Bernanke Fires Up the Printing Presses

Wham! For a while, investors didn’t seem to know what had hit them. They were dazed…dumbfounded…awe-struck…

The Bernanke Fed announced a “stunning” plan to save the world from depression on Wednesday.

The numbers were hard to follow, but they were big:
$300 billion, was the number Bloomberg reported
$1 trillion, said the New York Times.
$1.2 trillion, countered the Washington Post.

It turned out that all these numbers were correct. The Fed was going to buy $300 billion of U.S. Treasury bonds…and more of other securities – notably bonds from Fannie and Freddie.

“Quantitative easing,” the papers called it.

“What’s that?” investors wanted to know.

So, it took them a while to put two and two together. But when they’d done the math they began to see what we’ve been warning about.

“This is a very powerful and aggressive move,” said the chief economist at Bank of New York Mellon Corp., speaking with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”

Bloomberg continues: “With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.”

What do we know? Maybe Ben Bernanke will be able to do what no central banker has ever done before: put in just the right amount of inflation…not too much, not too little. In the past, they tended to overdo it. There are not many examples. France, England and America in the 18th century. Practically no examples we know of in the 19th century (they’d learned their lesson!). And in the 20th century – only marginal countries…or countries with nothing left to lose…engaged in ‘quantitative easing.’ Germany did it in the 1920s, because her war reparations burden was greater than she could sustain. Argentina did it in the 1980s, because it owed too much money to too many foreigners. And Zimbabwe did it in 2003-2009, for reasons of its own.
There are not many examples because the consequences of over-doing it are so horrible, central bankers have generally not done it at all. Quantitative easing was always a possibility…but it was always a last resort…like blowing up the powder and spiking the guns; it was something you did when you knew you’d lost the battle already.

But here is the world’s biggest economy and its oldest (arguably) and most successful government…doing something that used to be done only by desperadoes…

What does it mean? Where does it lead?

We don’t know. But we don’t think we want to go there.

Investors didn’t seem to want to go there either. They sold off stocks and bought gold.
Gold shot up on Wednesday, after the Fed announcement. Then, it just kept going…adding another $70 yesterday. We wondered why the price hadn’t already hit $1,000. It looks like it soon will…this morning it is back over $960 an ounce.

Meanwhile, oil rose above $50, the dollar took a big drop and the Dow finished down 85 points. The greenback slipped to $1.36 per euro.
As to the stock market, whether this is a pause in the rally…or a reversal, caused by the Fed announcement…we don’t know. Our guess is that it’s just a pause. The rebound is still unfinished business. Besides, investors aren’t running scared like they were a few weeks ago. Sentiment seems more relaxed. “We’ll muddle through this somehow,” investors tell themselves.

And the news appears more positive…at least, if you stand on your head and look up it.

Jobless benefits, for example. They’re getting paid out to a record number of recipients. But not as many as economists had expected.

The leading indicators are down 0.4% in February – but not as much as expected.

And consumers are spending less money – but not as much less as expected.

And, of course, there’s the money flowing from Washington. The auto suppliers just got $5 billion. Obama’s budget will probably reach $2 trillion in deficit this year. And this extra $1.2 trillion from the Fed is not exactly small change. And that’s in addition to the $11.7 trillion the feds have already ponied up in their fight against a free market. Investors are going to look at this flood of cash from the Fed and figure that it has to go somewhere. Some of it is bound to go into the stock market.

Now, we turn to our friends in Baltimore to see what the have in store for us…
“The larger [monetary] story,” opines Rob Parenteau, lending a The 5 Min. Forecast a hand today, “can be found in the deleveraging effort of households, which accelerated in the fourth quarter of 2008.

“We have never seen such a sustained buildup of credit flows to the U.S. household sector like the one that began in the late ’90s. Nor has the U.S. economy experienced such a reversal of household credit flows since the Great Depression.
“Policymakers, investors and entrepreneurs need to grasp this essential piece of the puzzle:

“There are good reasons why the household sector is are paying down debt in an environment of declining asset prices and personal income. Falling asset prices reduce wealth faster than households can pay down debt.

“We believe this has a number of very important implications, not the least of which is for the restructuring of global growth away from a growing dependence on consumer debt binges in Anglo-American developed nations. Not to mention the policy objective of renewing lending to the private sector… it’s misguided.”

And yet, it’s the very core of the justification for the TARP bailout and the broader Congressional stimulus plan. Rob unpacks this phenomenon in the latest issue of the Richebächer Letter entitled “Deleveraging Demystified”.

The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.
And back to Bill with more thoughts…
“Fed’s decision to put more money into the financial system reflects its worry that the U.S. economy is plagued by excess capacity,” says the Wall Street Journal.

As we keep saying, the economically correct thing to do would be to let the excess capacity sort itself out. People lose their jobs – and get new ones. Factories close down…and open up again, producing something else. Companies go broke…and new companies spring up to take their places. That’s what needs to happen. Then, after this restructuring, the economy can begin rebuilding on a more solid foundation.

But the Fed doesn’t listen to us. Ben Bernanke is determined to stop a Japan-style depression from happening in the United States – at all costs. And the only way he can possibly stop it – by his logic – is by increasing demand. Putting more money into circulation gives people more money to spend. It also raises prices – giving them a reason to spend it now.
“Will it work?” was the question put to our little band of analysts this morning.
“It depends on what you mean by ‘work’,” was the answer.

Bernanke has set the blaze…broken the glass…and pulled the alarm. Now, the sirens whine and the crowds form. He has no choice but to follow through. What that means is that he must continue fanning the flames…inflating the money supply (monetizing the debt)… until consumer prices rise (reflecting an increase in demand).

We don’t know how long that will take. But in that sense…it will work…sooner or later. Prices will rise…people will spend.

But what else? Do prices suddenly go wild? Or, do they gently rise…giving the feds time to get out the fire extinguishers before the whole economy burns down?

We don’t know. But here is a guess: between the time the flames shoot up out of the roof…and the time the feds have the conflagration under control…you’ll see gold over $2,000 an ounce.

*** Poor Tim. The U.S. Treasury Secretary is “out of the loop,” says one source. He’s “on thin ice,” says a member of Congress.

He appeared on TV and said he couldn’t stop the AIG bonuses. Then, the next day, his boss goes on the air: “Yes we can!” says he.

“US moves to take back bonuses,” says today’s Wall Street Journal headline.

Geithner has only been on the job a couple of months. And he’s had to deal with bailouts, meltdowns, regulatory restructuring. It’s a “crushing workload,” says the New York Times.
But it’s the bonus sideshow that gets people’s attention. And poor Tim is on the wrong side of the story.

Enjoy your weekend,

Bill Bonner

The Daily Reckoning

Why You Should Pray for Inflation

So there I was on Tuesday, pondering how far the absurdity of the rally would go and straightening out a few problems here and there for clients and what happens? The phone rings and it’s my friend The Bond Dude.

hadn’t heard from him for a while and what followed was about a 45-minute lecture on why my praise of Nobel Prize winner Joseph Stiglitz last week - remember Stiglitz is the guy saying that big banks were not really too big to fail, and that there were ways out of the present disaster in financial markets - was all wrong because I hadn’t considered the Federal Reserve’s Z-1 (Flow of Funds) Report.

Upon admitting I hadn’t read it since the December Z-1 report came out - it’s a quarterly - and why couldn’t my scolding be delayed until tomorrow when the next Z-1 comes out, TheBondDude launched into his scary explanation of why Stiglitz is wrong, and why the big banks really do have to be saved. Virtually no one understands this mess better than TBD…maybe even better than Ben Bernanke and Time Geithner, which is going a fair piece….so I paid close attention.

I’ll paraphrase best I can:

“The problem with the Stiglitz approach is that if you try to protect only the small depositors, you will have all that money (brokered CD’s and such) which is on deposit from other banks and big players to deal with. Say you’ve got major bank A and it is holding as part of its asset base certificates of deposits issued by bank C. You see what can happen? See what happens if the banks are allowed to fail? As soon as banks start to lose any confidence in one another’s paper, then you get something like the Herstatt effect where counterparties fail to perform and we get a Depression overnight.”

But Stiglitz, I argued, would do a better job of keeping Main Street’s money whole and the public wouldn’t be left holding the bag for the bankster’s bad behaviors and gambling addictions. But TBD persisted…and he insisted that there’s only one answer: Inflation, and just as fast as we can get it. If housing prices are down 20%, a bout of inflation would blow housing prices back up and fewer people would be ‘upside down’. “Would you miss a $1,500 payment on $100,000 of equity?”

That’s obviously what all the spending frenzy has been about in Washington - getting all that money borrowed and spent into the system. But TBD is not impressed.

‘Look: the problem is that what the government is doing now will work…but it won’t work until we are two or three years down the road…and by then, the whole country will be beggared.”

“We agree that the only way to fight incipient deflation is with a countermeasure of slightly greater inflation but all the spending coming out of Washington so far has been far to slow-acting to save us - 18-months at best. You saw what happened in the mortgage bonds last week?”

Since I don’t sit on a trading desk, and I’ve had the good sense to be parked in Treasuries, I had to answer “No.”

“Well, we had about a billion dollars worth of mortgage bonds come through and even though they were mostly option ARM’s, the yields were pushing 25%. Remember where they were the last time we talked?”

“Yeah…weren’t option ARM’s down around between 15 and 20 percent?”

“Exactly. And that was what, two months back? You see what’s happening? Things are getting worse, not better in the market.

I’ll give you and even more frightening example…let’s look at triple A commercial paper…uh…here’s an 8 1/2 at 196 over credit swaps…that works out to a 22% yield. 22% for triple A commercial, got it? And it gets worse as you go down the ratings… here’s a single A commercial for 48% yield.

You see how much worse things have gotten?”

Oh, boy, did I ever. “So the market rally on Tuesday isn’t real because if the single A commercial yield translates to a market P/E of what, for the hot money? A P/E of 2 maybe on the S&P 500?

“OMG, so we’d be looking at an S&P down around 200 and at those levels, we might really be back in breadlines and our 401(k)’s and even phat public pension funds would be toast…is that it?”

“You’re close. But in fairness, that single A 48% yield probably has some defaults priced in, so maybe after those, the market’s thinking the yield will be more like 33%.”

“But that still means a price/earnings ratio equivalent for the major stock indices around 3 in order to compete with the fixed income gang! I haven’t looked at the P/E of the Dow lately, but I’d bet it’s still north of 15 since everybody and their grandmother has been whacking earnings forecasts. Have we, like, passed the point of no return where it blows up into Depression 2.0 no matter what the policrats do?”

“Basically, unless they follow the plan I’ve laid out - and do so instantly, yes.

The only way to really fix this is for the President to declare a financial emergency and give mandate everyone in the whole country gets a 10% mandatory wage increase for all workers….

Of course, there would be hardship exceptions for businesses with a high labor component, so outfits like restaurants could lose money and bill the government for their losses and make a little dough. But we need money in the system yesterday to spin around from the developing deflation dynamics.”

“Hold it…Bond Dude…the last time you pitched me this idea a couple of months back it would only take a 5% mandatory wage hike. What happened?”

“Things have gotten worse. The fixed income yields are still climbing, as I explained, and thanks to government doing the wrong thing, the cost of saving the system keeps going up. Two months ago my solution would have cost maybe $100-150-billion - and it would have saved a pile of foreclosures because home prices would be stabilized and climbing again.

Since no one is paying attention and the interest clock is ticking, the cost has probably doubled to the $300 - $350-billion range. And it’s spreading into the primes now because banks aren’t lending, and with home values falling, the 5% of the prime pool that has to move every year for work reasons, can’t do so.

So here’s the hard part: what do you want? The alternatives are mandate 10% inflation now and that gets us further on the road to socialism on the one hand, or would you prefer to have the deflation dynamic build for another 18 to 24-months, have all those foreclosed homes picked up for pennies on the dollar and have a kind of New Landlord Feudalism on the other? Maybe those new Landlords will be Chinese repatriating some of their Treasuries, you think?”

Sadly, he’s probably right. If interbank holdings are large enough, then yes, maybe ‘too big to fail’ just might be true…

“And you know that would impact every bank, insurance company, and pension fund, which would then have to be made whole, too, right?

That’s the problem: Government’s doing something - it’s just the wrong something because it’s going to be too slow. We need inflation right now and without it, deflation is going to keep whacking us…”

“In spite of markets like today’s?”

“Yup.”

I then asked The Bond Dude why his helicopter and Gulfstream class friends haven’t sent him to DC to fix the problem. But I already knew the answer: Like me, he’s probably offended both sides of the political aisle to such an extent that they won’t return calls…even though more often than not, we turn out being right in the end.

—-

Having gotten thoroughly bummed out by that call, I dialed my friend Robin Landry who manages his client accounts from his office sensibly located in Shawnee Oklahoma, to see how his trip out to Vegas was last week and to ask him is this our long awaited rally catching fire?

“Probably not. This looks like it’s just Wave 4 of the 5th wave down which should still reach my target around 6,000 plus or minus a couple of couple points. The thing to watch as the next decline starts is if the breadth indicators get worse than they were in the preceding rally. If so, then even the 6,000 +/- 200 area will not hold.

The concern rises because some of the indicators that I use are not confirming that the wave that we’ve just had, before this rally, is really the third wave. Thus, leaving open the possibility that the market decline is extending itself to the downside.”

“So if that his how it unfolds, how soon would we be able to see it, and just how far down is do we go… I’m asking because the predictive linguistics guys are hinting that we may not see much of a rally this spring…and I’ve been watching since mid-December hoping to make a whole pile of money in gold and oil options in what should be a rally real quick, or to play some long-side stock index options…”

“If the indicators do show that the market is extending downward, then the possibility is that the rally from the November low of ‘08 to January ‘09 was not a fourth wave, but was in fact B wave or a wave 2, and we are already in the larger third wave down.

If that is the case, and by the way, even though I don’t think so — yet — but the concern is there due to some of the indicator readings — there really is no stopping point until the 4,300-4,400 line in my (Dow) work, and that would just be an area where we would get another bounce before working even lower from there.

The danger on the downside I believe is not understood by 99% of the investing public. There is still too much faith in the government’s ability to manage the economy and the stock market.

The psychological aspect that I believe is in charge here, of what we are going through right now, is that the average citizen has seen so much wealth destroyed that they are reverting back to using common sense in their day-to-day activities, i.e. buying only what they can afford and heaven forbid, starting to save money, instead of spending it. …the exact opposite of what the government is trying to tell you to do.

Thus the government policies, in my humble opinion, are doomed to fail and are like pushing on the proverbial string. Self-survival will cause people to do what’s best for them and not what the government wants them to do.”

So this morning, taking in all the inputs: Frank on the up-tick rule, The Bond Dude on competing yields for ‘hot money’ going into fixed incomes, and Landry’s system of analyzing markets which he’s been perfecting since 1976…it all smells like a little follow through at the open and a run this morning toward 6,979 plus or minus a Happy Meal, and then I’d expect another free-fall.

Or, we could go to 7,404 before free-falling again. But, it would take a day or two over 7,404 to convert Landry - or me for that matter - into believing the alternate wave count that would label the last week or two’s downside as a failed fifth and we are going into the long awaited (since mid-December) Fourth Wave.

If it turns out to be a failed fifth, I will have missed my ideal long side entry. But I don’t think so…at least not yet. So I will sit back and watch and wait; glad I’m not in the business of giving investment advice on your own there. Mid-session reversals, anyone?

For what it’s worth, Pacific Investment Management (PIMCO) has joined Warren Buffett and Dr. Doom Marc Faber is predicting an uptick for inflation.

But the problem is, like The Bond Dude explained, it’s probably too little inflation to keep us out of the soup lines. So for now, you might be praying for inflation and be pleased when you get it because it will keep your home price from collapsing and (if you’ve been paying attention) that garden I told you to plant this year will hedge you against higher food prices when inflation arrives and might even get you a little exercise for a change.

How to survive the coming century

Alligators basking off the English coast; a vast Brazilian desert; the mythical lost cities of Saigon, New Orleans, Venice and Mumbai; and 90 per cent of humanity vanished. Welcome to the world warmed by 4 °C. Clearly this is a vision of the future that no one wants, but it might happen. Fearing that the best efforts to curb greenhouse gas emissions may fail, or that planetary climate feedback mechanisms will accelerate warming, some scientists and economists are considering not only what this world of the future might be like, but how it could sustain a growing human population. They argue that surviving in the kinds of numbers that exist today, or even more, will be possible, but only if we use our uniquely human ingenuity to cooperate as a species to radically reorganise our world.

The good news is that the survival of humankind itself is not at stake: the species could continue if only a couple of hundred individuals remained. But maintaining the current global population of nearly 7 billion, or more, is going to require serious planning. Four degrees may not sound like much - after all, it is less than a typical temperature change between night and day. It might sound quite pleasant, like moving to Florida from Boston, say, or retiring from the UK to southern Spain. An average warming of the entire globe by 4 °C is a very different matter, however, and would render the planet unrecognisable from anything humans have ever experienced. Indeed, human activity has and will have such a great impact that some have proposed describing the time from the 18th century onward as a new geological era, marked by human activity. "It can be considered the Anthropocene," says Nobel prizewinning atmospheric chemist Paul Crutzen of the Max Planck Institute for Chemistry in Mainz, Germany.

A 4 °C rise could easily occur. The 2007 report of the Intergovernmental Panel on Climate Change, whose conclusions are generally accepted as conservative, predicted a rise of anywhere between 2 °C and 6.4 °C this century. And in August 2008, Bob Watson, former chair of the IPCC, warned that the world should work on mitigation and adaptation strategies to "prepare for 4 °C of warming". A key factor in how well we deal with a warmer world is how much time we have to adapt. When, and if, we get this hot depends not only on how much greenhouse gas we pump into the atmosphere and how quickly, but how sensitive the world's climate is to these gases. It also depends whether "tipping points" are reached, in which climate feedback mechanisms rapidly speed warming. According to models, we could cook the planet by 4 °C by 2100. Some scientists fear that we may get there as soon as 2050. If this happens, the ramifications for life on Earth are so terrifying that many scientists contacted for this article preferred not to contemplate them, saying only that we should concentrate on reducing emissions to a level where such a rise is known only in nightmares.

"Climatologists tend to fall into two camps: there are the cautious ones who say we need to cut emissions and won't even think about high global temperatures; and there are the ones who tell us to run for the hills because we're all doomed," says Peter Cox, who studies the dynamics of climate systems at the University of Exeter, UK. "I prefer a middle ground. We have to accept that changes are inevitable and start to adapt now." Bearing in mind that a generation alive today might experience the scary side of these climate predictions, let us head bravely into this hotter world and consider whether and how we could survive it with most of our population intact. What might this future hold? The last time the world experienced temperature rises of this magnitude was 55 million years ago, after the so-called Palaeocene-Eocene Thermal Maximum event. Then, the culprits were clathrates - large areas of frozen, chemically caged methane - which were released from the deep ocean in explosive belches that filled the atmosphere with around 5 gigatonnes of carbon. The already warm planet rocketed by 5 or 6 °C, tropical forests sprang up in ice-free polar regions, and the oceans turned so acidic from dissolved carbon dioxide that there was a vast die-off of sea life. Sea levels rose to 100 metres higher than today's and desert stretched from southern Africa into Europe.

While the exact changes would depend on how quickly the temperature rose and how much polar ice melted, we can expect similar scenarios to unfold this time around. The first problem would be that many of the places where people live and grow food would no longer be suitable for either. Rising sea levels - from thermal expansion of the oceans, melting glaciers and storm surges - would drown today's coastal regions in up to 2 metres of water initially, and possibly much more if the Greenland ice sheet and parts of Antarctica were to melt. "It's hard to see west Antarctica's ice sheets surviving the century, meaning a sea-level rise of at least 1 or 2 metres," says climatologist James Hansen, who heads NASA's Goddard Institute for Space Studies in New York. "CO2 concentrations of 550 parts per million [compared with about 385 ppm now] would be disastrous," he adds, "certainly leading to an ice-free planet, with sea level about 80 metres higher... and the trip getting there would be horrendous."

Half of the world's surface lies in the tropics, between 30° and -30° latitude, and these areas are particularly vulnerable to climate change. India, Bangladesh and Pakistan, for example, will feel the force of a shorter but fiercer Asian monsoon, which will probably cause even more devastating floods than the area suffers now. Yet because the land will be hotter, this water will evaporate faster, leaving drought across Asia. Bangladesh stands to lose a third of its land area - including its main bread basket. The African monsoon, although less well understood, is expected to become more intense, possibly leading to a greening of the semi-arid Sahel region, which stretches across the continent south of the Sahara desert. Other models, however, predict a worsening of drought all over Africa. A lack of fresh water will be felt elsewhere in the world, too, with warmer temperatures reducing soil moisture across China, the south-west US, Central America, most of South America and Australia.

All of the world's major deserts are predicted to expand, with the Sahara reaching right into central Europe. Glacial retreat will dry Europe's rivers from the Danube to the Rhine, with similar effects in mountainous regions including the Peruvian Andes, and the Himalayan and Karakoram ranges, which as result will no longer supply water to Afghanistan, Pakistan, China, Bhutan, India and Vietnam. Along with the exhaustion of aquifers, all this will lead to two latitudinal dry belts where human habitation will be impossible, say Syukuro Manabe of Tokyo University, Japan, and his colleagues. One will stretch across Central America, southern Europe and north Africa, south Asia and Japan; while the other will cover Madagascar, southern Africa, the Pacific Islands, and most of Australia and Chile.

The only places we will be guaranteed enough water will be in the high latitudes. "Everything in that region will be growing like mad. That's where all the life will be," says former NASA scientist James Lovelock, who developed the "Gaia" theory, which describes the Earth as a self-regulating entity. "The rest of the world will be largely desert with a few oases." So if only a fraction of the planet will be habitable, how will our vast population survive? Some, like Lovelock, are less than optimistic. "Humans are in a pretty difficult position and I don't think they are clever enough to handle what's ahead. I think they'll survive as a species all right, but the cull during this century is going to be huge," he says. "The number remaining at the end of the century will probably be a billion or less."

John Schellnhuber of the Potsdam Institute for Climate Impacts Research in Germany is more hopeful. The 4 °C warmer world would be a huge challenge, he says, but one we could rise to. "Would we be able to live within our resources, in this world? I think it could work with a new division of land and production."
In order to survive, humans may need to do something radical: rethink our society not along geopolitical lines but in terms of resource distribution. "We are locked into a mindset that each country has to be self-sustaining in food, water and energy," Cox says. "We need to look at the world afresh and see it in terms of where the resources are, and then plan the population, food and energy production around that. If aliens came to Earth they'd think it was crazy that some of the driest parts of the world, such as Pakistan and Egypt, grow some of the thirstiest crops for export, like rice."

Taking politics out of the equation may seem unrealistic: conflict over resources will likely increase significantly as the climate changes, and political leaders are not going to give up their power just like that. Nevertheless, overcoming political hurdles may be our only chance. "It's too late for us," says President Anote Tong of Kiribati, a submerging island state in Micronesia, which has a programme of gradual migration to Australia and New Zealand. "We need to do something drastic to remove national boundaries." Cox agrees: "If it turns out that the only thing preventing our survival was national barriers then we would need to address this - our survival is too important," he says.

Imagine, for the purposes of this thought experiment, that we have 9 billion people to save - 2 billion more than live on the planet today. A wholescale relocation of the world's population according to the geography of resources means abandoning huge tracts of the globe and moving people to where the water is. Most climate models agree that the far north and south of the planet will see an increase in precipitation. In the northern hemisphere this includes Canada, Siberia, Scandinavia and newly ice-free parts of Greenland; in the southern hemisphere, Patagonia, Tasmania and the far north of Australia, New Zealand and perhaps newly ice-free parts of the western Antarctic coast.

If we allow 20 square metres of space per person - more than double the minimum habitable space allowed per person under English planning regulations - 9 million people would need 18,000 square kilometres of land to live on. The area of Canada alone is 9.1 million square kilometres and, combined with all the other high-latitude areas, such as Alaska, Britain, Russia and Scandinavia, there should be plenty of room for everyone, even with the effects of sea-level rise.
These precious lands with access to water would be valuable food-growing areas, as well as the last oases for many species, so people would be need to be housed in compact, high-rise cities. Living this closely together will bring problems of its own. Disease could easily spread through the crowded population so early warning systems will be needed to monitor any outbreaks.

It may also get very hot. Cities can produce 2 °C of additional localised warming because of energy use and things like poor reflectivity of buildings and lower rates of evaporation from concrete surfaces, says Mark McCarthy, an urban climate modeller at the UK Met Office's Hadley Centre. "The roofs could be painted a light, reflective colour and planted with vegetation," McCarthy suggests. Since water will be scarce, food production will need to be far more efficient. Hot growing seasons will be more common, meaning that livestock will become increasingly stressed, and crop growing seasons will shorten, according to David Battisti of the University of Washington in Seattle and his colleagues. We will need heat and drought-tolerant crop varieties, they suggest. Rice may have to give way to less thirsty staples such as potatoes.

This will probably be a mostly vegetarian world: the warming, acidic seas will be largely devoid of fish, thanks to a crash in plankton that use calcium carbonate to build shells. Molluscs, also unable to grow their carbonate shells, will become extinct. Poultry may be viable on the edges of farmland but there will simply be no room to graze cattle. Livestock may be restricted to hardy animals such as goats, which can survive on desert scrub. One consequence of the lack of cattle will be a need for alternative fertilisers - processed human waste is a possibility. Synthetic meats and other foods could meet some of the demand. Cultivation of algal mats, and crops grown on floating platforms and in marshland could also contribute.

Supplying energy to our cities will also require some adventurous thinking. Much of it could be covered by a giant solar belt, a vast array of solar collectors that would run across north Africa, the Middle East and the southern US. Last December, David Wheeler and Kevin Ummel of the Center for Global Development in Washington DC calculated that a 110,000-square-kilometre area of solar panels across Jordan, Libya and Morocco would be "sufficient to meet 50 to 70 per cent of worldwide electricity production, or about three times [today's] power consumption in Europe". High-voltage direct current transmission lines could relay this power to the cities, or it could be stored and transported in hydrogen - after using solar energy to split water in fuel cells.

If the comparatively modest level of solar installation that Wheeler and Ummel propose were to begin in 2010, the total power delivery by 2020 could be 55 terawatt hours per year - enough to meet the household electricity demand of 35 million people. This is clearly not enough to provide power for our future 9 billion, but improving efficiency would reduce energy consumption. And a global solar belt would be far larger than the one Wheeler and Ummel visualise.
Nuclear, wind and hydropower could supplement output, with additional power from geothermal and offshore wind sources. Each high-rise community housing block could also have its own combined heat and power generator, running on sustainable sources, to supply most household energy.

If we use land, energy, food and water efficiently, our population has a chance of surviving - provided we have the time and willingness to adapt. "I'm optimistic that we can reduce catastrophic loss of life and reduce the most severe impacts," says Peter Falloon, a climate impacts specialist at the Hadley Centre. "I think there's enough knowledge now, and if it's used sensibly we could adapt to the climate change that we're already committed to for the next 30 or 40 years." This really would be survival, though, in a world that few would choose to live. Large chunks of Earth's biodiversity would vanish because species won't be able to adapt quickly enough to higher temperatures, lack of water, loss of ecosystems, or because starving humans had eaten them. "You can forget lions and tigers: if it moves we'll have eaten it," says Lovelock. "People will be desperate."

Still, if we should find ourselves in such a state you can bet we'd be working our hardest to get that green and pleasant world back, and to prevent matters getting even worse. This would involve trying to limit the effects climate feedback mechanisms and restoring natural carbon sequestration by reinstating tropical forest. "Our survival would very much depend on how well we were able to draw down CO2 to 280 parts per million," Schellnhuber says. Many scientists think replanting the forests would be impossible above a certain temperature, but it may be possible to reforest areas known as "land-atmosphere hotspots", where even small numbers of trees can change the local climate enough to increase rainfall and allow forests to grow.

Ascension Island, a remote outpost buffeted by trade winds in the mid-Atlantic, may be a blueprint for this type of bioengineering. Until people arrived in the 17th century, vegetation was limited to just 25 scrubby species. But plantings by British servicemen posted there produced a verdant cloud forest. "It shows that if you have rainfall, forest can grow within a century," says ecologist David Wilkinson of Liverpool John Moores University in the UK, who studied the phenomenon. Even so, the most terrifying prospect of a world warmed by 4 °C is that it may be impossible to return to anything resembling today's varied and abundant Earth. Worse still, most models agree that once there is a 4 °C rise, the juggernaut of warming will be unstoppable, and humanity's fate more uncertain than ever. "I would like to be optimistic that we'll survive, but I've got no good reason to be," says Crutzen. "In order to be safe, we would have to reduce our carbon emissions by 70 per cent by 2015. We are currently putting in 3 per cent more each year."