THE TIME OF TWO

Time is the longest distance between two places. ~ Tennessee Williams     

The only two things that scare me are God and the IRS. ~ Dr. Dre     

It’s now the time of 2. The numerical system that we all use was developed by Hindus in India between the 1st and 5th centuries. Later, the Persians and Arabs adopted it and spread it to the West during the Middle Ages via trade and commerce. Thus, we have been using the number 2 for many centuries as part of the Hindu-Arabic numeral system.

Number 2 is important in a variety of ways: our brains have 2 hemispheres; Cartesian geometry (as you remember from high school, with its 2-phase (x,y) coordinates) has played a large role since the early 17th century in learning about how the world works; the binary (base-2) numeral system is the core of all electronic operations (how smartphones and computers do their stuff); when using it as a divisor, it neatly produces the fundamental dichotomy of odd and even integers; it’s the first even number; it’s the smallest and only even prime number; and it’s the first “magic number” in physics.

The number 2 has recently become unexpectedly present in many diverse policy discussions. A numerical conundrum? Hardly, it’s no longer just Tea for Two or the number needed for tango-ing. It’s our economy and global policies adhering to the power of 2 in several interesting, hopefully not too tumultuous ways. Here are four (4) examples of the seeming primacy of number 2; that’s two-squared and 2x2 examples.

The first 2: GDP growth.  The Bureau of Economic Analysis recently determined that during the 3rd quarter of 2015 our real GDP grew at a meager 2%. And, between 2010 through 2014 the real US GDP grew at a miserly 2% per year. This 5-year period spans our not-so-great expansion following the Great Recession. Although better than 1.9% growth, 2% yearly growth is hardly heady. Regrettably it’s a lot less than the 4.1% average annual growth rate the US economy enjoyed from 1995 to 2000. I’ve talked before about several of the reasons for this frail growth.

The second 2: target inflation rate.  The Federal Reserve has an almost fixed-in-concrete 2% target for national inflation (the annual rate of change of prices for all goods and services). It turns out the Reserve Bank of New Zealand, its central bank, pioneered inflation targeting in 1990. In 1997, the Kiwis’ central bank was the first to adopt a 2% target inflation rate. The Federal Reserve announced its inflation target 13 years later, in Aug. 2003. In Jan. 2012, the Fed set its inflation target at 2%, where it remains. Actual inflation this past year in our country through Nov. was 0.5%. The 2% inflation target is internationally contagious. There are now at least 13 nations that have stated their target inflation rate is 2%.

The third 2: government bond rates.  On Dec 18 the interest rate on a 10-year US Treasury note closed at 2.2%. They have hovered around 2.2% since Dec. 1. For some international perspective, on Dec. 30 other nations’ 10-year notes’ interest rates ranged from -0.062% for Swiss bonds to 16.27% for Brazilian bonds. Yes, this Swiss interest rate is negative, indicating that purchasers actually pay money to buy the bond. Euro-bonds’ interest rates are also negative to defend their economies from slipping into deflation. Brazil is in the midst of a significant crisis of confidence with the government, has growing public debt, falling GDP and 2-digit inflation. It’s not at all a good economic place to be, as reflected in that 16.27% interest rate, which is over 8% higher than even Greek bonds. BTW, before last year Brazil’s economy had grown at 2.2%. It’s hard to get away from 2s.

The fourth 2: global warming threshold.  2^o Celsius is the declared upper limit of global warming. The earth’s temperature needs to not increase beyond 2^o C more than its pre-industrial average in order to prevent ruinous environmental damage. Since 1880, the earth’s average temperature apparently has increased 0.82^o C. An ever-expanding number of people accept this number 2 and are establishing public policies that recognize our collective responsibility to halt the climb in global temperatures. For example, see the Dec. 12 environmental accord reached in Paris by over 190 nations. This agreement is a necessary but insufficient step for curtailing environmental calamity. The sufficient step – and a tall order – is instituting a uniform, meaningful carbon consumption tax. Some scientists suspect this accord unfortunately offers 1-degree of separation from the 2-degree ceiling. These pessimista scientists expect the Paris agreement will allow a 3-degree rise in temperature. Given the sizeable uncertainties about the agreement’s policies, and the future, it’s hard to agree or disagree with this criticism.

It’s an altogether different issue to have reservations about the accuracy of the now thoroughly-institutionalized 2-dgree limit itself, which is based on intricate, very long-range weather/climate models. I’ve previously mentioned these reservations. Nevertheless, the 2-degree goal is a worthy one. As Thomas Friedman mentioned in a recent column, “Dinosaurs didn’t believe in climate change either.”

So these four 2s provide a fine foundation for economic and environmental policies in the US and beyond. Four 2s is an impressive poker hand, only beaten by a straight flush or holding four 3s through aces; a probability of 0.196%. Moreover, in terms of macroeconomic indicators GDP growth, inflation and bond rates carry significant authority for any modern nation. When each of these formidable gauges rolls a 2, it’s both odd and an extraordinary numerological event. Should we consider these four 2s two-timers? Not at all, so enjoy it while it lasts. Happy New Year!