Welcome to zero. I am Akshatrati. This week, back to basics. It's clear that we are in a moment of flux in global affairs. President Donald Trump's America First doctrine is shaking up diplomacy, trade, and markets. The hope that wars across Europe, the Middle East and Africa will ease up isn't really panning out. At the same time, climate change isn't slowing down either, and the impacts in vulnerable countries are growing. The energy transition isn't taking a break either. Last year, the global spend on energy was three trillion dollars, of which more than two trillion dollars was on clean energy technologies. According to Bloomberg nef So, in trying to make sense of things, I found that sometimes it can help to go back to the basics. There are fundamental forces that shape our world, and especially during a tumultuous time, it helps to understand them a little more deeply to be able to make a better mental map of the future. So for the next three episodes, we're going to explore the basics of finance for climate solutions and continue our Moving Money series.

Welcome to zero. I am Akshatrati. This week, back to basics. It's clear that we are in a moment of flux in global affairs. President Donald Trump's America First doctrine is shaking up diplomacy, trade, and markets. The hope that wars across Europe, the Middle East and Africa will ease up isn't really panning out. At the same time, climate change isn't slowing down either, and the impacts in vulnerable countries are growing. The energy transition isn't taking a break either. Last year, the global spend on energy was three trillion dollars, of which more than two trillion dollars was on clean energy technologies. According to Bloomberg nef So, in trying to make sense of things, I found that sometimes it can help to go back to the basics. There are fundamental forces that shape our world, and especially during a tumultuous time, it helps to understand them a little more deeply to be able to make a better mental map of the future. So for the next three episodes, we're going to explore the basics of finance for climate solutions and continue our Moving Money series.

Developing countries have said the number we need is a trillion. Developed countries have said maybe, but that's not coming from our budgets. There's no space there that could come from an onion of things. The outer layer might be private sector, the middle layer might be MDBs, and the inner layer may be government budgets.

Developing countries have said the number we need is a trillion. Developed countries have said maybe, but that's not coming from our budgets. There's no space there that could come from an onion of things. The outer layer might be private sector, the middle layer might be MDBs, and the inner layer may be government budgets.

We're welcoming back Avin ash Barsod, special advisor on climate risks to the President of the Inter American Development Bank and former economic advisor to Barbados Prime Minister Mia Mortley. Over the next three episodes, we'll be exploring the role of multilateral development banks and the various innovative financial tools that can unlock private sector investments in the climate transition. But first, let's take a big picture look at how the global financial order works in the first place, and how it can be reshaped for the climate era. We start the conversation by addressing one of the big challenges right now, the cost of capital. Think of it this way. When the cost of borrowing money is cheap, it's easier to build the clean energy projects we need, like solar panels, wind farms, and batteries. Developed countries typically enjoy cheaper costs of capital, meaning stuff can be built with lower borrowing costs. Developing countries, on the other hand, have much much higher cost of capital thanks to real or perceived risks of doing business there. This slows their growth and in the worst case scenario, can lead to a debt trap where they borrow more money just to make the interest payments on old loans. So I asked Savinage, how do we flow the script and how do we lower the cost of capital and make the financial system work for climate action not against it. Hi, Avinash, welcome back to another episode of Moving Money. Thank you. Today we're going to talk about the cost of capital. We've seen a lot of money go into developed countries for renewables, and those countries typically have lower interest rates and thus they're able to borrow money and pay small amounts on their interest payments. But developing countries typically have higher interest rates, and thus even if they had the capital to be borrowed, they will have to pay more on those interest rates. But surely, if the cost of renewbal just keeps falling, high interest rate, low interest rate, doesn't really matter, it'll scale, right.

We're welcoming back Avin ash Barsod, special advisor on climate risks to the President of the Inter American Development Bank and former economic advisor to Barbados Prime Minister Mia Mortley. Over the next three episodes, we'll be exploring the role of multilateral development banks and the various innovative financial tools that can unlock private sector investments in the climate transition. But first, let's take a big picture look at how the global financial order works in the first place, and how it can be reshaped for the climate era. We start the conversation by addressing one of the big challenges right now, the cost of capital. Think of it this way. When the cost of borrowing money is cheap, it's easier to build the clean energy projects we need, like solar panels, wind farms, and batteries. Developed countries typically enjoy cheaper costs of capital, meaning stuff can be built with lower borrowing costs. Developing countries, on the other hand, have much much higher cost of capital thanks to real or perceived risks of doing business there. This slows their growth and in the worst case scenario, can lead to a debt trap where they borrow more money just to make the interest payments on old loans. So I asked Savinage, how do we flow the script and how do we lower the cost of capital and make the financial system work for climate action not against it. Hi, Avinash, welcome back to another episode of Moving Money. Thank you. Today we're going to talk about the cost of capital. We've seen a lot of money go into developed countries for renewables, and those countries typically have lower interest rates and thus they're able to borrow money and pay small amounts on their interest payments. But developing countries typically have higher interest rates, and thus even if they had the capital to be borrowed, they will have to pay more on those interest rates. But surely, if the cost of renewbal just keeps falling, high interest rate, low interest rate, doesn't really matter, it'll scale, right.

So the issue of the cost of capital only occurred to me a couple of years ago, and indeed, if you look at the if you look at the negotiations, this concept of cost of capital is new. It's only now in communicats in G twenty in the last two years.

So the issue of the cost of capital only occurred to me a couple of years ago, and indeed, if you look at the if you look at the negotiations, this concept of cost of capital is new. It's only now in communicats in G twenty in the last two years.

Oh wow, And those interest rates are a thing that the financial system cannot work without. People were not.

Oh wow, And those interest rates are a thing that the financial system cannot work without. People were not.

Thinking those terms. As you and I have talked about before, many of the people involved in this space are not macro people. They are project financiers, so they're not thinking about global interest rates or country interistrates. They're thinking about a particular project they're trying to finance. And I remember I was in a negotiation room and the negotiative of a small European country is saying, finance isn't the problem, he says, and the rest of us are completely bored over by him thinking this, because we're thinking finance is the problem. And I'm sitting there trying to understand him. And I pick up my phone and I google as his country issued a ten year bond recently and it had and his cost of capital for his government was like three percent. And he was sitting next to the negotiator from South Africa. So I then google what was the last ten year bond issue for South Africa twelve point five, and the other next to him was was Brazil, And I google again and it's like thirteen percent. I'm thinking, Okay, that's the thing. He's not experiencing the cost of capital. So for him, finance isn't the problem for him, it may be about policies and regulations and how does he tax the right thing and subsidize the right thing. For the other two countries, there's no money flowing.

Thinking those terms. As you and I have talked about before, many of the people involved in this space are not macro people. They are project financiers, so they're not thinking about global interest rates or country interistrates. They're thinking about a particular project they're trying to finance. And I remember I was in a negotiation room and the negotiative of a small European country is saying, finance isn't the problem, he says, and the rest of us are completely bored over by him thinking this, because we're thinking finance is the problem. And I'm sitting there trying to understand him. And I pick up my phone and I google as his country issued a ten year bond recently and it had and his cost of capital for his government was like three percent. And he was sitting next to the negotiator from South Africa. So I then google what was the last ten year bond issue for South Africa twelve point five, and the other next to him was was Brazil, And I google again and it's like thirteen percent. I'm thinking, Okay, that's the thing. He's not experiencing the cost of capital. So for him, finance isn't the problem for him, it may be about policies and regulations and how does he tax the right thing and subsidize the right thing. For the other two countries, there's no money flowing.

Isn't the cost of capital just simply interest rates? I have a mortgage, I pay a particular interest Sadly it's gone up in recent years. Welf, what are interest rates? It's the price of money, and so it is the cost of capital. It's all circular, not entirely so. In Europe and the States, capital is abundant and it is cheap. There's a lot of sas a lot of capital, and the amount of investment going on is not huge. So investment takes away from the savings and makes the capital more scarce. But there's abundance of capital. The price of money is that prices demand and supply the demand for the money to invest and supply the money through savings. You go to a developing country and there's very limited savings because they're poor, they're small. They're economies. Maybe a big country, big population, but the economic activity is small and the demand for things that could be done are huge. So capital is really scarce. So demand high supply, low price is high, their cost of capitalist high. Now when you understand it in that way, you realize what the solution because many people say, ah, yes, well this is because they're having to pay a lot of foreign exchange hedging costs. So why don't we just borrow locally. Yeah, borrow locally means more demand for investment in a place with very limited supply of savings. So that's going to push the cost of capital up even more. So what we actually need to do is create a channel, a channel from the place of abundant, cheap capital to the place of scarce, expensive capital. And when we build this channel, why is this channel not flowing? Why is money not flowing?

Isn't the cost of capital just simply interest rates? I have a mortgage, I pay a particular interest Sadly it's gone up in recent years. Welf, what are interest rates? It's the price of money, and so it is the cost of capital. It's all circular, not entirely so. In Europe and the States, capital is abundant and it is cheap. There's a lot of sas a lot of capital, and the amount of investment going on is not huge. So investment takes away from the savings and makes the capital more scarce. But there's abundance of capital. The price of money is that prices demand and supply the demand for the money to invest and supply the money through savings. You go to a developing country and there's very limited savings because they're poor, they're small. They're economies. Maybe a big country, big population, but the economic activity is small and the demand for things that could be done are huge. So capital is really scarce. So demand high supply, low price is high, their cost of capitalist high. Now when you understand it in that way, you realize what the solution because many people say, ah, yes, well this is because they're having to pay a lot of foreign exchange hedging costs. So why don't we just borrow locally. Yeah, borrow locally means more demand for investment in a place with very limited supply of savings. So that's going to push the cost of capital up even more. So what we actually need to do is create a channel, a channel from the place of abundant, cheap capital to the place of scarce, expensive capital. And when we build this channel, why is this channel not flowing? Why is money not flowing?

And their various obstacles, and one obstacle is that, well, the abundant capital is in dollars and the scarce capital is in a local currency, and you have foreign exchange risk. Because one of the interesting things about renewables is, you know, why is this a new problem again? Foreign exchange is another one of those issues that was not on their communicators agendas anywhere just two years ago. Because fossil fuel investments, for example, are often in dollars because the thing you're investing in is priced in dollars, can be traded in dollars. But when I'm buying a solar farm in Brazil, I'm not getting earning dollars. I'm earning a local currency. Hel So now I have a foreign exchange problem. I'm earning revenues in one currency and I've got this other currency that I've invested in.

And their various obstacles, and one obstacle is that, well, the abundant capital is in dollars and the scarce capital is in a local currency, and you have foreign exchange risk. Because one of the interesting things about renewables is, you know, why is this a new problem again? Foreign exchange is another one of those issues that was not on their communicators agendas anywhere just two years ago. Because fossil fuel investments, for example, are often in dollars because the thing you're investing in is priced in dollars, can be traded in dollars. But when I'm buying a solar farm in Brazil, I'm not getting earning dollars. I'm earning a local currency. Hel So now I have a foreign exchange problem. I'm earning revenues in one currency and I've got this other currency that I've invested in.

That's true, if you bought gasoline in Brazil, you would be paying in real and then somebody up the chain has to pay eggs on mobile. I guess I got to sell.

That's true, if you bought gasoline in Brazil, you would be paying in real and then somebody up the chain has to pay eggs on mobile. I guess I got to sell.

Gasoline in US dollars. Though I can export the gasoline in US dollars, I can't export my solar farm and wind turbine in US dollars. So it's a fundamentally different problem. And so we want this massive investment, and we're coming across this problem, and so the solution is to clear out this channel, to unblock this channel. And we found that the project financiers think that the solution is to lower the risk.

Gasoline in US dollars. Though I can export the gasoline in US dollars, I can't export my solar farm and wind turbine in US dollars. So it's a fundamentally different problem. And so we want this massive investment, and we're coming across this problem, and so the solution is to clear out this channel, to unblock this channel. And we found that the project financiers think that the solution is to lower the risk.

Of the project.

Of the project.

As someone who used to work for developing country government and and so, I was a chief investment officer, if you like, for Barbados for a few years, and my job was to speak to these investors and try to attract them. And what I was competing with the governments will basically offered the investors a lot. We try to deal with all of their uncertainties. You know, they had to pick the right things to invest in. But if they were worried about the currency, we would say, well, you know, we'll try to hedge that from you. They were worried about the change in law, change in tax, They were guaranteed everything, and they still didn't really want to come, partly because of the foreign exchange of volatility and uncertainty. So we think the way in which we can reduce the cost of capital in developing countries is to unblock the flow from places of abundant capital by managing the foreign exchange. Now, if cost of capital is a problem, it really frames your approach to many things. So in a rich country, you can think about dealing with the problem of carbon and environment by saying I need to tax things that pollute and subsidize things that are clean. And because the cost of capital is low, that price signal will have investors switching. They will stop investing in a high tax thing and they'll invest in the subsidy thing. Go to a developing country and you impose the same tax and subsidy, but you've got a high cost of capital. They can't do that because they will need lots of money to invest in the new thing. And that's the other thing about renewables is they're very capital intensive. They're operating costs low, but they're very capital intensive, so you need to have capital and capital costs a lot of money, and that is stopping renewable investments happening in developing countries.

As someone who used to work for developing country government and and so, I was a chief investment officer, if you like, for Barbados for a few years, and my job was to speak to these investors and try to attract them. And what I was competing with the governments will basically offered the investors a lot. We try to deal with all of their uncertainties. You know, they had to pick the right things to invest in. But if they were worried about the currency, we would say, well, you know, we'll try to hedge that from you. They were worried about the change in law, change in tax, They were guaranteed everything, and they still didn't really want to come, partly because of the foreign exchange of volatility and uncertainty. So we think the way in which we can reduce the cost of capital in developing countries is to unblock the flow from places of abundant capital by managing the foreign exchange. Now, if cost of capital is a problem, it really frames your approach to many things. So in a rich country, you can think about dealing with the problem of carbon and environment by saying I need to tax things that pollute and subsidize things that are clean. And because the cost of capital is low, that price signal will have investors switching. They will stop investing in a high tax thing and they'll invest in the subsidy thing. Go to a developing country and you impose the same tax and subsidy, but you've got a high cost of capital. They can't do that because they will need lots of money to invest in the new thing. And that's the other thing about renewables is they're very capital intensive. They're operating costs low, but they're very capital intensive, so you need to have capital and capital costs a lot of money, and that is stopping renewable investments happening in developing countries.

We've talked about how if we want the capital to flow to developing countries, it's going to come from capital owners with sit in developed countries. If they invest that in developing countries, that will allow for more capital to be there in developing countries and thus will lower their cost of capital. One is currency exchange risk, one is political risk. What else is there that they worry about and can they hedge those other risks as well, economists, we like to break things down into simple things. It's a reductivist science. We'd love to be to tell people there's only one thing you need to do. The reality is the actual process of investing is quite messy, and so a company will say, why am I going to this place I've never been to before to manage a permitting process I've never managed before. So there's a whole bunch of uncertainties, you know. The difference between uncertainty and risk is risk. I can quantify a lot of these things. They can't quantify. Will it take a day to get my permit or will it take me three hundred days? Huge impact on the cost of this business, And so they are multiple things, but many of them there is insurance for it. So the insurance of the word bank MEAGA will offer you political insurance. Export credit agencies offer political insurance, so there are number of types of insurance to reduce that. But a country can't offer you insurance against their own currency because that's saying insurance against themselves having a problem, at which point they won't be able to do anything. So it's so we need other players to come in and manage that. But I think that's the main obstacle, are the kinds of risk that the country themselves can't guarantee because the country is trying to guarantee you everything else. One of the things I found I have to explain often to my friends and developed countries is that developing countries promise investors that they can take them to court in a foreign court for any change in policy. Now, if you went to Britain or Money and said, as an investor, I want that if you change your policies, that you have to compensate me in full, and if you don't, I'll take you to London. They'll look at you and you know, think you're crazy. They say, I can't change policies. What's happened to sovereignty. I have the sovereigny.

We've talked about how if we want the capital to flow to developing countries, it's going to come from capital owners with sit in developed countries. If they invest that in developing countries, that will allow for more capital to be there in developing countries and thus will lower their cost of capital. One is currency exchange risk, one is political risk. What else is there that they worry about and can they hedge those other risks as well, economists, we like to break things down into simple things. It's a reductivist science. We'd love to be to tell people there's only one thing you need to do. The reality is the actual process of investing is quite messy, and so a company will say, why am I going to this place I've never been to before to manage a permitting process I've never managed before. So there's a whole bunch of uncertainties, you know. The difference between uncertainty and risk is risk. I can quantify a lot of these things. They can't quantify. Will it take a day to get my permit or will it take me three hundred days? Huge impact on the cost of this business, And so they are multiple things, but many of them there is insurance for it. So the insurance of the word bank MEAGA will offer you political insurance. Export credit agencies offer political insurance, so there are number of types of insurance to reduce that. But a country can't offer you insurance against their own currency because that's saying insurance against themselves having a problem, at which point they won't be able to do anything. So it's so we need other players to come in and manage that. But I think that's the main obstacle, are the kinds of risk that the country themselves can't guarantee because the country is trying to guarantee you everything else. One of the things I found I have to explain often to my friends and developed countries is that developing countries promise investors that they can take them to court in a foreign court for any change in policy. Now, if you went to Britain or Money and said, as an investor, I want that if you change your policies, that you have to compensate me in full, and if you don't, I'll take you to London. They'll look at you and you know, think you're crazy. They say, I can't change policies. What's happened to sovereignty. I have the sovereigny.

I'm in parliament, I elect people, I change policies. But developing countries they've had to give up that to attract investments. So they actually guarantee a lot of stuff, but they are things they can't guarantee.

I'm in parliament, I elect people, I change policies. But developing countries they've had to give up that to attract investments. So they actually guarantee a lot of stuff, but they are things they can't guarantee.

After the break is cheap money, prolonging the lifespan of fossil fuels. And by the way, if you're enjoying this episode, please take a moment to rate and review the show on Apple Podcasts and Spotify. It helps other listeners find the show. One way to try and tackle the climate problem is to electrify as much as possible and decarbonize electricity. Now, we're getting pretty good at the decarbonization of electricity part because clean energy is getting cheaper and there are big forces, economic forces, demand levers that are coming for clean power. On the electrification side, we aren't doing all that much. There is electrification or transport that is happening, but most of the forces of electrification are in countries that are fossil fuel poor. So countries like China, which does not have very much oil and gas, or India, which does not have very much oil or gas, are electrifying much faster than countries like the UK or Germany.

After the break is cheap money, prolonging the lifespan of fossil fuels. And by the way, if you're enjoying this episode, please take a moment to rate and review the show on Apple Podcasts and Spotify. It helps other listeners find the show. One way to try and tackle the climate problem is to electrify as much as possible and decarbonize electricity. Now, we're getting pretty good at the decarbonization of electricity part because clean energy is getting cheaper and there are big forces, economic forces, demand levers that are coming for clean power. On the electrification side, we aren't doing all that much. There is electrification or transport that is happening, but most of the forces of electrification are in countries that are fossil fuel poor. So countries like China, which does not have very much oil and gas, or India, which does not have very much oil or gas, are electrifying much faster than countries like the UK or Germany.

Can I just ask you a question there? So you're saying the degree of electrification is more driven by whether the country has fossil fuels as opposed to I guess my previous thinking was it was about sectors, right, So industry, which may be hard to abate, is how to electrify parts of sectors. But you're saying it's less sector driven and more country driven.

Can I just ask you a question there? So you're saying the degree of electrification is more driven by whether the country has fossil fuels as opposed to I guess my previous thinking was it was about sectors, right, So industry, which may be hard to abate, is how to electrify parts of sectors. But you're saying it's less sector driven and more country driven.

Correct You can electrify parts of industry, and there are technology constraints on how much you can electrify, or how quickly you can do it, or what cost you can do it. But the primary driver of electrifications so far has been more tied to what fuels that country has access to domestically, because any fuel that they have to import is more expensive as to trade deficit, etc. Etc. So it puts developed countries like the UK and Germany and the US below the world average when it comes to their source of energy coming from electricity, which might feel strange to people. But projecting four years further, if America keeps on that trajectory, which is to not electrify all that much, and the rest of the world like China and India start to electrify more and more, we could start to see America become less of a leader in the future of energy, which is a strange thing to say today because America produces the most amount of oil in the world, the most amount of gas in the world. But I am talking about the future of energy, which I believe is an electrified future.

Correct You can electrify parts of industry, and there are technology constraints on how much you can electrify, or how quickly you can do it, or what cost you can do it. But the primary driver of electrifications so far has been more tied to what fuels that country has access to domestically, because any fuel that they have to import is more expensive as to trade deficit, etc. Etc. So it puts developed countries like the UK and Germany and the US below the world average when it comes to their source of energy coming from electricity, which might feel strange to people. But projecting four years further, if America keeps on that trajectory, which is to not electrify all that much, and the rest of the world like China and India start to electrify more and more, we could start to see America become less of a leader in the future of energy, which is a strange thing to say today because America produces the most amount of oil in the world, the most amount of gas in the world. But I am talking about the future of energy, which I believe is an electrified future.

You're not just talking about the future energy. Actually, there's also the future of economic growth in these countries because electrification produces significant efficiencies which boost growth over and above the benefits that now will becoming from cheaper fuel sources.

You're not just talking about the future energy. Actually, there's also the future of economic growth in these countries because electrification produces significant efficiencies which boost growth over and above the benefits that now will becoming from cheaper fuel sources.

And that, to me is the central point I want to get to as we explore why energy and economics play an intertwined role. So, as I was thinking about whether there's an economic driver for America to electrify, I couldn't find one. It is blessed with fossil fuels, It will have fossil fuels for a long time. That is an energy equation that I can understand pretty easily.

And that, to me is the central point I want to get to as we explore why energy and economics play an intertwined role. So, as I was thinking about whether there's an economic driver for America to electrify, I couldn't find one. It is blessed with fossil fuels, It will have fossil fuels for a long time. That is an energy equation that I can understand pretty easily.

Well. Couldn't the driver be that it is actually more economically efficient?

Well. Couldn't the driver be that it is actually more economically efficient?

Perhaps, but only if there is an economic constraint on that country to want to be more economically efficient. America is saying, partly through the fact that the fossil fuel market and prices are actually a fairly contrived thing, that they're partly controlled supply and demand can be fairly controlled. That they have enabled them to have a cheaper price than elsewhere, which is actually slowing their shift towards a more fundamentally efficient thing to do. When there was an economic crisis and energy crisis in Europe after Russia's attack on Ukraine, Europe started to electrify faster. America tends to face none of these crisis it doesn't have on its borders. It doesn't have an energy crisis given how much it's blessed with fossil fuels. And then finally, this is the thing that makes it seem like it's got the most unfair advantage is it's got the world's reserve currency.

Perhaps, but only if there is an economic constraint on that country to want to be more economically efficient. America is saying, partly through the fact that the fossil fuel market and prices are actually a fairly contrived thing, that they're partly controlled supply and demand can be fairly controlled. That they have enabled them to have a cheaper price than elsewhere, which is actually slowing their shift towards a more fundamentally efficient thing to do. When there was an economic crisis and energy crisis in Europe after Russia's attack on Ukraine, Europe started to electrify faster. America tends to face none of these crisis it doesn't have on its borders. It doesn't have an energy crisis given how much it's blessed with fossil fuels. And then finally, this is the thing that makes it seem like it's got the most unfair advantage is it's got the world's reserve currency.

I think you've actually created a whole other reason why fossil fuel substies are bad. People think fossil fuel substies are bad because of the fact that we're subsidizing a polluting industry, but it's also subsidizing economic inefficiency and slowing the adjustment. And the fact that the US has reserve currency status you're saying allows them to do that for longer. Allows the frog to be in the boiling water for longer than it might otherwise be able to do if it didn't have those crutches. Now, reserve currency status is something that many people find hard to grasp, and I find a useful way of saying it, especially for people of my age who remember writing checks, is that reserve currency status is like writing checks to pay for things that nobody ever caches.

I think you've actually created a whole other reason why fossil fuel substies are bad. People think fossil fuel substies are bad because of the fact that we're subsidizing a polluting industry, but it's also subsidizing economic inefficiency and slowing the adjustment. And the fact that the US has reserve currency status you're saying allows them to do that for longer. Allows the frog to be in the boiling water for longer than it might otherwise be able to do if it didn't have those crutches. Now, reserve currency status is something that many people find hard to grasp, and I find a useful way of saying it, especially for people of my age who remember writing checks, is that reserve currency status is like writing checks to pay for things that nobody ever caches.

They're quite happy to hold your uncashed check because your uncashed check is a reserve currency that they could use in the future when they're a difficult situation, and so that allows them to consume more than they produce to run a current account deficit, run a fiscal deficit. But people with countries with reserve currency status, where people are happy to sell goods but not cash the checks, can run these deficits.

They're quite happy to hold your uncashed check because your uncashed check is a reserve currency that they could use in the future when they're a difficult situation, and so that allows them to consume more than they produce to run a current account deficit, run a fiscal deficit. But people with countries with reserve currency status, where people are happy to sell goods but not cash the checks, can run these deficits.

But it might be worth taking even one more step back to understand why we ended up in this situation in the first place. My understanding is currency used to be tied to the gold standard. If you didn't have gold, you couldn't produce the currency. And then at some point that was taken off, and so a currency just became a fiat, which is it is backed by the status of that government and you have to trust in that government to provide you the value of that currency. And because America was the world's hegimen at that time, the dollar started to become the reserve currency of the world. Maybe there's a better way of understanding.

But it might be worth taking even one more step back to understand why we ended up in this situation in the first place. My understanding is currency used to be tied to the gold standard. If you didn't have gold, you couldn't produce the currency. And then at some point that was taken off, and so a currency just became a fiat, which is it is backed by the status of that government and you have to trust in that government to provide you the value of that currency. And because America was the world's hegimen at that time, the dollar started to become the reserve currency of the world. Maybe there's a better way of understanding.

Yes, I'm not internally sure that's the way I would view it. Before the dollar was a reserve currency. Stilling was the world's reserve currency. The Roman currency was a reserve currency. You're finding Roman coins thousands of miles away from where the Roman Empire was because clearly their currency was a reserve currency. So the key to being a reserve currency is you are a big trader, and there's value in people holding your currency being able to buy your goods in the future. So they are happy to hold your current if you don't produce anything and they don't sell you anything that's not very valuable. So we've never really had a small country or a non trader ever become a reserve currency country. So it's a function of your position in the world trade and it kind of amplifies your positions. So if you're the world's biggest trader, you then become even bigger in international finance. So the US maybe one side of fifty percent of global trade, but the US dollar is one side of almost eighty percent of financial transactions because it has this reserve currency status.

Yes, I'm not internally sure that's the way I would view it. Before the dollar was a reserve currency. Stilling was the world's reserve currency. The Roman currency was a reserve currency. You're finding Roman coins thousands of miles away from where the Roman Empire was because clearly their currency was a reserve currency. So the key to being a reserve currency is you are a big trader, and there's value in people holding your currency being able to buy your goods in the future. So they are happy to hold your current if you don't produce anything and they don't sell you anything that's not very valuable. So we've never really had a small country or a non trader ever become a reserve currency country. So it's a function of your position in the world trade and it kind of amplifies your positions. So if you're the world's biggest trader, you then become even bigger in international finance. So the US maybe one side of fifty percent of global trade, but the US dollar is one side of almost eighty percent of financial transactions because it has this reserve currency status.

Ali Zaidi, who is the National Climate Advisor to President Biden, said that if under Donald Frum, America doesn't pursue the technologies of the twenty first century, which are mostly electric. It would be economic malpractice because as a result, America will start to fall behind the rest of the world, and as it does so, it may have to trade less with the world, and maybe the reserve currency status of the dollar starts to weaken.

Ali Zaidi, who is the National Climate Advisor to President Biden, said that if under Donald Frum, America doesn't pursue the technologies of the twenty first century, which are mostly electric. It would be economic malpractice because as a result, America will start to fall behind the rest of the world, and as it does so, it may have to trade less with the world, and maybe the reserve currency status of the dollar starts to weaken.

But that will be hell. I mean, I think that we have some experience of that. So if becoming a reserve currency is like writing checks to buy stuff and no one ever cashing your checks, losing reserve currency status is all those checks come back to be cashed at the same time. This is what happened in the UK from the mid nineteen sixties. It led to the Sterling devaluation of sixty seven, the so called Barsel Accords of nineteen sixty eight, which will when there had to be an international agreement to stop people sending back their sterling and asking for to be repaid in gold or other things. They had to have a special agreement. The irony was the minute they announced this international agreement to save sterling. It woke everyone up to the fact that Stirling Who's engrave challenge and it collapsed afterwards. So the September bars agreements in sixty eight were a real problem.

But that will be hell. I mean, I think that we have some experience of that. So if becoming a reserve currency is like writing checks to buy stuff and no one ever cashing your checks, losing reserve currency status is all those checks come back to be cashed at the same time. This is what happened in the UK from the mid nineteen sixties. It led to the Sterling devaluation of sixty seven, the so called Barsel Accords of nineteen sixty eight, which will when there had to be an international agreement to stop people sending back their sterling and asking for to be repaid in gold or other things. They had to have a special agreement. The irony was the minute they announced this international agreement to save sterling. It woke everyone up to the fact that Stirling Who's engrave challenge and it collapsed afterwards. So the September bars agreements in sixty eight were a real problem.

It's like the streysand effect, but playing out in the sixties. Now. One thing I enjoy about our conversation is that we start from one place and we typically start to unspool more and more complicated things. One thing that comes up again and again is the international system. Now, what is a way to define the international system? I think we all have a sense of it, but is there a clearer way of understanding it?

It's like the streysand effect, but playing out in the sixties. Now. One thing I enjoy about our conversation is that we start from one place and we typically start to unspool more and more complicated things. One thing that comes up again and again is the international system. Now, what is a way to define the international system? I think we all have a sense of it, but is there a clearer way of understanding it?

I think it actually comes back to the international reserve currency aspect. So the international system, to me, you see it most when there is a global fright of some kind a shock. It could be a war, it could be some natural disaster. You see that investors get scared, and invest who get scared run to safety. And what we're finding that they run to the same place. That's the international reserve currency, and that today is the US dollar. So you see by the system, we had this EBB and flow of capital to and from US dollars, and that's the system. And now that's partly a function of history, a function of the size of the international of the US economy that it has the capacity to use absorb your dollars that you've kept as reserves. It's also then becomes morphed into conventions. So when you look at credit ratings, when you look at accounting standards, the US dollar and dollar assets are given special status because the convention writers will say, well, that is more liquid if you've got it in dollars. And so the world has safe assets, and these safe assets are in US dollars. And it's a very interesting dimension of development is that the US is an exporter of safe assets and developing countries are importers of safe assets. And that's the international system.

I think it actually comes back to the international reserve currency aspect. So the international system, to me, you see it most when there is a global fright of some kind a shock. It could be a war, it could be some natural disaster. You see that investors get scared, and invest who get scared run to safety. And what we're finding that they run to the same place. That's the international reserve currency, and that today is the US dollar. So you see by the system, we had this EBB and flow of capital to and from US dollars, and that's the system. And now that's partly a function of history, a function of the size of the international of the US economy that it has the capacity to use absorb your dollars that you've kept as reserves. It's also then becomes morphed into conventions. So when you look at credit ratings, when you look at accounting standards, the US dollar and dollar assets are given special status because the convention writers will say, well, that is more liquid if you've got it in dollars. And so the world has safe assets, and these safe assets are in US dollars. And it's a very interesting dimension of development is that the US is an exporter of safe assets and developing countries are importers of safe assets. And that's the international system.

But if China is now running a trade surplus substantial one and has been running it for many many years now, it's also starting to wield a lot of power with it. Yuon, So the Chinese Central Bank has created a digital yuan, and I have heard from suppliers in Europe that get their solar panels or other electricity related infrastructure from China directly find it easier to pay the Chinese supplier through the digital yuon rather than having to go through multiple banks where the euro will be committed to a dollar, will be then converted back to a yuan and go through costs at every transaction. The cost of transaction falls, the speed of transaction falls, and more and more Yuon gets traded.

But if China is now running a trade surplus substantial one and has been running it for many many years now, it's also starting to wield a lot of power with it. Yuon, So the Chinese Central Bank has created a digital yuan, and I have heard from suppliers in Europe that get their solar panels or other electricity related infrastructure from China directly find it easier to pay the Chinese supplier through the digital yuon rather than having to go through multiple banks where the euro will be committed to a dollar, will be then converted back to a yuan and go through costs at every transaction. The cost of transaction falls, the speed of transaction falls, and more and more Yuon gets traded.

That's an important development. But you know the measure of whether it is having global impact is when China starts running deficits. China running a surplus is a sign that people are not really hoarding you On. When people start hoarding u On internationally, then China goes into that place where they are consuming stuff, writing checks to pay for it, checks and you are and people aren't catching the checks, so they can consume more than they're producing and running a current account deficit. And clearly that's not where we are today, but we may not be a million miles from that. But so our future, if the future is Chinese, then that future contains big Chinese deficits.

That's an important development. But you know the measure of whether it is having global impact is when China starts running deficits. China running a surplus is a sign that people are not really hoarding you On. When people start hoarding u On internationally, then China goes into that place where they are consuming stuff, writing checks to pay for it, checks and you are and people aren't catching the checks, so they can consume more than they're producing and running a current account deficit. And clearly that's not where we are today, but we may not be a million miles from that. But so our future, if the future is Chinese, then that future contains big Chinese deficits.

So this power imbalance where America acts as a fossil fuel state because it has so much fossil fuels and has this reserve currency that gives it essentially an unlimited checking account, how does that make it easier or harder for developing countries to move to clean energy to increase the amount of climate finance that we are going to need. Where money, maybe dollars, flows from America to developing countries.

So this power imbalance where America acts as a fossil fuel state because it has so much fossil fuels and has this reserve currency that gives it essentially an unlimited checking account, how does that make it easier or harder for developing countries to move to clean energy to increase the amount of climate finance that we are going to need. Where money, maybe dollars, flows from America to developing countries.

Now it is actually strongly linked, but I need to build that story a little bit. So firstly, if we want the big middle income countries India in particular Brazil, Mexico, Indonesia, South Africa to shift into renewables and the planet needs them to shift massively and rapidly, the future energy demand in India's about to explode and if those are fossil fuel fired, that's going to be a problem. We're expecting massive investment. We need massive investment by definition, more than they have domestic savings. If they have enough domestic savings to match the investment, we know we're not doing enough investment because we're requiring there's some massive global sized investment boom. So they have to get the money from abroad. The international system has to work for the planet and for climate, and it's not because of this imbalance. And as a result we have these very different costs of capital. Cost of capital in India, even India, big country, deep liquid markets would be about eight percent to raise money eight percent plus, whilst it may still be three percent four percent in Europe. So we need to bring capital from places where it's abundant to places where it's scarce, and this channel is blocked. The channel is blocked because investors are concerned about this reserve currency status and the impact of that, and they don't think in terms of reserve current status. But what they're thinking about is currency volatility. Because if you are the if you are an import of safe assets, what happens is your currency is very volatile. When things are going well and people don't need safety, people are flooding into your country, and your currency is booming. When things are looking uneasy around the world, may have nothing to do with your country, and maybe your neighboring country. Then money is fleeing and so the currency is going up and down and you can do nothing about it. And international investors see that, they see that volatility, and they are saying, well, I can't manage that volatility. That volatility is not even to do with your country, to do with the international system, and what can you do about it?

Now it is actually strongly linked, but I need to build that story a little bit. So firstly, if we want the big middle income countries India in particular Brazil, Mexico, Indonesia, South Africa to shift into renewables and the planet needs them to shift massively and rapidly, the future energy demand in India's about to explode and if those are fossil fuel fired, that's going to be a problem. We're expecting massive investment. We need massive investment by definition, more than they have domestic savings. If they have enough domestic savings to match the investment, we know we're not doing enough investment because we're requiring there's some massive global sized investment boom. So they have to get the money from abroad. The international system has to work for the planet and for climate, and it's not because of this imbalance. And as a result we have these very different costs of capital. Cost of capital in India, even India, big country, deep liquid markets would be about eight percent to raise money eight percent plus, whilst it may still be three percent four percent in Europe. So we need to bring capital from places where it's abundant to places where it's scarce, and this channel is blocked. The channel is blocked because investors are concerned about this reserve currency status and the impact of that, and they don't think in terms of reserve current status. But what they're thinking about is currency volatility. Because if you are the if you are an import of safe assets, what happens is your currency is very volatile. When things are going well and people don't need safety, people are flooding into your country, and your currency is booming. When things are looking uneasy around the world, may have nothing to do with your country, and maybe your neighboring country. Then money is fleeing and so the currency is going up and down and you can do nothing about it. And international investors see that, they see that volatility, and they are saying, well, I can't manage that volatility. That volatility is not even to do with your country, to do with the international system, and what can you do about it?

Now?

Now?

When you have problems in a country with reserve currency status, they can do stuff about it. You know, when the economy is hit badly, they can cut infrast rates, they can expand spending. Investors are still there, They're not fleeing, they're not worried about your policies. This imbalance in the system is blocking the f of money from places where the capital is the places where we need the capital. So we need a solution that takes away this imbalance. That actually means that for renewable energies, we can count these middle income countries as being part of the reserve currency zone and not subject to this kind of volatility. And that's something we're working on with the Foreign Exchange Liquidity Facility, using the fact that the multilateral development banks are also triple A, so they are safe assets, and so we will spread our cordon of safety around projects involved in renewable energy so that the international investor knows they can rely on a development bank to be lending the project dollars at times of as international stress. The project has to pay back, but they're less subject to the volatility of the international financial system and the volatility of the currency markets.

When you have problems in a country with reserve currency status, they can do stuff about it. You know, when the economy is hit badly, they can cut infrast rates, they can expand spending. Investors are still there, They're not fleeing, they're not worried about your policies. This imbalance in the system is blocking the f of money from places where the capital is the places where we need the capital. So we need a solution that takes away this imbalance. That actually means that for renewable energies, we can count these middle income countries as being part of the reserve currency zone and not subject to this kind of volatility. And that's something we're working on with the Foreign Exchange Liquidity Facility, using the fact that the multilateral development banks are also triple A, so they are safe assets, and so we will spread our cordon of safety around projects involved in renewable energy so that the international investor knows they can rely on a development bank to be lending the project dollars at times of as international stress. The project has to pay back, but they're less subject to the volatility of the international financial system and the volatility of the currency markets.

That's a stunning explanation for a thing that I came across in my very early days of journalism. I joined a news organization called Courts, and on the very first day of my job, there was a betting round going on in the general slack channel, and it was on how many jobs in the US will the job's numbers say, And it made no sense to me, as somebody with a science background, not an economics background. Why the world cares about the US economy producing a few hundred thousand jobs in a monthly basis? Now I know because when something happens to the US, when it sneezes, everybody cares because of the dollar, because the reserve currency, because tiny volatility of the US economy has much bigger ripple effects in the rest of the world.

That's a stunning explanation for a thing that I came across in my very early days of journalism. I joined a news organization called Courts, and on the very first day of my job, there was a betting round going on in the general slack channel, and it was on how many jobs in the US will the job's numbers say, And it made no sense to me, as somebody with a science background, not an economics background. Why the world cares about the US economy producing a few hundred thousand jobs in a monthly basis? Now I know because when something happens to the US, when it sneezes, everybody cares because of the dollar, because the reserve currency, because tiny volatility of the US economy has much bigger ripple effects in the rest of the world.

And you know, what happened during COVID is a very interesting way of matching something that everyone experience and so know a little bit about with this international financial system. So COVID happens impacts us all roughly around the same time, the developed countries, with their reserve currencies are able to slash interest rates, we go back towards zero. They're able to expand fiscal policy, and investors don't flee because they see governments reacting. Investors flee from the developing countries who are unable to act that way. So they have to start raising interest rates to keep money in and they have to cut back their spending. Their currencies are falling, and they deepen their recession because that's the only way they can respond. Then, as a result of them deepening the recession and the developed countries being able to respond quickly, the developed countries have the recovery quicker. So now what they've got to do is they've got to raise their interest rates so that they're recovering faster. Inflation's coming up, so they raise interest rates and setting their currencies up. And again money's fleeing from the developed countries because they're now being attracted from these higher infrast rates available in the safe haven. So again the recovery slowed in developing countries because they've got to respond to money leaving. So when they should be recovering, the recovery is delayed because they're raising interest rates before their economy is recovered, and they're having to cut back spending before their economy is recovered. So what you saw was the response of the developing world was they were unable to respond fast enough in terms of policy on the way down, and they were unable to recover fast enough on the way up. And that was because nothing to do with what they were doing in their country. That was to do with the international financial system and the way it works, and.

And you know, what happened during COVID is a very interesting way of matching something that everyone experience and so know a little bit about with this international financial system. So COVID happens impacts us all roughly around the same time, the developed countries, with their reserve currencies are able to slash interest rates, we go back towards zero. They're able to expand fiscal policy, and investors don't flee because they see governments reacting. Investors flee from the developing countries who are unable to act that way. So they have to start raising interest rates to keep money in and they have to cut back their spending. Their currencies are falling, and they deepen their recession because that's the only way they can respond. Then, as a result of them deepening the recession and the developed countries being able to respond quickly, the developed countries have the recovery quicker. So now what they've got to do is they've got to raise their interest rates so that they're recovering faster. Inflation's coming up, so they raise interest rates and setting their currencies up. And again money's fleeing from the developed countries because they're now being attracted from these higher infrast rates available in the safe haven. So again the recovery slowed in developing countries because they've got to respond to money leaving. So when they should be recovering, the recovery is delayed because they're raising interest rates before their economy is recovered, and they're having to cut back spending before their economy is recovered. So what you saw was the response of the developing world was they were unable to respond fast enough in terms of policy on the way down, and they were unable to recover fast enough on the way up. And that was because nothing to do with what they were doing in their country. That was to do with the international financial system and the way it works, and.

In some way as climate change plays out and more and more disasters are felt. Let's hope it's never as extreme as the pandemic was at any given time, but we will sustain that level of impact over a longer period, and we'll see developing countries suffer through the same cycle, perhaps in a lender time frame.

In some way as climate change plays out and more and more disasters are felt. Let's hope it's never as extreme as the pandemic was at any given time, but we will sustain that level of impact over a longer period, and we'll see developing countries suffer through the same cycle, perhaps in a lender time frame.

So developing countries, especially finance ministry officials, central bank officials, they have long seen this and long wondered what can we do about it? It has been very hard to do something about it because they were never very significant in the international economy. Now they are. They are looking so, for example, the bricks countries are thinking about, well, maybe we should create our own reserve currency. And because the brick countries are big traders, they actually have the potential of doing something in a way that they couldn't have done, say twenty years ago. I'm not sure they have a solution yet, but there's a potential that they could do something, and it would seem to me that it would be the interests of the beneficiaries of the existing system to prolong that system by trying to make the system work better for everybody. And if they don't do that, the system will at some point be usurped by another system.

So developing countries, especially finance ministry officials, central bank officials, they have long seen this and long wondered what can we do about it? It has been very hard to do something about it because they were never very significant in the international economy. Now they are. They are looking so, for example, the bricks countries are thinking about, well, maybe we should create our own reserve currency. And because the brick countries are big traders, they actually have the potential of doing something in a way that they couldn't have done, say twenty years ago. I'm not sure they have a solution yet, but there's a potential that they could do something, and it would seem to me that it would be the interests of the beneficiaries of the existing system to prolong that system by trying to make the system work better for everybody. And if they don't do that, the system will at some point be usurped by another system.

Could you imagine what that other system might be?

Could you imagine what that other system might be?

The future of international reserve currency status will be determined by who is the biggest trader. And we're in a world increasingly where China is exporting and importing from developing countries and maintaining its increasing share of international trade, and so they are potentially the next beneficiary. And you know, India is an alternative as well, because the one challenge that China has has a few but one of the main ones. And often you hear people say that China will get owed before it gets rich. That the one child policy meant that China has an acute demographic and it's aging heavily, and that aging will slow its growth and slow its economic presence globally. India is still at a sweet spot on demographics and expanding, and that divergence will increase, and so we will be in a world at some point in this century in which India is the world's largest economy and the largest trader, and so India or China maybe become the next reserve currency.

The future of international reserve currency status will be determined by who is the biggest trader. And we're in a world increasingly where China is exporting and importing from developing countries and maintaining its increasing share of international trade, and so they are potentially the next beneficiary. And you know, India is an alternative as well, because the one challenge that China has has a few but one of the main ones. And often you hear people say that China will get owed before it gets rich. That the one child policy meant that China has an acute demographic and it's aging heavily, and that aging will slow its growth and slow its economic presence globally. India is still at a sweet spot on demographics and expanding, and that divergence will increase, and so we will be in a world at some point in this century in which India is the world's largest economy and the largest trader, and so India or China maybe become the next reserve currency.

Wait what I mean? I thought it'll be either an American century or Chinese century. I'm an Indian, but did not expect India to become the world's largest economy.

Wait what I mean? I thought it'll be either an American century or Chinese century. I'm an Indian, but did not expect India to become the world's largest economy.

And it's not something they're intending to, you know. Whilst America and China have been quite deliberate about their international role, it will be in somewhat typical Indian fashion, haphazardly and happening just out of some crazy evolution.

And it's not something they're intending to, you know. Whilst America and China have been quite deliberate about their international role, it will be in somewhat typical Indian fashion, haphazardly and happening just out of some crazy evolution.

Thank you, Having Nash, Thank you very much. Thank you for listening to Zero. Next week in the Moving Money series, we'll be looking at the role of multilateral development banks. If you have any questions about climate finance, please write to us at Zero pod at Bloomberg dot net. And if you like this episode, please take a moment to rate and review the show on Apple Podcasts or Spotify, Share this episode with a friend or with your mortgage advisor. And now for the sound of the week. M Yes, that's the sound of Japan's Maglev train performing a test run at five hundred kilometers per hour. This episode was produced by Oscar Boydberg's head of podcast is Sage Bowman and head of Talk is Brendan neunim Our. Theme music is composed by Wonderly Special thanks to might Ley Rau Somarsadi Mosses and Blake Maples and Shawan Wagner i'm Akshadrati back next week for another episode of Moving Money,

Thank you, Having Nash, Thank you very much. Thank you for listening to Zero. Next week in the Moving Money series, we'll be looking at the role of multilateral development banks. If you have any questions about climate finance, please write to us at Zero pod at Bloomberg dot net. And if you like this episode, please take a moment to rate and review the show on Apple Podcasts or Spotify, Share this episode with a friend or with your mortgage advisor. And now for the sound of the week. M Yes, that's the sound of Japan's Maglev train performing a test run at five hundred kilometers per hour. This episode was produced by Oscar Boydberg's head of podcast is Sage Bowman and head of Talk is Brendan neunim Our. Theme music is composed by Wonderly Special thanks to might Ley Rau Somarsadi Mosses and Blake Maples and Shawan Wagner i'm Akshadrati back next week for another episode of Moving Money,