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Lifschultz: "Hedge funds, through their derivatives, operate as if they are in a casino"

David Lifschultz, president of Lifschultz Investments, took part in our roundtable discussion on climate change (click here to read in full). Here, he gives his own view on the global economy and how he thinks carbon emissions can be reduced

I think the key to successfully running a world economy is creating productivity. Bank credit is supposed to finance new industries and new technologies in order to advance civilisation, but if banks are financing zero sum games as derivatives and hedge funds, they're not really advancing production – the bank's credit is being channeled into unproductive investments and that's a big problem.

Hedge funds, through their derivatives, operate as if they are in a casino. They're gamblers who play with very large amounts of money, can move markets and make their investment strategies self-fulfilling. The banks participate in this by creating credit through banking systems. And now they are all losing billions of dollars because they bet incorrectly in this zero sum game.

I think governments should be directing incentives towards longer term investments by taxing the shorter term trading gains at a higher level and forcing banks to return to their traditional role as aids of production.

My family has been in business since 1899 and we've been highly successful by choosing productive investments over the long term. We do not invest in hedge funds that are long and short, but look for hedge funds that have ideas like ours and make us think about other productivity advances – this is how we get a return on our investments by productivity advances gained through technology.

Where are solutions to global problems going to come from? Business or government?

I think it will be both. Governments are trying to solve the world's energy problems, but they have to lead the way if they want to create the necessary incentives for business. For example, the German government has backed the solar movement. The theory behind it is that the technology gets into mass production so they can make continuous advances until it becomes as efficient as petrol and diesel. That's where governments may come in and, in turn, investors will follow.

If you believe that global warming is based on carbon emissions and you look at the rise of the Chinese economy, which according to Goldman Sachs is going to have 600 million cars by 2050, then you're going to have a lot more carbon emissions.

At our family office we invest in the technology that can try to help the situation by providing an economic solution.

One of the biggest issues as far as we see it is heavy oil versus "light" oil. If the heavy oil [that these cars in China are going to have to use] cannot be converted into light oil, then there is no point worrying about world trade, because transportation costs will rise to such an extent that the comparative advantage between nations will cease forcing national autarchy. The transportation costs will just be too high based on very high oil costs. That is why our Genoil GHU upgrade is so important to convert the 900 billion barrels of heavy oil reserves into light oil as that yields three times as much gasoline as unconverted heavy oil.

Another so-called solution is fuel cells, which will probably never efficiently power a car. But I don't think these are going to solve the carbon emission problem either, because to run fuel cells, hydrogen has to be taken from energy sources such as natural gas. However, this process is also a heavy producer of carbon emissions. Electric power has the same problem – your electric car may take away city smog but you need to use coal or natural gas in order to produce it at a distance from the city and there you will still end up with carbon emissions.

We have another company, Romlight, that will reduce carbons emissions by reducing your existing use of electricity – by up to 60% for every streetlight. This is a much more likely solution, because it is easier to make energy more efficient than it is to hamper people's usage levels. Otherwise, I don't know how you can get around the carbon emissions unless you start to ration your allocation of natural resources.

Do you agree with David Lifshultz? Email us your thoughts at fib-feedback@campden.com

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