The global economy: an era of inefficiency is ending

In last year’s annual outlook report “The Convergence of Falsehood and Reality”, we proposed that after the impact of the exogenous epidemic, the global economy will return to endogenous fluctuations in 2021, and the differentiation of finance and entities will converge. We need to pay attention to China’s debt sustainability and the United States. inflation risk. Looking ahead to 2022, the market needs to pay more attention to more issues, including energy and commodity prices, bottlenecks in the global industrial chain, mismatches between supply and demand of labor in developed countries, as well as downward pressure on Chinese demand, real estate and related debt risks, etc. This report systematically presents The analysis of these issues by the CICC research team focuses on the economic, policy and market implications for 2022.

Different from the common demand-driven economic cycle, behind this round of economic fluctuations, there are two forces of supply and demand at the same time, which increases the difficulty of analyzing problems, especially how to distinguish temporary and permanent factors. Controversial. The most prominent example is the Fed’s shift from emphasizing the “transient” of inflation to accepting that “inflationary pressures persist longer than expected.” To achieve “not afraid of floating clouds to cover our eyes”, we need an anchor that goes beyond the short-term to form a judgment on the general trend of the future economic pattern. The most important thing is, what kind of lasting impact will the once-in-a-century COVID-19 epidemic have on the economic operating mechanism?

This paper presents a perspective, from the point of view of efficiency, that the “era of inefficiency” of the past 40 years in the global economy is coming to an end. The evaluation of “inefficiency” here has two dimensions: one is that the efficiency of resource use is reduced in an environment of continuous oversupply, which is generally referred to as extensive management; the other is that resource allocation that appears to be effective in the short term may be ineffective in the long run. , prominent examples are the use of natural resources that may increase future constraints on the economy, such as climate change from carbon dioxide emissions. In the environment of increasing supply constraints, the improvement of future efficiency will be reflected in technological progress and economic transformation. At the same time, the problems accumulated in the past inefficient era need to be resolved, which has profound implications for the macro environment, economic structure and asset valuation.

Population ageing curbs supply expansion

An era of inefficient use of resources has come to an end, which is not only reflected in the constraints of natural resources, but also not caused by the new crown epidemic, although the epidemic has played a role in accelerating adjustment. In fact, the decline in excess supply in the global economy has been reflected in the fading demographic dividend of major economies. Population is a slow variable whose impact on the economy goes beyond short-term cyclical fluctuations and has a cumulative effect. People are both producers and consumers, and demographic change is the most fundamental driving force for economic development.

In the book “The Dividend of Dividing Away” published in 2013, the author analyzed the impact of demographic changes on the economy in detail, and put forward three perspectives on the future outlook: 1) China’s economic growth rate has entered a trend of slowdown 2) The structural imbalance is multifaceted, and the fundamental imbalance is the gap between the rich and the poor; 3) The combination of high savings, real estate bubbles and credit expansion is the biggest macroeconomic risk in the next 5-10 years. In 2013, there was a lot of controversy over these three views, but now it seems to be basically in line with the actual situation in the past few years. These three perspectives still help us understand the supply constraints that population imposes on the economy, especially the role of interest rates.

The slowdown in the growth rate of the working-age population in major economies or even a decline in absolute numbers has brought downward pressure on economic growth, but this in itself does not necessarily change the balance of supply and demand in the economy. What is more important is the change in the age structure of the population. When the number of young adults (producers) in an economy exceeds that of the elderly and children (consumers), it will bring the so-called demographic dividend, which is reflected in excess supply relative to demand, and savings relative to investment. Excess brings low inflation, low interest rates, and high valuations of risky assets. The increase in the supply of labor has an inhibitory effect on wages, income distribution is more conducive to capital, and the widening income distribution gap in turn exacerbates insufficient consumption and excess supply.

Looking at the time when producers exceeded consumers, Japan was in the mid-1970s, the United States and Europe in the mid-1980s, and China in the mid-1990s, which together drove global inflation and interest rates down over the past 40 years. But the “producer/consumer” ratio has peaked and started to decline in major economies, with the inflection point in the US and Europe in the first decade of this century, Japan earlier, and China in the second decade of the century. The high point of the demographic dividend has passed, and the supply constraints faced by major economies tend to increase, which will bring pressure on inflation and rising interest rates.

The COVID-19 shock may have accelerated population supply constraints, especially in advanced economies. In the process of economic recovery, labor shortages, or the mismatch between labor supply and demand, are prominent, especially in fields with relatively low skill requirements such as transportation. Some factors may be temporary, such as government unemployment benefits, the need to care for children, etc., resulting in a decline in willingness to work. But the big logic behind the labor shortage is an aging population. The baby boomer generation in developed countries is nearing retirement age. The oversupply environment in the past has given this generation a better retirement arrangement, and their accumulated assets are also at a high valuation level. Under the impact of the epidemic, they retire early. willingness to increase.

Carbon neutrality brings new constraints

The 26th United Nations Climate Change Conference (COP26) will be held in Glasgow, UK from October 31st to November 12th, 2021. This is the first summit after major economies have clearly announced their carbon neutrality goals. Policy measures to reduce carbon emissions and paths to carbon neutrality. However, just two months before the summit, the United Kingdom restarted coal power plants, China and India increased coal production, oil, natural gas, and coal prices rose sharply, and many countries encountered power shortages and gas shortages. Is this the revenge of the old economy? How to understand the implications of green transition for the economy?

The rise in energy and commodity prices in 2021 will be driven by both demand and supply factors. Under the impact of the epidemic, consumer demand has shifted from services to goods, and at the same time, the fiscal stimulus of developed countries such as the United States has caused residents’ disposable income to rise instead of falling, all of which have led to a sharp increase in commodity demand. On the other hand, after the global financial crisis, economic growth was low and investment continued to be insufficient. As infrastructure ages and investment slows, traditional economies are less able to produce and supply commodities. In recent years, global ESG investment has become more and more important, especially the proportion of green transition-related investment has increased rapidly, which has exacerbated the problem of insufficient investment in the traditional economy.

The recent rise in commodity prices, especially the rise in energy prices, is the beginning of a commodity super cycle? Commodity super cycle generally refers to sustained strong demand that leads to price increases, but the elasticity of supply is limited in the short term, because it takes time for investment to increase production capacity, and supply growth is slow, causing prices to trend upward for a long time. Commodity supercycles have been accompanied by stronger economic growth. The last supercycle was in the early years of this century. Behind the demand for commodities was China’s strong infrastructure and real estate investment.

What’s different this time? This time there is a long-term constraint on switching to new energy sources. High prices are beneficial to investors and producers of fossil energy in the short term, but the higher the price and the longer the duration, the more it can promote the investment in new energy and the transformation of energy use, which will eventually reduce the demand for fossil energy. In turn, it is expected that the current investment in fossil energy will be limited, and it will be difficult to effectively alleviate the short-term supply shortage. For example, the willingness of large oil and gas companies to increase traditional investment may be limited, as shareholders are concerned about the short life cycle of new capacity and are more inclined to invest in the new energy sector.

On the other hand, the growth of new energy production capacity is limited by technological progress, and there may be a situation of decline in fossil energy production and insufficient supply of clean energy for a period of time. The deeper problem is that the rapid expansion of solar and wind power generation has not paid enough attention to the instability of new energy sources, and the related infrastructure has yet to be improved. Energy security and stability are public goods that are difficult for private institutions to provide. Regulators require banks to provide provisions to maintain financial stability, and can also require energy providers to prepare for the worst, which means increased investment in ancillary services such as energy storage and increased energy transition costs.

Carbon emission reduction and carbon neutrality require a reduction in the use of fossil energy. If alternative energy sources are not in place, the supply of fossil energy will be in short supply, which will have the effect of stagflation for the economy, that is, the cost of economic operation will rise, while the decline in real income will bring about a decline in demand. Facing the constraints of carbon neutrality, unlike past commodity super-cycles, traditional fossil energy will show a trend of shrinking quantity and rising price, and at the same time, it will have a distinct relative price adjustment feature, that is, energy prices will rise relative to other commodity prices , including the increase in the cost of carbon use (carbon tax or price formed by the carbon trading market).

In the book “The Economics of Carbon Neutrality – Macro and Sectoral Analysis under New Constraints” published in August 2021, we propose three possible scenarios for future carbon neutrality: first, carbon neutrality efforts are unsuccessful, Global climate change has brought significant damage to human society; second, the goal of carbon neutrality is mainly achieved by increasing the cost of energy use, and the global economy will face stagflation pressure for a long time; third, public policies include international cooperation to promote innovation in technology and social governance, Carbon neutrality brings new development opportunities, and human beings enjoy a higher level and healthier life. Technological innovation is the key, but technological progress does not fall from the sky. The rising cost of fossil energy use is an important driving force for promoting investment in green technology progress.

Industrial chain restructuring increases costs

The epidemic has had a great impact on the global industrial chain. From gasoline, natural gas, to coal, from toys, furniture, to chips, from chefs, stevedores, to truck drivers, there are many parts of the world that are in short supply. Supply shocks happen every year. Floods and earthquakes may cause production to be suspended in a certain area, but this time around the world, not only production but also transportation and logistics have been severely affected. Ports are blocked and sea freight has risen sharply. It can be said that it is a generational Talent sees a supply shock.

In the past few decades, the node division of labor in the global industrial chain has become more and more refined and scattered, while the production and supply of a single node have become increasingly concentrated. With smooth operations, this improves overall efficiency and reduces costs, benefiting consumers around the world. Under the impact of the epidemic, problems occurred in the production of some nodes or the transportation between different nodes, which dragged down the upstream and downstream of the industrial chain (for example, the shortage of chips affected the production of automobiles). The industrial chain is a cyclic system. Problems in one link will affect other normal links. That is to say, the division of the industrial chain will magnify the initial impact, and the resilience of the entire chain depends on its weakest link. How stable.

Looking to the future, is the supply shock a temporary phenomenon caused by the epidemic, or is it the beginning of structural adjustment of the global industrial chain? Intuitively, it is easy to extrapolate linearly based on past experience. After the epidemic subsides, production and logistics return to normal, and the supply problem is temporary. Especially for China, because the control of the epidemic is more effective than other countries, the impact on production is less, and the substitution effect makes China’s exports strong, which may cause this illusion. The technological competition between China and the United States also makes it possible for people to pay more attention to geopolitical factors and less attention to the internal logic of the economy.

Governments and industries around the world are now rethinking the stability and security of the industrial chain, which may have far-reaching impacts. Industrial chain security has horizontal and vertical dimensions. Horizontal refers to the concentration of production and supply of finished products. Three major production centers of finished products have been formed in the world, China, Germany and the United States. China is the largest exporter of finished products, and non-central economies have thus become overly dependent on the center. worry. The vertical is the relationship between upstream and downstream. Countries with natural resources and irreplaceable technologies are in the upstream, and economies in the downstream such as China will be worried about being stuck. Both horizontal and vertical are the result of the efficiency-oriented division of labor in the global industrial chain. The whole world enjoys the cost reduction brought by economies of scale and the improvement of consumer welfare. However, the impact of the epidemic, coupled with geopolitical issues, has highlighted the fragility of the global industrial chain.

How to increase the stability of supply, there are three possible ways: one is to increase inventory to provide room for manoeuvre for natural disasters and unforeseen shocks; the second is to diversify suppliers and reduce the concentration of supply sources; the third is to return manufacturing (U.S. ), independent innovation (China). However, the path dependence formed by the economic structure and natural resources means that independent innovation, the return of manufacturing and the dispersion of supply sources are not easy. In the past, investment, infrastructure construction, and maintenance of supply relationships all have path dependence. Changing the existing structure means costs. Increase.

Increased costs may lead to insufficient incentives for private institutions to adjust and the importance of government industrial policy to rise. Industrial policy has a new dimension, that is, attaching importance to the stability of the system, focusing on strengthening domestic and regional production networks and reducing external dependence. Europe is increasing support for the semiconductor industry and increasing government funding in design and manufacturing. A working group appointed by the US President released an assessment of the vulnerability of the US supply chain in June 2021, focusing on four aspects: semiconductors, high-capacity batteries, key raw materials, drugs and active pharmaceutical ingredients.

The increased resilience of the global industrial chain is not only reflected in the increase in redundancy in different links, but also in the reorganization of the links themselves, which means that behind the increase in stability is the increase in costs. On the surface, it is to sacrifice a certain efficiency in exchange for the improvement of stability. In fact, looking at the long-term dimension, some arrangements that seem to be effective in the short term may be inefficient or even ineffective. An example is that low inventories improve efficiency, but increase vulnerability, which may result in greater losses in the event of sudden shocks. The key problem is that there is a problem with the business model. Excessive pursuit of short-term efficiency and reduction of short-term costs actually damages long-term efficiency.

A comparable example is financial stability. Before the global financial crisis in 2008, the mainstream view was that financial markets can allocate resources efficiently, financial liberalization and globalization improve the efficiency of economic operations, and financial derivatives help economic entities diversify and manage risks. , which improves the resilience of the entire system. After the financial crisis, countries have strengthened financial supervision, which is not only reflected in the increase of capital, but also in the definition and regulation of business scope. Although it increases the operating cost of financial institutions, it reduces the risk of financial instability. It is a more effective mechanism arrangement in the medium and long term.

Efficiency-damaging role of the financial cycle will decline

Looking forward to the economic situation in 2022, in addition to supply constraints, the market also pays attention to real estate and related debt risks. These two issues are interrelated, not only affecting consumption and investment demand in 2022, but also an important perspective for us to look at the balance of supply and demand in the economy in the medium and long term. Finance is pro-cyclical, which is mainly reflected in the fact that real estate is an important credit collateral, real estate prices and bank credit promote each other, coupled with the government’s explicit and implicit guarantees to banks, market discipline constraints will not play a role in the short term until asset bubbles And debt unsustainable, there is a drastic adjustment.

A financial cycle lasts 15-20 years, while the general economic cycle is only a few years. Since the financial liberalization in the 1980s, the traditional economic cycle has become weaker and weaker, and the financial cycle has become the main force driving economic fluctuations. In the past 40 years, the United States has experienced 3 financial cycles. The top of the first financial cycle was the savings and loan crisis of 1989-90, the top of the second financial cycle was the subprime mortgage crisis of 2007-08, and the third The upside of the financial cycle started in 2013 and it remains to be seen when the top is.

A feature of these three financial cycles is that the average level of inflation and interest rates has fallen successively, and the oversupply of the economy has intensified. What is the reason? In addition to benefiting from the above-mentioned demographic dividend and the division of labor in the global industrial chain, the financial cycle exacerbates the imbalance between supply and demand by suppressing demand, which is a driving force for low inflation. Specifically, credit not only supports real demand, but also can buy second-hand assets, especially real estate. Credit-driven monetary expansion does not necessarily increase real demand, but promotes asset prices. At the same time, credit expansion has brought debt growth in the corporate and household sectors, and the debt service burden has dampened consumption and real investment demand. Third, generally speaking, finance is the icing on the cake rather than the help. Credit often requires collateral. The expansion of credit benefits the existing wealth occupiers more, increases the gap between the rich and the poor, and reduces the average consumption rate.

Things have started to change in the past 10 years. After the global financial crisis, financial supervision has been strengthened, and the pro-cyclicality of finance has declined. The credit expansion in this upswing of the U.S. financial cycle is milder than the previous one, and the household sector has experienced continuous deleveraging. More importantly, under the impact of the epidemic, the U.S. fiscal deficit has increased significantly, and coupled with the quantitative easing of the Federal Reserve, the U.S. M2 will increase by about a quarter in 2020, of which about half comes from fiscal expansion, which increases the net assets of the private sector and boosts growth. Consumer demand is an important driver of rising inflation.

China is in the first financial cycle. Starting from the credit expansion in response to the global financial crisis in 2008, real estate and credit expansion complement each other, and the real estate bubble has become a prominent problem. After the National Financial Work Conference in 2017, financial supervision was strengthened, and the concept of “housing, not speculating” was gradually reflected in macro and structural policies, which opened the adjustment in the second half of the financial cycle. After special policies to deal with the impact of the epidemic, regulators re-regulated real estate financing, the Standing Committee of the National People’s Congress authorized the State Council to carry out pilot work on real estate tax reform in some areas, and the real estate market cooled down significantly.

In a word, under the background of strengthened financial supervision and policies that pay more attention to narrowing the income distribution gap to promote common prosperity, the expansion momentum of real estate and credit has declined. The second half of China’s financial cycle may take a long time to adjust, and the recent exposure to debt risks related to real estate companies is part of this process. In the book “The Approaching Financial Cycle” published in 2017, the author proposed that in the second half of the financial cycle, the general trend of the macro policy mix is ​​”tight credit, loose money, and loose finance”, which will help the household sector and the corporate sector. The restoration of the balance sheet will help reduce the income distribution gap and promote the growth of consumption and investment demand. It should be said that the worst-case scenario in which the financial cycle reduces the efficiency of resource allocation is in the past.

The economic logic of stagflation

The three factors that lead to increased supply constraints have been described above, population aging, carbon neutrality, and global industrial chain restructuring. Unlike general localized supply shocks, such as earthquakes and floods, although population aging mainly involves developed countries and China, aging countries account for the majority of the global economy. The shutdown of production caused by the new crown epidemic also has overall characteristics, but it is short-term after all, and the aging of the population and green transformation are constraints in the next few decades. How to understand the impact of these long-term supply-side forces on the global economic landscape?

Compared with the past few decades, the most important impact is that there is less room for extensive use of production factors and waste of resources. In this sense, an era of inefficiency is over. At the same time, the future economic mechanism will not be completely separated from the past. Many economic activities are still path dependent. The long-term dynamic inefficiency implied by the short-term static high efficiency needs to be gradually digested, such as environmental pollution and climate change caused by carbon emissions. Heating and pension issues.

In the process of adjustment, the most intuitive result is that the cost of production factors and economic operation will increase, wages will rise, energy prices will rise, and production and transportation costs will rise. What impact does this have on economic growth and prices? First of all, these are relative price changes in essence, where the prices of production factors or commodities that are undersupplied relative to other commodities and services rise, with a structural adjustment and income distribution implications. Second, a reduction in supply means a reduction in real income for the overall economy, which has a negative impact on aggregate demand, causing other commodity prices to fall. Combining the two, the effect is that the economic growth rate will decline and the overall price level will remain unchanged.

In reality, in response to the impact of supply shocks on demand, macro policies respond to support aggregate demand. Assuming that the decline in aggregate demand is completely offset by policy actions, economic growth remains unchanged and the overall price level rises. In the case of supply constraints, the counter-cyclical adjustment space of macro policies on the demand side is limited, and a balance between growth and inflation is required, which is the so-called stagflation problem.

Stagflationary pressures pose two challenges for economic policy. First of all, fundamentally speaking, alleviating supply constraints requires efforts on the supply side. Promoting the recovery of fertility is an important aspect, but this is a long-term process. Even if fertility rebounds, the burden of childcare will intensify the supply constraints in the next 20 years. Structural measures including tax cuts, improving the business environment, and improving the labor market are conducive to improving supply elasticity. The key is to improve production efficiency through technological progress, and the rise in related commodities such as energy prices plays a role in guiding resource allocation. However, science and technology have certain attributes of public goods. To overcome the problem of insufficient investment by individual institutions, the government needs to play a role.

In the in-depth report “Innovation: The Unquenchable Torch” released by CICC in September 2021, it is pointed out that technological innovation requires the establishment of a partnership between the government and the market. It should also be oriented to promote innovation. From a macro perspective, fiscal policy (including policy finance) can play an important role. This is not a traditional counter-cyclical adjustment, but a dynamic and effective public policy that combines reducing long-term supply constraints and hedging short-term demand impacts.

monetary logic of inflation

Another challenge to stagflationary pressures is monetary policy. In this round of economic recovery, why is the global supply shock manifested as inflation in the United States (increase in general prices) and in the expansion of the CPI/PPI scissors gap in China (relative price changes or quasi-stagflation)? Will inflation in the US continue? Will China’s relative price rise translate into inflation at the overall price level? The key is to see the balance of monetary policy between different objectives and the policy transmission mechanism.

First, from the perspective of transmission mechanism, it is necessary to distinguish between endogenous money and exogenous money. To put it simply, exogenous money is not the result of the operation of the economic system itself, such as fiscal deficit spending money. A typical endogenous currency is credit, which reflects the internal kinetic energy of economic operation, including economic growth and real estate demand for credit. Historical experience tells us that the main problem caused by excessive expansion of exogenous money is inflation, because the supply of exogenous money exceeds the endogenous demand for money in the economy. In contrast, the main problems that accompany endogenous monetary over-expansion are asset price bubbles and debt problems.

In 2020, China mainly provided money through credit, and the debt burden formed began to manifest in 2021, which inhibited consumption and investment. U.S. money grows faster, and a considerable part of it comes from exogenous money from fiscal injections. Calculations show that in the second half of 2020, the growth rate of M2 in the United States will be as high as 25%, of which nearly half comes from financial investment. It should be noted that during the 2008 financial crisis, the U.S. fiscal contribution to money supply was also relatively large, but it was mainly to bail out financial institutions, and real sectors such as enterprises and households had limited direct benefit. In contrast, the U.S. fiscal expansion this time has gone straight to individuals and businesses, showing typical characteristics of exogenous money.

Therefore, the answer to the above question ultimately depends on how monetary policy balances objectives such as economic growth (employment), price stability, and financial stability. With stronger financial regulation and slower credit growth, there may be inherent requirements for a greater fiscal role. After the financial crisis, the Federal Reserve’s monetary policy operations were extremely loose, interest rates remained low for a long time, and even the central bank purchased government bonds in the market to release money (quantitative easing). At first, quantitative easing was considered an unconventional monetary policy, but it is now accustomed to it, and it seems to have changed. become a regular policy tool. Many people accuse the Federal Reserve of being too loose monetary policy, but forget that the strengthening of financial supervision has slowed down the pace of credit expansion, and the private sector, especially households, has experienced more than a decade of deleveraging. The result of such a policy mix is ​​higher inflation but lower systemic financial risks.

Another perspective is income distribution. Rising wages will improve income distribution and reduce the gap between the rich and the poor. If this is not conducive to controlling inflation, how should the policy be balanced? Should controlling inflation come at the expense of widening income gaps? Traditionally, central banks need to balance inflation and growth (employment), and wage increases should be in line with labor productivity growth, i.e. without rising prices. But if there is a period of time when wages grow slower than labor productivity and returns to capital rise (as has been the case in the US over the past 20 years), should society accept that wages grow faster than labor productivity, returns to capital fall, and inflation rises for another period?

This is the challenge for central banks around the world, how to balance policy between different objectives in a secular trend of increasing supply constraints. The author’s basic judgment is that, based on the pro-cyclical harm of finance and the prominent income gap, in order to correct the problems accumulated in the past 40 years, the tolerance of global central banks to inflation will increase; on the other hand, there are historical lessons on the harmfulness of high inflation. The central bank will not tolerate persistently high inflation, and monetary policy will inevitably respond, and there may even be overcorrection in the later stage due to excessive tolerance in the early stage. The result is an increase in macroeconomic volatility, with important implications for the valuation of broad asset classes.

Asset Valuation Reconstruction

To sum up, with the increase of supply constraints, the balance between growth and inflation changes. The same economic growth brings higher inflation, or in other words, controlling inflation at the same level requires sacrificing more growth. Higher inflationary pressure means that the constraints of counter-cyclical operations of monetary policy increase, the importance of the financial cycle decreases, the short-term volatility of the economy increases, and the era of “Great Moderation” characterized by a decline in macroeconomic volatility is over. Carbon neutrality is driven by global public policies, and the decades-long economic transformation, the impact of the newly added constraints on the existing economic system is global and deserves special attention. Looking at the prices of major asset classes in the medium and long term, there are several implications.

First, in contrast to the past few decades, a long-term trend across the globe is rising average inflation and rising interest rates. China’s financial cycle is in a downward adjustment, and the exposure and disposal of debt risks may last for a long time, limiting the rise of interest rates, and the risk premium mainly affects real estate and related financial institutions. Risk assets in the United States are more problematic, with rising interest rates lowering the valuation of risky assets, and increasing volatility in corporate earnings, requiring higher risk premium compensation. For U.S. equities with high valuations, returns in the next few years have been severely eroded.

Second, in order to alleviate the supply constraints faced by the economy, investment in the resource sector needs to increase significantly, especially in the field of green transition to combat climate change, which requires the ex-post return (equity valuation) and ex-post return (corporate earnings) of related investments to remain within the high level to guide capital investment. There are two aspects worth paying attention to: (1) Unlike fossil energy, clean energy has manufacturing attributes and relies on technological progress and innovation. Moreover, innovation in the ecological field is a general technological innovation, which is likely to become an extremely important technological change in the history of human development, just like the invention of the steam engine and electricity; (2) There is not only insufficient investment in clean energy, but also insufficient investment in low-carbon energy, such as natural gas, etc. The carbon emission of calorific value is about 60% of that of coal, and the fossil energy structure needs to be converted from coal and oil to natural gas.

Third, considering the fundamental role of natural resources, especially energy, in the modern economy, green transition will inevitably bring loss of interests, energy substitution, technological progress, changes in consumer habits, and increased economic fluctuations. It is conceivable that many enterprises, even It is difficult for the entire industry to adapt to this transformational pressure. Transformation will inevitably require lower ex-post and ex-post returns on investments in replaced and obsolete sectors. We’re already seeing some signs, like the contrast between conventional cars and electric cars.

Fourth, the two motives of maximizing returns and avoiding losses require that long-term portfolios be allocated a substantial proportion of green and broader natural resources. In the hyper-inflationary economy of the 1970s, investments focused on energy and related resource assets earned positive returns that exceeded inflation, and the return on most diversified portfolios did not keep pace with inflation.

From a long-term asset allocation perspective, a fundamental question is what role carbon emissions trading and the resulting price play. The global carbon trading market is still in the initial stage of development, and its importance will increase as the green transition progresses. There are two ways to achieve a reduction in carbon emissions without considering technological progress. One is to limit the production and supply of fossil energy through regulatory requirements (such as energy consumption standards), which have a direct effect on reducing carbon emissions. Given the demand for fossil energy in economic activities, energy prices rise. The rise in price suppresses energy demand until a new equilibrium point between supply and demand is finally reflected in the reduction of quantity and price increase. For investors, although the price increase is a good thing, the investment target is not necessarily within the scope of the reduced volume, and the required risk premium will lower the valuation.

Another possibility is to increase the cost of fossil energy and reduce demand through some form of carbon price (such as carbon trading market price), thereby bringing down the price of fossil energy, which in turn drives down the supply of fossil energy and carbon emissions. In the second case, the carbon price becomes the price of a new factor of production, and the price increase in the “quantity reduction and price increase” of fossil energy in the green transition process is not reflected in traditional energy, but in carbon price. Therefore, it is a controversial issue how much financial attributes should be given to carbon prices from the design of the trading system. If the carbon trading price fluctuates greatly, it is not conducive to the business planning of economic entities.

In short, population aging, green transition, industrial chain restructuring, strengthening financial regulation, and reducing the gap between the rich and the poor will end the era of inefficiency in the global economy, from the pursuit of short-term efficiency and cost reductions to the focus on mid- and long-term sustainability. Although the roles of these forces are not synchronized and manifested differently in different countries, the general direction is the same. An important manifestation of the dynamic inefficiency or inefficiency of resource allocation is unsustainably high valuations, including low energy prices that do not consider negative externalities, and high asset prices that do not consider pension burdens. Sustainable development requires that the wealth of the older generation who enjoy the demographic dividend shrink, which is reflected in the decline in the valuation of financial assets and the rise in labor returns (wages) for the younger generation.

The scarcity of resources will ultimately improve the efficiency of their use and promote economic growth. The average per capita GDP growth rate in the United States from 1950 to 1979 was 2.4%, and it has dropped to 1.6% since the 1980s. On the other hand, the demographic dividend of the United States began in the 1980s, which cannot explain the decline in its growth rate, but can only reflect changes in production efficiency, which is consistent with the dynamic and effective logic emphasized in this paper. The end of an inefficient era has different impacts on stakeholders, and the beneficiaries in the past may suffer in the future, but the overall welfare of society is not necessarily damaged, especially in the coming new era, which plagues all mankind The problem of excessively large income distribution gaps between the same generation and between generations will be reduced.