Posted by
rycK on Monday, January 18, 2010 5:18:57 PM
The Bursting of the GanGreen Bubble.
Abstract: Government funding of inefficient programs of the green sort tends to guarantee that an asset bubble is forming and will
soon burst because of economic reasons. California is the best place to study this phenomenon
outside of Europe where Spain and Germany are going through a green bubble exercise of their own.
We are all learning
some elementary lessons on debt and finance at this time and there will
unquestionably be some further rapt instruction in the near future. The folly of offering credit to those who
cannot pay their debts off as in the ‘affordable housing’ bubble we just experienced has not yet been
fully accepted by the masses. The notion that wealth is lost after a collapse
in house prices was hazy or vague until the public was forced to accept the
notion that home equity was credit which is money and a lot of that vanished.
Collapsing home prices erases equity and thus vacates the collateral for credit
thus preventing borrowing to buy things. The second wave of debt problems comes
in when that lost wealth causes businesses to lay off people and corporate
earnings fall and the stock market crashes. The second bubble next up on deck
is actually a mixture of two simultaneously occurring bubbles: commercial real
estate and consumer debt monthly in the form
of credit cards. It is difficult to believe that major banks who issue millions
of credit cards at 25% interest rates are losing money on the deal, but that is
what they now report so a contraction in this credit market is now bubbling
away and will commence.
These debt-to-bubble
lessons have not been learnt in sufficient depth and with a true conviction
because many governments suppose they can just borrow and replace the lost
equity in homes for some of the citizens or provide a stimulus to the economy
to get things started again. Thus when house prices raise so do taxes and when
they fall the government needs to borrow and replant this equity so as to keep
some notion of balance or fairness. They used debt to finance this government
spending in the name of the first stimulus and thus risk creating more bubbles.
That is what they are doing now with this furious thrust into the realm of EcoNazism where we must spend and spend to save the earth from catastrophe
with green goodies like electric cars, windmills, carbon dioxide scrubbers and
other follies. Apparently our failure to act promptly in Copenhagen on the Cap and Trade taxes has led
directly to current punitive, reflexive earthquakes in Haiti.
There are two basic
problems with this: [1] a new green bubble is forming as the asset base for
this project is being manufactured directly from wholesale and naked debt, [2]
the replacement of cars and electric power with solar panels and such and other
big ticket items with their green equivalents is not cost effective. Thus, to switch to solar cells drastically
increases the cost of electrical energy and attempting to use batteries to
propel cars in inefficient as the batteries are heavy, inefficient and will not
give the car much range. These batteries are expensive, do not last very long,
and are expensive to replace and add greatly to the cost and operation of the
car. Spain is reported to have lost 2.1 private
sector jobs for each new green job in that country.
This notion, then
leads to more debt and boosts risks by creating new debt-driven asset bubbles.
Places like California which is 64 billion dollars in debt
with an additional projected 20 billion dollar deficit [20% or so of their
budget] that must be financed somehow and the implied notion that they will cut
spending is apparently not acceptable. Thus, California is heading toward financial oblivion
created by massive debt they cannot repay from state tax revenues and are
simultaneously funding massive green projects that act as economic gangrene and rots out the financial infrastructure of the state. The novel solution to this is to grow, sell
and tax dope and to raise taxes wherever possible except on homes which are
protected by the infamous Proposition 13. A philosophy like this drives out
tens of thousands of high-wage earners every year from the state and tax
revenues plummet. Isn’t this strange?
The US national debts are massive and
Californians bears a massive load of debt of its own. Since there are only 65
million workers to handle 12 trillion dollars in National Debt and only half of
them pay taxes above the median of $32,000 then this works out to $192,000 each
for these workers. California has 36,756,666 million people while the US has 304,059,724 with about 65 million
total workers in above the median. Thus California has about 12.1% of those workers and
since about 21.1 % of the workforce on average across the country pays the
taxes we find that the 7,850,000 are liable for the total CA
tax burden and that works out to about $8,100 in state debt per worker in the
upper half of the income bracket. This puts the total tax burden at $200,000
each. For households with two workers and a total income of at least $62, 000
or twice the median this gives the household debt at $400,000 at this current
time. So, at a time of high debt we are generating more debt to fund projects
that will produce goods and services at a higher cost. This is the way the
thinking goes now in leftist circles. This is probably the new economics as
long as it lasts.
Now, the costs of solar power cells and
installations are rapidly increasing as Germany has
shown. Germany
subsidizes its power that is generated from solar and other sources and will soon
cut those subsidies by about 18%.
The problem here is this new green business is raising consumer costs for such
power. France and Spain now
follow suit in attempts to minimize this subsidy and stock prices in solar cell
companies are plummeting. The key here is that such generators of solar power
were guaranteed some 56 cents per kWh and that was double the price the
consumers paid. When solar power was a mere 1% of the total power generated
then this could be spread around with minimal cost elevation. But, when solar
approaches 10% of the total power generated subsequently the burden suddenly
becomes excessive and expensive. The German Solar Industry
Association warns that many
businesses will not survive these cuts. This is bubble formation by government.
Now, the confluence of high taxes, high
debt and high costs form some common vector in the economy where the poor
efficiency of the solar cells compared to coal now shows up in the market place
as excessive cost. If the subsidies, like the stimuli here in the US for ‘cash for clunkers’ and home buyers, are reduced the business
balance sheet lines will show lower income [top line] and higher middle line
costs. The Obama stimulus #1 has not worked and neither did cash
for clunkers or the housing subsidies. The recent
‘jobs’ program spent $92,000 per joband, then, we
spent $24,000 per car on the Clunker
Follies and a mere $43,000 per house
on the housing scam.
And, none of these had a lasting effect. All of
the money to propel this was either borrowed or printed up quickie fashion by
our government.
Thus, these expensive and inefficient
green businesses cannot stay in business for long if the government subsidies falter
so the bubble will burst with rising unemployment and wasted fixed assets.
But, this is the logic of the Neo-Keynesians and Paul
Krugman
and his followers and such follies will
remain with us until another collapse in our economy convinces us otherwise.
Our debt levels were way too high before this nonsense started metastasizing in
our economy and if it lasts too long then our debt will bury us.
rycK
Comments
to: ryckki@gmail.com
Affordable Housing Follies and
the Intentional Corruption of Supply and Demand Economics
The
Second Big Bubble: The Future of Commercial Real Estate. It May Be Time To Move
Out.