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Note from Mike: The following column written by five Nobel Prize winners in economics appeared in the Wall Street Journal. It reminds us that the US financial situation will dominate the headlines in the near future. Technical analysts like Martin Armstrong and David Bensimon see the coming problem for government finances playing a dominant role in the investment markets from 2014 through 2017.
Where are we now?
By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
“Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing – the purchase of government debt, mortgage-backed securities, etc. – the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give – not lend – to banks?
… the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management.
This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
“When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy.
Are you surprised that so much cash is waiting on the sidelines?…
In short, we risk passing an economic, fiscal and financial point of no return. The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.
The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.
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As one solar company after another goes out of business, here is what investors do not know and promoters will not tell you: Solar panels do not work that well.
Sometimes not at all. But for several years, most solar systems, big and small, were so heavily subsidized, they were practically free. So lots of people did not really care.
Not enough to check the output of their systems. The few who did often had a big surprise.
That was the first shock.
The second was realizing that a large solar array was not just one system, but thousands. Each panel a mini-power plant. And the only way to figure out if the individual panels were working was to test each one.
There go your solar savings.
The gang at Google figured out that the farmer next door had plowed a field, kicking up the dirt, knocking down its power. Solar panels have to be cleaned, sometimes often.
And the place where they need the most cleaning is where solar panels work the best: The desert. But that is where water is scarce and expensive.
There go your solar savings.
Lousy panels are No. 2. Remember Solyndra? Before its well-publicized collapse, Solyndra was well known for its tube-shaped products that were supposed to collect solar power directly from above, and indirectly, reflected from below.
They found out the hard way in Livermore, Calif. There a movie theater got a lot of attention for installing a roof top solar array — first of its kind when it was installed in 2009. A year later, technicians found out the system was producing 25% less power than projected.
The movie theater had no idea. I’m not sure they ever found out.
The only laboratory that ever tested the actual performance of Solyndra products figured it out. But it was in Germany and did not receive much attention. Said one energy web site:
the report claims the Solyndra module’s shadow blocked most if not all of the sunlight before hitting the reflector foil installed below the module, allowing only a small portion of reflected sunlight to hit the backside of the module.
This is the same place where 100 reporters covered President Obama’s visit there in 2010, and not one took a moment to figure out why Solyndra’s auditors said the company was “not a going concern.”
Like First Solar’s panels, how would you know? You don’t.
No. 3 is this: The darn things don’t work — at all. In San Diego, the local Space theater and museum asked some people to check its panels. As usual, they were installed with lots of fanfare.
But one year later, they were surprised that squirrels and trees had reduced their solar output to zero.
A public utility in a southern state had the same experience. A solar company wanted to field test a new energy product, and the engineers at the utility said they could test it on their system.
Soon, 10 engineers were tromping around the roof of the utility’s headquarters, looking for best place to hook up their device.
“These panels don’t work,” said one of the engineers with the new product. “There is no power coming out of these panels.”
Engineers for the utility said “Your instruments are wrong. We are sure the panels work.”
So the utility’s engineers checked with their instruments.
Sure enough: Nothing.
These stories go on and on and on. They don’t work but no one cares because most people put them up for the publicity and marketing. Not energy. The movie theater Web site brags it has: “the second largest solar power system on the roof of a movie theatre anywhere in the world!”
Solar promoters consider themselves part of a political movement to save the planet. They do not tolerate naysayers.
That is why it is still so easy to find stories that say the non-performance of solar equipment “really looks like a non-story.” That is what one analyst said after First Solar’s stock recently took a 10% hit in one day after the company revealed problems with its products.
Here’s a bonus reason No. 4: Shade. A shadow on a solar array not only knocks out power to that panel, it also shuts down a wide area of panels around it.
Listen to the National Renewable Energy Laboratories: “the reduction in power from shading half of one cell is equivalent to removing a cell active area 36 times the shadow’s actual size.”
Do your own test: Ask your neighbors if they know how shadows hurt solar panels. Most do not.
Some companies install monitors on each panel. But monitor makers find that the very existence of their product is an admission of problems in that industry. And that is the last thing the True Believers want anyone to hear about.
Especially investors.
That is why I shorted First Solar at $121 in March of 2011 — and said so on my radio show and in my newsletter.
And that is why investors should stay away from betting on their resurgence.
This article is commentary by an independent contributor, separate from TheStreet’s regular news coverage.
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Get ready to infuse the long winter months with color, carnivals, and adventure. Chosen by our editors, this year’s best winter trips span the globe and transcend the season. Find your favorite, then share your winter trip plans with fellow travelers.
Harbin Ice Festival, China
Hibernating is not an option in the frosted reaches of northeast China, where brisk Siberian winds keep the average winter temperatures in Harbin barely above zero degrees Fahrenheit. Hardy local artisans in the Russian-influenced “Ice City” celebrate the season by sculpting ice blocks chopped from the Songhua River into colossal crystalline pyramids and palaces, whimsical dragons and fairies, and frozen slides worthy of a water park. The monthlongHarbin Ice and Snow Festival (beginning January 5), showcases the frosty craftsmanship of local carvers and international teams and includes a Snow Sculpture Expo at Sun Island recreational area and the Ice Lantern Garden Party at Zhaolin Park. Daylight activities include figure skating, ice boxing competitions, and, for the daring, a polar plunge into an ice-free section of the frigid Songhua. After dark, bundle up to see the festival’s illuminated ice displays dazzle neon bright against the night sky. Harbin is accessible via train or plane from Beijing or Shanghai.
….read more HERE
Mike takes on the “Corruption Capital of Canada, the incredible and well ignored bribe taking between Government Officials in Montreal’s City Hall and the Mafia. One Goverment Official took $700.000 in bribes in on year alone!
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At stake is the very nature of the American social contract.
“Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way that Bill Clinton did not.” That was Barack Obama in 2008. And he was right. Reagan was an ideological inflection point, ending a 50-year liberal ascendancy and beginning a 30-year conservative ascendancy.
It is common for one party to take control and enact its ideological agenda. Ascendancy, however, occurs only when the opposition inevitably regains power and then proceeds to accept the basic premises of the preceding revolution.
Thus, Republicans railed for 20 years against the New Deal. Yet when they regained the White House in 1953, they kept the New Deal intact.
And when Nixon followed LBJ’s Great Society — liberalism’s second wave — he didn’t repeal it. He actually expanded it. Nixon created the Environmental Protection Agency (EPA), gave teeth to the Equal Employment Opportunity Commission and institutionalized affirmative action — major adornments of contemporary liberalism.
Until Reagan. Ten minutes into his presidency, Reagan declares that “government is not the solution to our problem, government is the problem.” Having thus rhetorically rejected the very premise of the New Deal/Great Society, he sets about attacking its foundations — with radical tax reduction, major deregulation, a frontal challenge to unionism (breaking the air traffic controllers for striking illegally) and an (only partially successful) attempt at restraining government growth.
Reaganism’s ascendancy was confirmed when the other guys came to power and their leader, Bill Clinton, declared (in his 1996 State of the Union address) that “the era of big government is over” — and then abolished welfare, the centerpiece “relief” program of modern liberalism.
In Britain, the same phenomenon: Tony Blair did to Thatcherism what Clinton did to Reaganism. He made it the norm.
….read more HERE
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