US investment guru backs carbon tax

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US investment guru backs carbon tax

Jeremy Grantham says the days of abundant resources and falling prices are over forever, writes Leonie Lamont.

By Leonie Lamont

Julia Gillard has been given a much needed business endorsement for the government's carbon tax proposal, with the US investment guru Jeremy Grantham declaring it a ''magnificent idea''.

Grantham, who four years ago donated more than $US23 million to establish a climate change institute at Imperial College London, said scientists' predictions of global warming were ''dangerously conservative'', and the global environment was ''deteriorating very fast''.

House price warning . . . Jeremy Grantham yesterday.

House price warning . . . Jeremy Grantham yesterday.

''Any leadership is to be welcomed and any lack of leadership, such as we've had in the US for the last two years, is to be deplored,'' he said. Likening Australia's unilateral decision to pursue a carbon tax to a ''little guy'' baling out a sinking boat, he said Australia's efforts might be enough to keep the boat afloat until the ''big guys'' joined in. ''I mean, it's a magnificent idea,'' he said, adding that a tax and rebate scheme was the simplest, most saleable long-term initiative.

Though not as well known here as Warren Buffett, Grantham, 72, regularly influences thinking on Wall Street and he has loyal followers. The company he co-founded in Boston more than 30 years ago, GMO, manages US$110 billion ($100 billion) in investments. Grantham expounded yesterday at a media briefing in Sydney on his gloomy view that the days of abundant resources and falling prices are over forever.

For 102 years, since 1900, prices of metals and farm commodities had declined by 1.2 per cent a year, with the exception of oil, which he says in his newsletter ''peeled off in 1974, a precursor of things to come''. Since 2002, in a world of finite resources driven by population growth and the emerging economies of China and India, commodity prices had risen and ''we are now in the midst of one of the giant inflection points in economic history''.

''It is dangerous not to recognise that, it is dangerous not to plan if you can and if you are a government. And if you want to make money as an investor or a corporation, there will be fortunes made in scarce resources as they get scarcer, and there will be fortunes made in starting up enterprises to be efficient, to save energy, to save resources, to find cheaper substitutions all the time - and we will do this very quickly,'' he said.

On Grantham's last visit to Australia last year, he sparked headlines with comments that the housing market was a bubble, a ''time bomb'' just waiting for interest rates to increase. He said that unlike the US, and other spectacular housing market collapses in Ireland and Spain, where a building boom brought about by rising house prices preceded the bust, Australia and Britain were ''aberrant markets'' which had had not increased supply.

''Australia is in a very interesting situation where bureaucrats allowed more immigrants on the one hand and restricted housing supply via land release,'' he said. Variable interest rates, unlike the fixed rates in the US, complicated the picture. The Reserve Bank is expected to raise rates soon, possibly next month.

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A Goldman Sachs report last year said Australian houses were about 35 per cent overvalued, and that prices during the past decade had been about 10 times average earnings, compared to six times in 1997.

Grantham said the killer was when first home buyers no longer entered the market, and people moved out of cities such as Sydney because they feared their children would never be able ever to own a home. ''How socially idiotic is it to engineer a situation like this?''

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