The Bursting of the GanGreen Bubble I.

Originally published in 2009 [several Townhall links are broken]

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[1] 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[2] 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.[3]

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.[4]

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.[5] 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.[6] California has 36,756,666 million people while the US has 304,059,724 with about 65 million total workers in above the median.[7] 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%.[8] 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 job[9] and, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam.[10] 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[11][12][13][14][15][16] 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

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[1] Affordable Housing Follies and the Intentional Corruption of Supply and Demand Economics

http://rycksrationalizations.blogtownhall.com/2009/11/09/affordable_housing_follies_and_the_intentional_corruption_of_supply_and_demand_economics.thtml

[2] The Second Big Bubble: The Future of Commercial Real Estate. It May Be Time To Move Out.

http://rycksrationalizations.blogtownhall.com/2009/11/21/the_second_big_bubble_the_future_of_commercial_real_estate_it_may_be_time_to_move_out.thtml

[3] http://www.foxnews.com/story/0,2933,583244,00.html

[4] The Jobs Initiative - Suspend AB32 By Dan Logue California State Assemblyman representing the 3rd Assembly District Mon, December 7th, 2009 http://www.foxandhoundsdaily.com/blog/dan-logue/5990-the-jobs-initiative-suspend-ab32

[5] http://www.marketwatch.com/story/california-downgraded-by-sp-bonds-fall-2010-01-13?dist=afterbell

[6] The Fed Thinks of Ways to Claw Back Some of the Stimulus Money: This Will be A Disaster as Congress Will Continue to Spend and Spend.

http://rycksrationalizations.blogtownhall.com/2010/01/03/the_fed_thinks_of_ways_to_claw_back_some_of_the_stimulus_money_this_will_be_a_disaster_as_congress_will_continue_to_spend_and_spend.thtml

[7] http://quickfacts.census.gov/qfd/states/06000.html

[8] http://www.bloomberg.com/apps/news?pid=20601085&sid=aRVZXRCRokdc

[9] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’ is a Numerical Monkey Circus

http://rycksrationalizations.blogtownhall.com/2009/10/31/650,000_strawdogs_bark_at_the_moon_the_obama_%E2%80%98recovery%E2%80%99_is_a_numerical_monkey_circus.thtml

[10] Belligerent Ignorance, Phony Economics and the Clunker Crusaders: Washington Wastes our Money Again.

http://rycksrationalizations.blogtownhall.com/2009/10/29/belligerent_ignorance,_phony_economics_and_the_clunker_crusaders_washington_wastes_our_money_again.thtml

[11] Paul Krugman Clarifies the Outcome of the NJ Gubernatorial Race for Us: Spend More! Spend More! Spend More!

http://rycksrationalizations.blogtownhall.com/2009/11/06/paul_krugman_clarifies_the_outcome_of_the_nj_gubernatorial_race_for_us_spend_more!_spend_more!_spend_more!.thtml

[12] Paul Krugman Mumbles about Misguided Monetary Mentalities and Offers Other Hokums about our Currency

http://rycksrationalizations.blogtownhall.com/2009/10/12/paul_krugman_mumbles_about_misguided_monetary_mentalities_and_offers_other_hokums_about_our_currency.thtml

[13] Krugman Confuses Bacchus, Baucus and Baloney with the Threshold for Healthcare.  Not Enough Big Government in the Latest Episode

http://rycksrationalizations.blogtownhall.com/2009/09/18/krugman_confuses_bacchus,_baucus_and_baloney_with_the_threshold_for_healthcare__not_enough_big_government_in_the_latest_episode.thtml

[14] Averting the Worst in Liberalism as Contrasted by Paul Krugman. Tax and Spend our way to Prosperity.

http://rycksrationalizations.blogtownhall.com/2009/08/11/averting_the_worst_in_liberalism_as_contrasted_by_paul_krugman_tax_and_spend_our_way_to_prosperity.thtml

[15] Rewarding Bad Actors by More Bad Actors and Higher Taxes: A Krugman Gem

http://rycksrationalizations.blogtownhall.com/2009/08/04/rewarding_bad_actors_by_more_bad_actors_and_higher_taxes_a_krugman_gem.thtml

[16] Krugman Applies Protosimian Logic to Health Care. Big Government and Higher Taxes! Of Course!

http://rycksrationalizations.blogtownhall.com/2009/07/31/krugman_applies_protosimian_logic_to_health_care_big_government_and_higher_taxes!_of_course!.thtml

Krugman Boils a Pot Boiler about Boiling Frogs. Another Propaganda Exercise Example. Tax Alert!

http://rycksrationalizations.blogtownhall.com/2009/07/13/krugman_boils_a_pot_boiler_about_boiling_frogs_another_propaganda_exercise_example_tax_alert!.thtml