Tag Archives: economics

Another Example

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…of the failure of government intervention in “green” energy.  And of the lack of understanding of the problem by the participants.  This four minute video via Deutsche Welle tells the tale.

A group of Spanish farmers, in order to “improve their pensions and to do something for the environment,” banded together to build a solar farm, Spain’s biggest cooperative solar park, an operation of solar cell collectors at roughly €90,000 per module.

The central takeaway:

[T]he modern facility is currently losing money because the conservative government has drastically cut the subsidies for solar power.

The solar farm is not economic viable, it cannot compete in the market place, without those subsidies, without OPM.  The thing simply is not market ready.

The lack of understanding is in the plaints that this is someone else’s fault; it can’t possibly be a poor business decision to rely on a technology that can’t compete and that isn’t ready for prime time.

I feel swindled by my own government, by the politicians we Spaniards voted into office.

And

The big energy companies regard us small investors as enemies because we threaten their monopoly on the market.

Except that these “small investors” don’t have anything with which to challenge them without all that OPM to prop you up.  Their enemy—and the small investors’—is that government subsidy.

One bit of slanting by DW: there is a vague reference to a tax on solar cell installations on private homes in that region of Spain.  However, DW chose to provide no context for that reference: what the tax is for, how much it is, what is actually being taxed, and so on.

It’s About Time, Ollie

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In a move met by applause from at least one congressman, the Energy Department announced a pilot program for research into domestic mining of rare earth elements.

Rare earths are minerals critical to computing technologies and to various military and civilian sensor technologies.  China currently dominates the production and market for these elements, with about 85% of the world’s production from its domestic mines.

Another major source for rare earths, not yet exploited, is the South China Sea floor.  Part of the purpose of the PRC’s seizure of the South China Sea and of its island-building and militarization of those constructs is to control access to those rare earths and to reserve them for itself.

The US has about 13% of the world’s total reserves, but very little of this is in production: mining efforts aren’t extensive because it hasn’t been economically feasible (or yet politically necessary) to mine seriously.  Instead, we’ve been buying our rare earths almost exclusively from the PRC.

We’re very late to this production party, but with Secretary Rick Perry’s announcement, we need to jump in with both feet.  This is another area where we have to cease our dependence on our enemies for our own prosperity.

Saudi Oil Embargo Against the US?

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Saudi Arabia is cutting its oil exports to the US for the express purpose of directing our use of our own oil to Saudi purposes—to make us use up our existing “excess” supplies.

Saudi Arabia is slashing its US oil exports to a near three-decade low for this time of the year, intensifying its efforts to reduce a global supply glut that has been pummeling crude prices.

Not just the global gut—our supply in particular.  Saudi Arabian Oil Co is cutting its exports to the US to the lowest level since the late ’80s.  Saudi Aramco is cutting its exports to us to the lowest level since 2009, the end-game of the Panic of 2008.

[S]ome analysts say these reductions in Saudi exports to the US could be a step toward ensuring that OPEC’s cuts have the intended effect of reducing bloated inventories of oil around the world, and particularly in the US.

[Emphasis added.]

This is a prickly ally; however, the embargo (which is what this amounts to, even if not intended and even if not complete) will have little deleterious effect on us, and it’s likely to backfire on the Saudis and their OPEC compatriots.  The reduced sales, whether to us or to the world generally, only opens the world market to us: we’ll increase our market share, to the benefit of our economy.  Furthermore, we can handle lower prices than can the OPEC members and their oil allies (vis., Russia and Iran), producing profitably at those lower prices; that encourages our continued production even as the Saudis and OPEC try to manipulate price with their doomed-to-fail attempt to manipulate supply.

And the American consumer, far from the more serious embargoes of the last century, will benefit from the largely unaffected supply and the lower prices of oil (and of natural gas, which aside from being inherently cheaper also is under price pressure to the extent that oil and gas are substitutes for each other), both directly and through the ripple of those lower prices throughout our economy.

The Fed and the Markets

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The Federal Reserve’s interest-rate increases aren’t having the desired effect of cooling off Wall Street’s hot streak.

Well, NSS.  There’s a hint there.

The Fed needs to stop trying to manipulate the market and go back to doing its job, maintaining stable price levels (controlling inflation to low levels) and achieving full employment (whatever that means.  And, the latter is wholly dependent on the former and so need not be an independent goal, but that’s a different story).

Manipulating the markets as a primary means of helping the underlying economy is a fool’s errand.  While the markets are very strongly tied to the underlying economy, they are not the underlying economy, and the lags between economic performance and market behavior are both too long and too variable for Fed market shenanigans to be useful for anything other than letting the Fed pretend it’s doing something useful.

In theory, financial conditions should serve as the conduit between the Fed’s monetary policy and the real economy. When the Fed lifts short-term rates, long-term rates should rise also and financial conditions should tighten.

This is misguided; see above.  Financial conditions should be set by the free market behaviors of market participants.  The Fed’s role, to properly execute theory, needs to stay within its mandate: set the framework within which the free market operates by controlling longer-term price level.  That’s the sum and total of the purpose of the Fed’s monetary policy and its relationship with the underlying economy.

The Fed should set its benchmark interest rates to levels historically consistent with 2% inflation (the Fed’s oft-stated target inflation rate), and then it should sit down and be quiet.

Currency Valuations and Economic Growth

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There’s an interesting piece in The Wall Street Journal that looks at the economic theory that suggests that a nation’s devaluing currency, by making its exports cheaper, would spur domestic production and so economic growth.  As the article says, Great Britain is offering a real-time experiment that tests that theory.

In that experiment, the pound has lost value in the exchange markets to a significant degree, but exports—and the British economy—have not expanded as much as was expected by some under the theory.  This “failure” of the theory is being blamed on globalization.  For example,

Chemicals made at Chemoxy International Ltd’s factory in Middlesbrough are worth about 20% more in the export market after last June’s fall in sterling, given the beefed-up value of the currencies used to buy those goods overseas. Higher costs for imported materials, however, all but erased that advantage.

And

Car maker Aston Martin, which exports 80% of its vehicles…. Before Brexit, when the pound traded at $1.50, sports cars sold in New York for $150,000 would bring home £100,000. With the pound now at $1.27, such sales bring an extra £18,000. But over half the car’s components must be bought from abroad, blunting the effect.

In fact, though, the theory tying a domestic economy’s prosperity to changes in that nation’s currency exchange rate never looked at exports and imports in isolation from each other; the two, along with the overall domestic economy, have been understood to be tightly intertwined all along.  It’s just that the expansion of globalization over the last generation, or so, have increased the influence of exchange rate impacts on imports to a large degree.

The outcome of globalization—so long as free market principles dominate international trade activity—is a long-run loss of the ability to manipulate exchange rates for nationalistic purposes.  Short-term effects can remain powerful, though, and such manipulations cannot be ignored to good effect.