other hand, market players would likely hoard cash in such an event, leading to tighter liquidity condition and pushing money rates higher.
We think that both movements are likely to ensue initially, meaning higher repo/SHIBOR rates and lower CGB yield if default were to realize. We suggest positioning likewise by paying 1y IRS and long 5y CGB. On the swap curve itself, we think the immediate reflection will be a bear flattening move.
Interestingly, an informal survey conducted on WeChat among finance professionals suggests the same kind of repo rate reaction (Chart 1). We think this survey is important because we believe these investment professionals will likely behave accordingly because the default event is not priced in and hard to hedge a priori.
Trust company can’t have their cake and eat it too
Of course, we can’t rule out that the involved parties do find a solution to avoid default. However, with a case as clear cut to us as this one favoring default, we believe such outcome would send a strong signal to investors that the best investment is to buy the worst credit.
Thus, we believe the near term market reaction with no default would be for the AA credit to shine brightly since this segment has been under pressure for quite some time. Trust investment would be met with enthusiasm and trust assets would likely expand further.
However, we see a fundamental problem in the industry; the leverage ratio has gone to a level which requires investors and trust companies to answer some serious questions: will trust company stand back behind every trust investment or will trust company have to default on some or potentially many of them? We believe the question needs an answer because the trust companies can’t have their cake and eat it too.
For the industry, the AUM/equity ratio has nearly doubled from 23 to 43 in less than three years during the period of 4Q2010 to 3Q2013 (Chart 2). Some in the industry has argued that one should only count the collective trusts since other trusts are originated by non-trust players like banks. Thus, trust companies have no responsibility for paying investors other than collective trusts.
We see two problems.
Even if we accept the trust companies’ argument, it is still questionable whether trust companies would be able to pay even a reasonable amount of default. The growth of leverage on collective trusts was much more aggressive. Collective trust AUM/equity ratio was 2.7 in 1Q2010 and 4.7 in 4Q2010 (Chart 2). It rose to 10 by 3Q2013, more than doubled in less than three years and more than tripled in less than four years. Along the way, the average provision has dropped from 84bp to 34bp when measured against collective AUM.
As the case of CEQ1 illustrates, as long as full redemption is on the table, no involved party could walk away totally clean. CEQ1 is a case of collective trust, but the ICBC still faces the pressure to pay. If the bank is being pressured to pay in the case of collective trust default, trust companies will likely be pressured to pay as well should some non-collective trusts get into trouble. If trust companies are on the line for the total AUM, their financial condition is even shakier, with average provision covering barely 7bp of total AUM as of 3Q2013.
On longer term market trend
Based on the analysis in the above section, we see a possibility for trust companies to have to let some trust products default with such high leverage and so few provisions. This is especially likely the case given that there will be more and more trust redemption this year and next year as a result of the fast expansion of this industry over the last couple of years and short duration of such products.
The heaviest redemption in collective trusts this year will arrive in the 2Q (Chart 3). Given that the financial system is stretched thin and there were more cases of near defaults on smaller amount of redemption last year (three cases in December alone), we believe some form of default is almost inevitable in the near term.
The potential first default, even if it’s not CEQ1 on 31 JANUARY, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event. Over the last year, China appeared to be mirroring what happened in the US during 2007, the spike of money rate (much higher repo/SHIBOR), the steepening of money curve (14d money much more expensive than overnight and 7d), and small accidents here and there (junior tranches of a few wealth management products offered by Haitong Securities losing more than 60%, a few small trusts and now CEQ1’s redemption difficulty).
Theoretically, China’s risk is best expressed using a China related instrument, but we also think the more liquid expression of China goes through the south pacific. The following points list our longer views on China and Australia rates.
- We have liked using Australia rates lower as a way to express our China concern and we continue recommending doing so as a theme.
- We recommend long CGB and underweight credit product. The risk for such positioning in the near term is no CEQ1 default. But we believe any pain suffered due to overt market manipulation to avoid default will be short lived since it has become much harder to keep the debt-heavy system in balance and the credit spread is bound to widen.
- After a brief flattening on CEQ1 default, we see swap curve steepening as being more likely on more default threatening growth leading to easy monetary policy and more issuance going to the bond market.
- We look for higher CCS rates due to the fact that the currency forward will more likely start expressing the risk.
“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”
The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector.
By now you’ve likely heard that the U.S. is expected to overtake Russia this year as the world’s biggest producer of oil and gas. The surge in production comes from a drilling boom enabled by using hydraulic fracturing, or fracking, along with, in many places, horizontal drilling. These technologies have made previously inaccessible pockets of oil and gas in shale formations profitable.
But at what cost? Accidents, fatalities and health concerns are mounting. Here’s a look at what we’ve learned about the dangers of fracking in the last few weeks.
1. Exploding Trains
Another day, another oil train accident, it seems. On the night of January 7, a traincarrying crude oil and propane derailed near Plaster Rock in New Brunswick, Canada. A day later the fire continued as locals evacuated, unsure if they were being exposed to toxic fumes.
It’s a familiar story. 2013 went out with a bang in North Dakota when a train carrying crude oil from the Bakken shale derailed and exploded on Dec 30. The ensuing fireballs and toxic smoke caused the evacuation many of Casselton’s 2,300 residents.
Fracking has unleashed a firestorm of drilling in the Bakken (a rock formation under parts of North Dakota, Montana and Saskatchewan). The Casselton accident was the third rail accident in six months in North America involving oil trains from the Bakken (it’s unclear if the Plaster Rock train was carrying Bakken oil). The most horrific was the July derailment and explosion of a train that killed 47 people in the small town of Lac-Megantic in Quebec. The second occurred in Alabama in November.
All of this has grabbed the attention of the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration. “Crude oil produced in North America’s booming Bakken region may be more flammable and therefore more dangerous to ship by rail than crude from other areas, a U.S. regulator said after studying the question for four months,” wrote Angela Greiling Keane and Mark Drajem for Bloomberg.
That doesn’t mean shipments will stop, only that trains may be relabeled to say they are carrying a more hazardous cargo.
As Gordon Hoekstra wrote for the Vancouver Sun:
The significant increase in the transport of oil by rail, and the growing evidence that Bakken shale oil is proving itself to be a very explosive commodity, shows that regulations on both sides of the border are not adequate, said Mark Winfield, an associate professor at York University who researches public safety regulation.
Even Robert Harms, who heads North Dakota’s Republican party and consults with the industry, has called for a slowdown, according to Reuters.
2. Workers at Risk
Those who live along train routes aren’t the only ones facing safety risks from the oil and gas industry. NPR reports that accidents among workers in the industry are on the rise—bigtime. From 2009 to 2012 the industry added 23 percent more workers but “the hiring spree has come with a terrible price: Last year, 138 workers were killed on the job — an increase of more than 100 percent since 2009,” wrote Andrew Schneider and Marilyn Geewax for NPR . “In fact, the fatality rate among oil and gas workers is now nearly eight times higher than the all-industry rate of 3.2 deaths for every 100,000 workers.”
Last July, I visited a well pad in New Milton, West Virginia. The following day there was an explosion at the site injuring several workers, two of whom died from their injuries. In my time in West Virginia I met several workers on other sites who were bleary-eyed from long hours on the job.
Sure, jobs are good, but safe jobs should be a priority. Accidents happen in a dangerous industry, but they also increase when workers are kept on the job for too many hours or lack proper training or industry doesn’t follow safe practices.
3. The Accidents You Don’t Hear About
Trains bursting into flames usually (and rightfully) makes the national headlines—especially when fatalities occur. But smaller accidents happen daily that often fail to make it beyond local reporting, if that. Those who live in communities adjacent to the oilfields and gaslands keep their own tallies.
In Tyler County, West Virginia on January 2 an incident occurred on the Lisby natural gas well pad. The West Virginia Department of Environmental Protection press release said, “A tank ruptured and leaked fluids to surrounding grounds on the well site.”
“Ruptured and leaked” may be accurate, but more than an understatement. A tank filled with fracking fluid (although the WVDEP hasn’t been able to say for sure what exactly was in it) ignited and ended up across the well pad. “What we’ve been able to determine is that a tank ruptured during the flushing of frac lines,” said Thomas Aluise, spokesperson for the WVDEP. “Vapors formed from the fluids inside the tank and were somehow ignited, possibly by static electricity, but that has not been confirmed. As a result of the ignition and subsequent rupture, the tank was dislodged from its foundation.”
Does this photo look like the tank simply “dislodged?”
The tank held 50 barrels of fluid, some of which has leaked into soil, a neighboring property, and potentially into a nearby stream. The explosion happened 625 feet from the nearest house and one person at the site, a contractor who broke his ankle, was injured in the incident. The company, Jay-Bee Oil & Gas, is required to submit plans for soil and water sampling by January 14, which seems like quite a while to wait to take samples if chemicals are leaking into the ground or water sources.
Jay-Bee does not have a glowing corporate record. “The West Virginia Department of Environmental Protection has cited the company for 21 environmental violations since 2010, and the federal Occupation Safety and Health Administration has cited the company for 38 worker safety violations, “ wrote Gayathri Vaidyanathan for E&E. “The incident suggests that environmental and worker safety violations often go hand in hand.”
How many environmental and safety violations does it take before a company is shut down?
Accidents like this are common across oil and gas country. So are compressor station fires in Pennsylvania, New York, New Jersey, Wyoming. Or truck accidents, as Food and Water Watch reports: “Heavy-truck crashes rose 7.2 percent in heavily fracked rural Pennsylvania counties (with at least one well for every 15 square miles) but fell 12.4 in unfracked rural counties after fracking began in 2005.”
The Centers for Disease Control reported that the top cause of fatalities in the oil and gas industry are motor vehicle accidents. “[W]orkers drive long distances on rural highways to travel to well sites. Often these roads lack firm shoulders and other safety features,” the agency reports. This puts not just workers at risk, but everyone on the road.
All these incidences won’t make national news, but collectively they add up for the residents who live nearby who may fear for their safety while on the roads or in their own homes.
4. Not So Good for Your Health
Findings presented at a recent meeting of the American Economic Association by researchers from Princeton University, Columbia University and Massachusetts Institute of Technology have made headlines. The researchers “looked at Pennsylvania birth records from 2004 to 2011 to assess the health of infants born within a 2.5-kilometer radius of natural-gas fracking sites,” reports Mark Whitehouse for Bloomberg.
“They found that proximity to fracking increased the likelihood of low birth weight by more than half, from about 5.6 percent to more than 9 percent,” writesWhitehouse. “The chances of a low Apgar score, a summary measure of the health of newborn children, roughly doubled, to more than 5 percent.”
The study has yet to be peer-reviewed, so let’s see how it fares. It does not implicate drinking water, however. The most likely culprit is air pollution. Oil and gas operations have been found to release volatile organic compounds (VOCs) and nitrogen oxides, which contribute to ground-level ozone.
So far no communities where fracking is occurring have done a comprehensive health assessment to see how residents may be at risk from activities related to increased oil and gas drilling. Is it time yet?
Outdoor air pollution is a leading cause of cancer in humans, according to the International Agency for Research on Cancer (IARC), an arm of the World Health Organisation (WHO).
The IARC said on Thursday that a panel of top experts had found “sufficient evidence” that exposure to outdoor air pollution caused lung cancer and raised the risk of bladder cancer.
The predominant sources of outdoor air pollution were transport, power generation, emissions from factories and farms, and residential heating and cooking, the UN agency said.
The most recent data, from 2010, showed that 223,000 lung cancer deaths worldwide were the result of air pollution, the report said.
“Our task was to evaluate the air everyone breathes rather than focus on specific air pollutants,” said the IARC’s Dana Loomis.
“The results from the reviewed studies point in the same direction: the risk of developing lung cancer is significantly increased in people exposed to air pollution,” he added.
Although the composition of air pollution and levels of exposure can vary dramatically between locations, the agency said its conclusions applied to all regions of the globe.
It said pollution exposure levels increased significantly in some parts of the world in recent years, notably in rapidly industrialising nations with large populations.
The latest findings were based on overall air quality, and based on an in-depth study of thousands of medical research projects conducted around the world over decades.
Air pollution was already known to increase the risk of respiratory and heart diseases.
“Classifying outdoor air pollution as carcinogenic to humans is an important step,” said the IARC’s director Christopher Wild.
“There are effective ways to reduce air pollution and, given the scale of the exposure affecting people worldwide, this report should send a strong signal to the international community to take action without further delay.”
The data did not enable experts to establish whether particular groups of people were more or less vulnerable to cancer from pollution, but Kurt Straif of IARC said it was clear that risk rose in line with exposure.
Diesel exhaust and what is known as “particulate matter” – which includes soot – have been classified as carcinogenic by the IARC.
The IARC said that it was set to publish its in-depth conclusions on October 24 on the specialised website The Lancet Oncology.
- Air pollution causes cancer, WHO concludes (telegraph.co.uk)
- Outdoor air pollution is a cancer cause (skynews.com.au)
- Outdoor pollution is carcinogenic: WHO (thehindu.com)