Tuesday, March 11, 2008

Watch out for the green bubble bath (updated)

MoneyBomb In the seventeenth century it was the tulip bulb mania.  In the eighteenth it was the South Seas Bubble.  In the nineteen-twenties it was a stock market boom and a bubble in Florida swamp land; in the eighties a boom in sales of white shoes, gold chains and shoulder pads; and in the late nineties a "dot-com boom" in which even the most be-pimpled jandal-wearing geek was able to float an IPO to buyers eager to 'invest' their piles of borrowed government-created credit in schemes ranging from bizarre to unlikely.   All of these various bubbles imploded leaving investors taking a bath and creditors awash in un-backed IOUs -- which largely describes the government-created credit most 'investors' were using to seek their fortunes. 

The lesson is obvious enough: Boom leads to bust.  Today's rocket-fuelled "irrational exuberance" is tomorrow's rational reflection that every time the currency is inflated in the way central bankers periodically like to do, prices tend to inflate like the Hindenburg did just before the airship fell to earth in a shower of sparks.

Any time borrowers are flush with excess credit you see a boom in whatever borrowers like to decide is fashionable, and rampant inflation in prices in markets conveniently not measured in the central bankers' inflation-measuring baskets.  The most recent boom in property prices is just one bubble in which some investors are already taking a sub-prime bath.  Here's another to keep an eye on: Alternative energy

Notes Harper's magazine in support of this thesis, the alternative energy bubble has the legs to go all the way, just like the Hindenburg did: it's fashionable; it's driven by legislation and subsidy; and already companies like First Solar (who on the back of an 800% rise in share price were declared Wall Street Journal's "best 1-year performer" ) have become the darlings of Wall Street, despite a grand total of 12 clients, factories producing to capacity and what one analyst calls "an enormous multiplier." (Says Zachary Scheidt of Stearman Capital, "The deck seems stacked against shareholders at this time, not due to the inadequacy of management or the strength of the company, but simply due to the unbridled enthusiasm of investors.")  How bad will this bubble be?  Harper's estimates

the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry.

Let us remind ourselves that this and every other bubble was created by debasing the currency -- a "seeming golden age — in reality, a thinly gilded one — during which the first, most favored issuers of cheap credit and artificially boosted equity prices enjoyed almost effortless success, but whose successes must eventually be paid in the destruction of real capital.   As Sean Corrigan notes, real, physical capital was never called into being quite so readily as the artificial credit created out of thin air by central banks, since the creation of real, physical capital "requires not the staccato keystroke of a fiat banker, but entrepreneurial vision, hard work, and genuine saving."

By that last we mean a voluntary abstention from current consumption, undertaken in order to improve the chance of greater plenty in the future, and not the corrupt preemption of a man's spending power — effected with monetary trickery — which inflationists laud as "forced saving." Being a species of initially unrecognized compulsion, this is a deceit doomed to fatal self-contradiction once its dupes wake up to the nature of the con being practiced upon them.

PS: Here's Czech president talking to Glen Beck about how freedom is more important than warmism and subsidised climate nonsense.

UPDATE: A reader has drawn my attention to the fact that while the Harper's article makes good sense on the possible energy boom-and-bust, it peddles pure Keynesian bullshit in earlier parts of the piece.  See here for example.  Readers are warned to skip the earlier paragraphs head straight to the sections on alternative energy, and discard the rest as arrant nonsense.

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2 Comments:

Blogger Andrew said...

Best put a disclaimer on that Harper's article - the following is pure Keynesian bullshit:

"In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not."

3/12/2008 03:44:00 am  
Blogger PC said...

Ah, well spotted. I skimmed through the earlier nonsense to get to the recommended paragraphs. Seeing Roosevelt's name however should have brought me up short, shouldn't it.

The paragraph you quote from the article is just flat wrong, isn't it. Let's rewrite it correctly:
"In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began initially to expand on the back of the consumption of capital it stimulated, then contracted even further so that by 1937 the US economy was in an even more parlous state than it ws before.

"But it was World War II that brought real recovery, not because it was the highly effective, demand-generating, deficit-and-debt-financed public-works project that Keynes’s flawed theories, demanded, but because for all the war years and for several years before there were virtually no consumer goods whatsoever produced on which consumers could spend their money, meaning that by war's end the capital destroyed in the previous decade by war and Keynesian theory had been replace and more by real and genuine savings.

"Far from being the saviour of the world's economy, war and Keynesian theory instead put off the recovery for at least a decade..."

3/12/2008 09:32:00 am  

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