The Good News is Durban is a Dud!
As expected not much progress is being made in Durban on solving the world’s carbon emissions challenges. Kyoto Protocol became effective in 2005, requiring greenhouse-gas reductions in nearly every developed nation. The US recognized the unsustainability of a treaty that excludes the fastest growing polluters China, India, Russia and Brazil because they were emerging markets while requiring the established markets to effectively write them big checks so they could keep growing and pollute more.
Reducing greenhouse gas emissions is a worthy goal, but one nation or block of nations alone cannot solve that problem. Signing up for a giant wealthy transfer from developed countries to emerging and undeveloped countries was a tough guilt-tripped sell in the booms times of the global economy. It is a non-starter now that the global economies except for those emerging markets are in the ditch.
So the Kyoto Protocol’s first commitment period will end in 2012 and there is nothing to replace it laments the assembled delegates in Durban. GOOD! We can now all quit pretending it was a good idea in the first instance. Canada, Japan and Russia all signed onto Kyoto the first time but now realize they scored few green points for such a commitment and don’t plan on continuing the charade by re-upping for another five years of greenmailing. The EU said it was willing to sing-up for a second five year commitment—-IF and ONLY IF everyone else did so. Fat chance of that!
The best that can be said of the Durban conference is that thousands of delegates will have improved the economy of Durban by their whining and wining. The release of another round of leaked emails about climate scientists behaving badly when the science did not fit their politically correct views soured the event further with reminders of the first Climategate scandal. They now face a second round of red-faced bluster knowing that there are still more than 220,000 documents to be leaked.
If the world is serious about reducing greenhouse gas emissions then everyone must take action on their own to do so. We don’t need a treaty for that—we need resolve. Gaining consensus about that resolve also means that the cure cannot be worse than the disease. Kyoto was worse than no treaty at all. It tried to guilt the 1% nations into paying reparations to the 99% as penance for their economic growth and success. The US made the right decision to just say no to such a dumb idea. The EU played politics for domestic consumption but now cannot continue to hide the stupidity of its decision.
The world public is skeptical that this enterprise is worth the cost and aggravation because of the overreach of political pandering and the Climategate scandal revelations that the ‘incontrovertible scientific evidence’ isn’t so incontrovertible after all. That should not be interpreted as lack of public resolve, but rather public realistic public resolve. Our politicians have nearly bankrupted us with their mismanagement of the economy—let’s not give them control over the earth!
Is China a Bubble about to Burst?
“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor. We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”-– Harold L. Sirkin, a BCG senior partner
That is the conclusion of none other than The Boston Consulting Group after a recent comparative study of China and American relative competitive positions. It’s good news for America since a combination of forces have virtually stripped our country of its strategic manufacturing capacity while demographics drain our craft and mechanical skills as a generation of workers retire with few replacements being trained.
My wife is a high school teacher. At her school there has been a steady series of budget cuts over the past few years with nothing left of arts or music or any “industrial arts” as shop and woodworking were called when I went to high school. Gone! We only seem to want college prep classes and every kid is expected to go to college.
But there is a place in our country and every country for electricians, plumbers, welders, mechanics and a hundred other skilled craft careers. We are losing our sense of pride in such craftsmanship even though we need those skills more than ever.
One of the great fears of my utility clients is the tsunami of retirements washing over them over the next five years where as many as 40% of skilled craftsman will retire.
What does this have to do with China and its bubble?
China is not immune from demographic change. In fact, it has a worse problem than we do in the US because its one child policy is setting up a profound change in China’s productive work force for the future. But before that crisis hits China faces a bigger economic threat in the erosion of its export base as rising costs and rising expectations reduce its competitive position. That is the basis for BCG thinking and it seems right on the money.
Will American manufacturing prowess roar back to life?
Hey, Happy Days was cancelled and Richie Cunningham went off to college too. This isn’t the 1950’s all over again, but America’s competitive advantage future is to produce more of the products from our own advanced technology R&D here at home rather than risk a bleeding of intellectual property and risk of piracy offshore.
China has built its export powerhouse out of low cost manufacturing of products invented elsewhere. Commoditizing old technology to drive down the cost is good for business, but China must now focus on R&D and domestic consumption of the goods it produces in order to offset the drain of its manufacturing cost advantage as China takes its place in the Darwinian cycle of having market share taken off-shore by lower cost producers.
Producing more of our own products at home is a good thing. That it can again be done competitively with offshore competitors like China is delicious irony.
Will Chinese Yuan Flee to America Market Safety?
You remember all the hand-wringing about the implications of china’s rapid growth overtaking the US dollar to become the reserve currency of the world?
McKinsey is out with an article by Gordon Orr, their man in Shanghai—well at least until the Chinese read his article in the McKinsey Quarterly—with a provocative list of possibilities for the Chinese economy in 2011. It makes for good food for thought as you digest President Obama’s state of the union speech about “we do big things here in America” bravado.
SOURCE: HSBC
Mr Orr lists the following problems facing China:
1. Inflation in food prices will take longer than expected to control. The food supply chain is maxxing out as wealthier Chinese eat more and could lead to further food quality crises. Even small distribution problems can exacerbate supplies and raise prices.
2. Middle-class bankruptcies will expand dramatically if inflation drives up interest rates and drives down real estate values in a bursting bubble of speculation. Buyers have aggressively bought multiple properties with every penny of free cash flow. Sound familiar?
3. Minimum wages will rise, but productivity gains will outstrip labor costs. The government fearing labor unrest will raise minimum wages, Orr says, by 15 to 20 percent. Complaints about employers not paying overtime or demanding longer hours will likely grow.
4. Chinese cities could see demonstrations over food price rises, unemployment, or both. The government will quickly try to respond but fears protests will spread to other cities. The combination of food price inflation, the real estate bubble, demands for more worker productivity even with higher wages piles up into public dissatisfaction
5. China’s economic growth will be lower than expected. To fight inflation subsidies to consumers will be reduced and discretionary spending will fall with it. The cumulative impact could be slower economic growth and all the consequences a cooling economy brings. The Wall Street Journal reports that China’s economic and market data may be under-reporting its true situation meaning economic growth might actually be higher than China reports but so could inflation which makes the risk of bursting bubbles even higher.
6. China will accelerate its “invest out” program in the new five-year plan. Mr. Orr suggests China could easily double its cumulative outbound investment in other countries within the next five years. In so doing China sees diversifying its income potential across markets as a way to reduce its own volatility and put its treasury of reserves to work profitably while expanding its role in other markets to keep exports growing. Orr predicts this will lead to major problems with some countries resisting China’s attempt to ‘buy the country’s strategic assets’ before its money runs out.
7. China will try to reduce its ownership role in domestic business. Reducing the government’s stake in Chinese companies will reduce liquidity and ease speculative pressures encouraging a buy and hold strategy for investors wanting a place in the Chinese markets. Share prices could be expected to fall making China more a buyers’ market for outside investors even while China itself uses the cash to buy foreign companies and assets outside China.
So Let’s Think About This for a Moment.
China’s overheated economy is having trouble managing a soft landing so China might unload assets to foreign investors thus reducing the government’s stake in China’s markets. There are plenty of risks for foreign direct investment in China but the Chinese government pitch book will say this is your best opportunity to get into the ground floor for China’s next boom—if you survive the looming bust.
Meanwhile, instead of buying US Treasuries China will use its currency reserves and proceeds from asset sales at home to buy up better quality assets around the world to assure its access to strategic markets and acquire the best technologies, resources, expertise and intellectual property to fuel its next boom. In consolidating, capital starved markets there will be no shortage of sellers.
Back home in China, inflation, housing bubbles, and low wages are making the aspiring middle class angry that the Government is running their economy in the ditch. The government will use both carrots and sticks to keep the lid on and preserve its control fearing domestic unrest more than anything.
This seems a far different story than President Hu Jintao was telling us just last week when he predicted that China’s Yuan will be the world’s reserve currency within twenty years. But then again, maybe that side trip to Chicago was to check out the price of penthouse apartments on Michigan Avenue after he retires in 2012.
Welcome to America—-we know a lot about short sales!
PS: Pssst, Hu Jintao have we got a deal for you—ever hear of Fannie Mae and Freddie Mac?
The Gift of the Chinese Visitor
The state visit of Chinese President Hu Jintao was much anticipated and much studied for clues about the relative power of the two countries. The press has been full of speculation about whether President Obama would bow to the foreign leader as he has to so many others. But doing so this time would be more profound not only because this was “home” and because it would symbolize the truth to the Chinese view oft expressed that America’s time has passed and we should reconcile ourselves to China’s ascendance to global leadership.
It would only be a matter of time before the yuan replaced he dollar at the world’s reserve currency the Chinese keep telling the world as if to presage a realignment of the geopolitical stars and planets.
None of these things came to pass in the visit which was cordial but distant, intentional but not pretentious, honest but not acrimonious. Thus the objectives of both China and the US were achieved by the state visit. No bad things happened, but neither did much good happen either.
Yet as the world press tried to read every smile and smirk to detect the tenor of the meetings there were comparisons galore between the two countries. This entire news binge was useful and to some degree clarifying.
Here’s my take:
- It was good to welcome Hu Jintao to America and congratulate China on its many accomplishments. They deserve much praise for what they have succeeded in doing to transform Red China into Gold China with their phenomenal economic growth.
- China should also be praised because it has chosen a path of mercantilism instead of militarism for its ‘great leap forward’ and the world is a safer and better place because of it.
- Global trade works to lift all boats when nations work together collaboratively, and while there are risks to be sure from trade imbalances the opportunities far outweigh the detriments. America’s relationship today with China is tribute to capitalism and trade more profound than could have been hoped when Nixon went to China the first time.
- America has nothing to fear from an ascendant China. In truth the risks to America are more serious from a China unable to manage a soft landing for its unsustainable growth, its risk of runaway inflation, and the social unrest that might result from the end of the dream of every Chinese citizen that he too will someday, somehow climb out of poverty to join China’s growing middle class. For much of China poverty remains a reality.
- China is self absorbed and that is good because its problems are greater than its many strengths. It poses no imminent threat to America’s strategic interests and we should not change our global strategies because of China. China is a proud nation still shamed from past invasions and insults, but America is not responsible for those sins nor should we change our strategic priorities because the Chinese might take offense.
- America’s economic problems are real but America is resilient. Our near meltdown experience may even prove providential if it constrains our spending and adjusts our politicians’ aspirations as appears to be in the works. The genius of America is the capacity to reinvent itself, renew itself, and unleash the creative power of its citizens—and that is exactly what we must do to dig ourselves out of the hole we are in today. America has learned that it cannot out-source its strategic manufacturing even to a friendly China without adverse effects at home. America must restore its productive capacity to make things because it is a condition precedent to a stronger America not because we fear or resent China’s growth.
- World trade is good for China and good for America but China cannot live by two rules—access to the world’s markets while restricting access to domestic markets. America should insist that China plays ‘fair’.
- America is pushing back on cap and trade legislation because Americans realize that killing off the rest of our industrial capacity to reduce greenhouse gas emissions when China, India and other developing countries refuse to play the game does neither the environment for our economy any good. But allowing China to misappropriate our intellectual property, reverse engineering our technology and export it back to us at lower prices to gain market share for their export growth isn’t going to cut it any more.
- China may not be our friend but it is not our enemy. While some would like to see us become rivals the truth is China and America need each other more than ever to face the challenges ahead. By pursuing our own strategic global interests, cooperating where we can, competing where we must both nations can have a brighter future.
So it was good for Hu Jintao to come to America to remind us how fortunate we are to live in this great nation so full of potential—and to put into perspective that while China may be growing fast today it faces far greater risks than the US before it can replace us as the world’s reserve currency or the world’s leader.
China and US: Two Peas in the Same Soup
President Obama will soon welcome his Chinese counterpart, President Hu Jintao, to the White House and there is a lot at stake in the meetings for both sides. The press is full of speculation about what they will discuss and the symbolism of the visit. After months of tension and banter clearly the relationship needs work and the fact that the White House visit is happening signals recognition that the relationship is important to both sides.
As the meeting takes place among the issues under discussion will be North Korea and the equally looming nuclear threat from Iran. Chinese willingness to bring pressure on one or both of these states is a major objective of the US. But what is China’s objective?
The truth is China probably wants most for nothing bad to happen on the rest of President Hu Jintao’s watch as it prepares for a major change of leadership in 2012. Conflict with North Korea or an oil crisis sparked by conflict with Iran could hurt China’s delicate economic condition and threaten its continued growth. A big trade spat or conflicts over the value of the Yuan or trade imbalances cause uncertainty and risk neither party wants nor needs.
President Obama actually might have the same objective since the last thing he wants is a conflict with China over trade issues, deficits and China’s purchase of American bonds and debt allowing time for President Obama to reduce unemployment, increase economic growth and position Americans to feel more confident about their future by 2012.
There are also unspoken issues and undercurrent at stake too. The huge American deficits and the President’s spending on health care, stimulus and other Democrat aspirations cost his party their majority in the US House of Representatives and may threaten his own reelection if he cannot get it under control and off the front page. For that President Obama needs jobs growth and tax revenue growth. Just this week, Moody’s and S&P announced that they were putting US debt under credit review because of the looming deficit. A group of noted economists gathered in Cambridge, Massachusetts this week and one, MIT’s Simon Johnson said bluntly that the damage from the financial crisis and its aftermath have dealt U.S. prominence a permanent blow and he expected the Chinese Yuan would be the world’s reserve currency within two decades.
But before we starting paying Professor Johnson’s salary in Yuan let’s not forget the Chinese have their own problems and like everything in China these days they are huge. Washington may have huge deficits to work down, but China has an economic miracle that must continue to be miraculous or else, if I may paraphrase STRATFOR. And while we all know that economic growth can go down as well as up, the Chinese just cannot afford for it to go down too much or too fast without creating an existential risk to the Communist Party and to China’s economic transformation from third world to first world country. No pressure, right. Frankly, I’ll take our US problems any day over the fractious political, ethnic and economic problems facing China.
And if the Chinese bubbles start bursting too much or too fast they have consequences for America and the rest of the world no one really wants to face.
China has another strategic issue it has tried to avoid in the balancing of its aspirations for regional and global leadership and the fears that causes among its neighbors Japan, South Korea and the Southeast Asian “Tigers.” If China becomes a bigger military as well as economic threat to its neighbors it risks setbacks for its exports everywhere in the world with unpleasant consequences at home. So far China has pushed forward and tacked back just enough to maintain a prudent course but China’s export-based economic model is vulnerable since it depends upon good relationships with the major economies of the world to make a welcome home for its exports and continue to send their money to Beijing. Government investment drives the Chinese economy, but Beijing is walking a very difficult path must continually balance the risk of run-away inflation and rapid economic decline. Hu Jintao does not want a big screw-up to happen on his watch in advance of the 2012 leadership changes planned.
The problems China faces are ironically the same ones faced by American leaders. How do we deal with these pressing structural and economic issues without creating political problems for our parties and protests from our citizens? Procrastination makes the problems worse, potentially, for both the US and China. Hu Jintao still has control of his party but not necessarily the geo-political or economic events that could cause ‘bad things’ to happen. President Obama faces a divided Congress and Republican opponents eager to upset him for re-election so like it or not he will be forced to accept actions to cut spending and reduce the intrusive influence of government over the next two years.
My view longer term is this:
America is not as weakened or humbled at Professor Johnson states, and the genius of our country has been its resilience and ability to adapt to change. Don’t count America out. Besides, while the nations of the world love to complain about America we are still the safe haven for their investments, the world’s best markets for their products, and the only country capable of projecting military power anywhere in the world in the defense of our strategic interests and our allies.
China is not as strong as its current growth rates suggest nor does it have the staying power to be either the world’s reserve currency or its global leader. This is not a slight to the miraculous growth of China or of its potential. But a global super power must be confident at home before it can be taken seriously abroad. China may well get there but it will require more than export growth and a big pile of cash to spend. It requires much more than that. If China can create a soft landing from its miracle and a sustainable pattern of reasonable growth long term that will be a singular achievement worthy of a great nation, but it is not sufficient to overtake the US.
The good news is both China and the US benefit from their relationship, share major strategic goals, and working together have the power and strength to secure their long term economic interests without disadvantaging the other.
Turning the Tables on North Korea
The actions of North Korea in sinking a South Korean ship and shelling a remote South Korean island primarily because it was beyond the armistice line are clear violations of the 1953 armistice agreement. North Korea has been lead to believe by the lack of consequences for its bad behavior that it can do largely as it pleases in attempts to further extort financial assistance from a cowering West which seeks to avoid conflict above all else.
There are worse fates than conflict as we know from our history and bullies left unchecked do not generally improve their behavior.
Our hopes that China would see the craziness of North Korea’s behavior and do something—anything—to bring the regime in line has proved not well founded. China wants to be respected as a great nation and superpower but shrinks from stepping up to the plate to take a proportionate share of responsibility when the world needs it. While we clearly want to cooperate with China in finding a solution to this problem, we cannot subordinate our own strategic interests to China’s indecision.
Leaving North Korea unchecked is also dangerous because of its export of weapons and mischief to Iran and other bad behaving players around the world proliferating some of the worst weapons to some of the worst threats to global peace and security.
As we have learned before and the Wikileaks remind us again, often it is only the United States that has the capacity to change the game and provide the leadership to solve the world’s biggest problems.
That is what we need to do now.
Gordon Chang writing in the New Asia blog published on Forbes suggests a way to do just that. He proposes that since North Korea has already asserted that it does not plan to respect the 1953 armistice that the United States should follow suit and declare that it no longer is obligated to the armistice either and is free to take appropriate retaliatory action against North Korea for any violations. Chang suggests three specific steps that would tilt the playing field back to balance:
1. Order Financial Freeze on North Korean Assets. The US Treasury once before punished North Korea by ordering targeted banks used by North Koreas who hope to do business with or in the US to freeze assets and refrain from any transactions involving the North. This truly ticked off Kim Jong-Il and would do the same today especially if expanded much more broadly.
2. South Korea could close the Kaesong Industrial Complex. This industrial zone shared between the Korea’s was established as a bridge builder for future cooperation. We see how well that worked. Closing it would, according to Gordon Chang deprive the North of as much as $600 million in hard currency each year. Surely the manufactured goods could be relocated to other facilities inside South Korea.
3. Interdiction of North Korean Exports. Without the armistice, the US and other nations would be free to board, search and seize cargo shipped from North Korea that represented a violation of any UN resolutions, a proliferation of unauthorized weapons sale or a threat to global security.
To be sure these are acts of war and the North will wail it most belligerent epithets at even the suggestion of such actions. But mice do not generally pick fights with tigers especially when the tiger is hungry or angry.
A willingness of the United States to say ENOUGH!—and mean it would make possible a fresh start by all parties in resolving this problem once and for all. To back up this change in approach the US would need to demonstrate its resolve by:
1. Deliver a clear and unambiguous message to North Korea it will defend any attack against South Korea or any US interest will a full and appropriate military response.
2. Reaffirm US support for unified Korea and a willingness to work with China and others in Asia to facilitate such reunification when the North Korean regime collapses.
3. Announce that the US was engaging in discussions with South Korea, Japan and others within range of North Korea’s missiles for the deployment of US weapons including tactical nuclear weapons to back up the strategy.
Such a no nonsense strategy for trapping the errant mouse is the only thing a mouse as wily as Kim Jong-Il understands.
How China is Winning the Renewable Energy Race
“Green jobs are key to our future, right now, China is taking every possible step – many of them illegal under international trade laws – to ensure that it will control that sector. America can’t afford to cede more of its manufacturing base to China.” — Leo W. Gerard, International President of the United Steel Workers
That was the press message from the United Steel Workers as they asked the US Government to file an unfair trade complaint against China at the World Trade Organization (WTO) as permitted by Section 301 of the treaty. The focus of the union complaint is China’s push into the clean and renewable energy sector of wind turbines and solar panels. The union says China is taking clean American manufacturing jobs by heavily subsidizing the production of cheaper wind and solar equipment and exporting it to the US at prices that make American made alternatives uncompetitive.
In fairness, this is not a new position for the USW or other unions. They have alleged that world trading regimes have caused the decline of America’s manufacturing base. European unions and manufacturers have made similar arguments. This same argument over solar panel prices hit the fan in Spain and then Germany where their own feed-in-tariffs (paying above market prices for solar and wind energy to attract producers) backfired because they attracted Chinese producers who offered lower prices for their equipment than Spanish or German firms and thus slurped up the lion’s share of the feed-in-tariff subsidy money and sent it back to China.
The EU was outraged that the Chinese would intrude in their efforts to subsidize their own manufacturers and undercut the locals to win the bidding on solar projects and wind turbines. Remember this happened just as Greece was melting down and thus was used, in part, as an excuse to reduce or eliminate the unsustainable feed-in-tariff subsidies blaming the Chinese.
Capitol Hill Meets Main Street
Here in the US the story is similar. The renewable portfolio standards adopted by the states and the pressure from Washington to do more to reduce emissions and grow market share for renewable energy has utilities scrambling to procure energy to meet those goals. Many utilities are near achieving those existing RPS targets so pressure is building to raise the RPS goals much as California is trying to do with its 33% target.
Meanwhile, the Bakersfield Effect of angry ratepayers waving their utility bills and demanding answers from regulators and politicians about why these policies are driving their rates through the roof. California even has Proposition 23 on the November 2010 ballot to suspend its AB32 Global Warming Solutions Act implementation until unemployment falls below 5.5% for four consecutive quarters. Bills to enshrine the 33% RPS goal into California law failed to pass this legislative session just ended. So 20% is the legally mandated goal and pushing beyond it is much tougher.
Utilities are under a regulatory obligation to add renewable energy to their power supply portfolio to meet these RPS goals but also satisfy a prudency test of ‘least cost, best fit’ standard of procurement care. Tough to do when the costs are going up. So along comes China with a growing manufacturing base for wind turbines and solar panels to compete against GE and other manufacturers who have sought to dominate the markets in renewable energy just as they did for gas-fired combustion turbine power plants.
Main Street Loves Low Prices
The Chinese offer low prices, almost always lower prices than American or European manufacturers and begin winning more of the deals. The Chinese also are investing in building American market share by buying the energy management and services firms needed to install and maintain all this equipment further irritating local vendors.
Are the Chinese subsidizing this manufacturing of wind and solar panels—absolutely.
The EU and US virtually demanded it remember in the aftermath of the Kyoto Protocol and the build up to Copenhagen by accusing China and other developing countries of failing to do enough to control greenhouse gas emissions. China responded that it was poor and just building its economy and could not slow its economic growth to clean up its environment UNLESS the US and EU were willing to pay it to do so faster by imposing restrictions on our greenhouse gas emissions while letting China off the hook.
This was the essence of the Kyoto Protocol and you know how well that worked. COP15 failed utterly because the world has wised up to the inconvenient truth about the game being played by the developing world to use the treaties and the political correctness of global climate change to enact the mother of all income redistribution regimes. But I digress. . .
The USW object to growing Chinese market share in the US for clean energy business seeing that as a threat to the growth of manufacturing here. The problem with that argument is that battle is already lost. China is driving down the cost of solar panels and wind turbines to grid parity prices and that is a wonderful thing. It means that soon utilities will be able to install this clean energy equipment without the necessity of subsidies from our own government.
The union believes in the promise of millions of clean energy jobs resulting from this shift to a clean energy policy subsidized into the mainstream by the Federal Government and ordered by the states in their RPS targets. These jobs are neither real nor promising. Roofing companies across America are adding solar panels to their inventory and using their existing work forces to install them in order to stay in business during the recession. American manufacturers like Dow are working overtime to design and build new roofing shingle systems with embedded thin film solar technologies to reduce the installation cost and thus compete head to head with older PV panel installation by offering a better product.
So what?
The trade complaint may be useful politics but it is wasted time and bad economics. Regaining America’s competitive advantage does indeed involve rebuilding our manufacturing prowess in strategic areas important to the nation. The unions can play a vital role in making that happen and in so doing probably win new members. But the prescription is not tariffs and trade restrictions it is reforming the tax structures, overhead and other costs which chip away at America’s ability to compete by building the newest technologies the world needs while commoditizing the old.
The real fight with China worth having is over access to Chinese markets on level playing field terms so that American manufacturers of new technologies can enter those markets and compete just as the Chinese do in American markets. The measure of that level playing field is a better balance of payments relationship that enables both sides to win through fair trade.
Volatility is a Wonderful Thing
Volatility is a wonderful thing. It not only brings profits to some willing to take risk, it punishes the foolish and teaches them lessons that make them stronger. Some days just aren’t that great in times of volatility, but we keep going because we believe that tomorrow will be better, that we will be wiser the next time, and it reminds us of the values and principles that ground us to reality. That is the natural optimist in each of us, but it also works for companies and countries too.
We are living through one of those funky periods where life seems out of control and surreal. Just when we think things are getting better something completely unexpected like a ‘flash crash’ of 1000 points happens on Wall Street. Just when we think our energy situation is improving because advanced technology has enabled domestic production to go up, BP blows it and mucks up the Gulf of Mexico. Just when the global markets show signs of growth Greece bleeds red ink and threatens to take the rest of the PIIGs or even the Euro with it.
Volatility teaches us lessons the hard way so we remember them.
What are you talking about, you ask?
- EURO RESPONSIBILITY. After months of finger pointing by European leaders that the world’s economic problems were caused by those nasty American bankers and shady credit default swaps and other instruments of financial torture, we learn that ancient Greece has been up to its ancient ways cooking its books to hide its budget deficit borrowing money like Wall Street speculators from European banks eager for the transaction fees. As Bogart said best “I’m shocked to hear that gambling is going on here!” But this time it was the GERMAN sheriff stepping in to break up the mayhem and restore order.
- GHOST OF CALIFORNIA’S CHRISTMAS FUTURE. For California, living near the edge is not something we learned from Greece but our fate could be similar to Athens when judgment day arrives. Those Greeks rioting because their pensions, salaries and spending irresponsibility was purchased with borrowed money look a lot like the California state employees, CALPERS, and the feckless State Legislature.
- ARIZONA, MEXICO, DRUGS AND CONTROL OF THE BORDER. Drug cartels fight for control of markets and supply routes leaving a trail of violence and lawlessness sweeping Mexico. Now that violence spills over the US border but the Federal Government does little to stop it. Arizona’s Governor is appointed Secretary of Homeland Security and its expectations that the Feds will help are raised then dashed when nothing happens. After years of writing letters to Republican Feds, Secretary Napolitano now ignores the same plaintive letters from her successor as Governor. The parties switched places but the results are the same—NOTHING! So Arizona ups the ante by adopting SB1070—a virtual mirror of Federal law except it prohibits racial profiling (something not prohibited in Federal law) in an effort to get the Feds to act. President Obama then accuses Arizona of racial profiling intentions. President Calderon correctly points out that drugs are a problem because of US drug demand. While he disses Arizona for SB1070 in a state visit Mexico’s own immigration law is much more onerous than the Arizona law. Mexico depends upon the remittances from Mexicans working in the US to family back home to help prop up its failing economy. There are immigration issues which must be addressed, but this is political malfeasance where both Democrats and Republicans seek to use a divisive issue to score political points. Shame on both of them!
- A POX ON BOTH PARTIES! Republicans hope for an election bloodletting as Americans recoil from the stunning overreach of Democrats misreading their mandate and misusing the recession and economic volatility to impose a program of deficits spending, vast intrusions into business and daily life, and a blitzkrieg of legislation with little transparency hoping to enact their agenda before midterm elections. But as voters it seems like we just kicked out the Republicans for the same reasons—they forgot who they work for! Now we are unsure that returning them to majorities will be much of an improvement.
- CHANGE WE DON’T BELIEVE IN ANYMORE. The president’s popularity was born of Americans joy at his election as a symbol to the world of our redemption from discrimination past and our belief in the principles of the founders that “all men are created equal” for the future. But the celebration has turned moody feeling deceived that this change is not really what we expected. Americans see little difference between the Democrats overreach in power today rewarding their friends and the Republicans overreach in power yesterday doing the same. Sometimes those friends are the same bankers, unions and lobbyists pouring money into the political accounts of politicians to gain favor. The Tea Party movement is a powerful and terrifying symbol of American dedication to its Constitutional values for our political class and due notice that the revenge of the voters will be exacted on both parties before it runs its course.
So why am I optimistic?
The genius of America has always been our ability to adapt to change and reinvent ourselves to take advantage of opportunities presented. The volatility and economic shock we have experienced combined with the political wake-up call we are experiencing now are the best evidence of that American renewal process at work today.
The midterm elections will punish incumbents in both parties. But we hope it will bring in new blood with a deeper commitment to the values we seek to advance and less partisanship. We have learned as voters that we get better results in Congress when both parties fear us. Giving big majorities to either party rarely works out well for us so we need to keep them evenly balanced and have good “adult supervision” from our president to set a wise course.
So far Obama is not winning any ‘Rookie of the Year’ awards but we still hope he can turn things around. But as insurance we are likely to take away his majority in at least one house of Congress this November. And if his performance does not improve we may not renew his contract in 2012.
Volatility separates those with a future from those with just a past.
The difference between America and Greece is while we both celebrate our past, America lives into its future. Our manifest destiny was reinvented from a quest for control of our continent to a quest to project our values of liberty, competitive markets and the rule of law into a world that craves each.
We won the cold war and now are completing the circle of the end of that long struggle. Had America as the sole superpower after the Cold War sought to preserve its hegemony we would not have seen the rise of China as a great economic power, the integration of Europe, the natural spread of democracy and thirst for freedom all celebrated as global progress. But progress also brings problems we now share with a more integrated world including the struggle to deal with Islamic terrorism, bad boy countries in the continental neighborhoods that must be policed, and the unintended consequences of global markets and trade. But that interdependence is also strength since the consequence of not working together is worse than the price of compromise.
The world still needs American leadership but what it wants is American resolve to live into its core values and act predictably to advance them. The world worries when America’s President apologizes for America’s values or advancing America’s self interest. In a choice between having the world love us and having them respect us take the latter every time.
When we live into our American values we set the global compass to true north and enable others to act in their self interest in ways that are either deliberately in concert with our own or—if they feel daring opposed to them. If America wimps out and lets such challenges pass we only invite more dangerous behaviors. But when we stand up for our values—and for our friends and allies—we don’t need to apologize for our behavior.
Volatility is a wonderful thing because it separates the brave from the bullies.
The best way to deal with bullies has always been to confront them face to face and expose them for what they are. Bravery is learned from experience and is born of self confidence and values that are stronger than the fears we face.
That is why I have faith in America’s future! But I am still going to enjoy kicking both Democrat and Republican butts this election. I am not a Libertarian like Rand Paul but he said it for all of us election night in Kentucky:
“We are coming to take back out country!”
Main Street Redefines Sustainability
As we approach midyear, 2010 is turning out to be both a good year and a bad year for the clean energy crowd. There is soul searching, consternation and inspiration taking place all at once around the world today as the global aspirations for the clean energy economy and a massive response to fears of climate change confront the realities of the great recession, climategate, looming deficits and dreaded inflation.
The world is emerging from the great recession taking stock of the impacts and dealing with the aftermath. In that context, the Pew Charitable Trusts released its report on the clean energy economy as a follow-up to the recent meeting of the G-20 leaders. You can find it here.[1]
Once you get past the political correctness, pandering and the “America is falling behind” spin because we did not pass cap and trade, sign off on COP15 or apologize enough for other sins, it isn’t a bad read.
I would highlight the following points from the report:
- Global Clean Energy Economy is Growing. Clean energy investments in G-20 nations grew 230% from 2005 to 2009. Despite a retreat of 6.6% during the worst of the recession, there are $162 billion in continued investment in 2009 and it is expected to grow in 2010 by $200 billion.
- Despite COP15 Cop-out, BRIC Countries Stepped Up Clean Energy Spending except for Russia (does that make it the BIC countries?) signaling durability for the clean energy economy.
- USA led the world in renewable energy capacity at 53.4 GW, but Pew calls this falling behind the faster pace set by China, Germany, Spain and India. It conveniently fails to mention that China is tired of being beaten up for building fossil plants and its massive pollution, sees a huge export market for PV panels and wind turbines, and was vacuuming up the feed in tariff subsidies from Spain and Germany until the latter pulled the plug and cratered their own clean energy market growth which proved unsustainable without the subsidies.
- China overtakes the US in installed renewable capacity in 2010 which Pew again spins as America falling behind. Instead America’s RPS policies, tax credits and renewable investment supports are bringing America to the brink of achieving the original 20% RPS goals in many states.
- Wind is a mainstream resource in every market and solar is near mainstream as prices fall and installed capacity grows. America benefits from China driving down the price of wind turbines and PV panels to grid parity levels even if it does cause accelerated consolidation in the clean energy segment. China and the entire world benefit if expanding clean energy production in China grows its market share of renewable energy capacity—a win-win not a win-lose.
My biggest gripe with the Pew report is its pandering to the G-20 by denigrating the US. Look at page 13, for example, in the section entitled Renewable Capacity Growing Worldwide in which Pew states that the US led the world in installed capacity for wind, solar, geothermal and biomass but risks falling behind in market share growth as other countries pick up the pace. It then refers again to Spain and Germany as if they are models to emulate with their heavy, unsustainable subsidies that imploded in a FiT of economic unreality.
Celebrate Competitive Clean Energy Markets
From my vantage point, the US should celebrate the growth in clean energy investment and renewable energy market share in other countries around other world as validation that the US investment and leadership in making a market for clean energy, nurturing that market but forcing it to be economic and sustainable is a better model than the socialized approach used in Germany and Spain, for example.
So what does this rant have to do with Main Street you ask?
Read the recent story in the Sacramento Bee about how vineyards in Napa Valley and farmers in the great Central Valley of California are adapting to this clean energy economy. Deprived of enough water to grow their crops by court decisions, environmental restrictions and a disinterested (except in election years) Federal Government some are turning to harvesting energy from their land to stay in business.
Mark Glover’s story in the Bee May 1st is a case in point.[2] The Sutter Basin Growers Cooperative, made up of 125 Northern California rice and bean growers recently dedicated a five acre solar farm of 11,922 PV modules near Sacramento. The 864kw plant has been in service since March and powers rice and bean dryers during the co-op’s peak harvest season and the peak power season too from September to November and net meters its energy back to the utility grid when not being used by the farmers. It is part of a strategy to reduce the cost of operations. That it also helps the environment is good news, but the more important goal is to help the farmers survive. The project is expected to cut the farms’ energy costs 80 percent, or $226,615 the first year.
The $4.5 million project cost was defrayed by state and federal solar tax incentives and other utility credits. Sutter Basin Coop financed the project through a lease from the Farm Credit System, with an option to purchase it outright after 10 years. This project is one of about a dozen agriculture-related solar projects installed in the Central Valley in recent years, according to Glover’s story.
America’s Main Street clean energy story is about the bottom line
Germany and Spain bought market share by heavy subsidies and feed in tariffs that were not sustainable. China used those subsidies to undermine the German and Spanish policy by vacuuming up the subsidies to buy cheaper wind turbines and PV panels instead of the work going to German and Spanish companies as the government expected.
Yes, we have some of that here too. Remember Senator Schumer of New York wailing that the Federal Stimulus money for renewables was being used to buy cheaper Chinese turbines and panels? Schumer’s union friends demanded a “buy American” policy quid pro quo but that violates virtually every trade deal we have ever signed. China is growing market share largely because its command and control economy enables it to make decisions quickly and execute them for competitive advantage. This is useful but not always lasting.
America’s sustainable defense in the global clean energy economy is competitiveness.
When deals make sense at the bottom line instead of the political contributions line they are sustainable. And guess what else the Pew report failed to mention?
America is the hottest market in the world AGAIN for clean energy investment. Why? Because our markets are open, our business is transparent, corruption is low, the contracts are safe and enforceable, and the deals work because they are sanity checked every day, every quarter, every year at the bottom line by investors.
Now that’s what I call sustainability!
[1] http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G-20%20Report.pdf
[2] http://www.sacbee.com/2010/05/01/2719234/5-acre-solar-project-to-boost.html
Unintended Consequences for Clean Energy Stimulus
“We are demanding the Obama administration suspend this program immediately and indefinitely. We are sending a letter to Secretary Geithner asking him to halt all payouts for this program until we in Congress can go back and fix this law.”
Letter signed by Senators Charles Schumer (D-NY), Bob Casey (D-PA), Sherrod Brown (D-OH) and Jon Tester (D-MT)
An embarrassing firestorm swept Capitol Hill after the results of a study by Investigative Reporting Workshop showed that 79% of the more than $2 billion in clean energy stimulus payments granted since September 2009 were actually paid to foreign firms supplying wind projects.[1] Remember this is the change in the law sought by the wind industry because the production tax credits and investment tax credits traditionally used to subsidize wind energy proved useless in the credit squeeze in recession.
Congress tried to mask the stimulus impacts by wrapping them in a ‘Buy America’ disguise for domestic consumption but howls of foreign protest forced the Obama Administration to soft pedal those constraints to avoid a rash of unfair trade practices complaints by global suppliers.
While this is hitting the fan now, it should have come as no surprise to those who understand the global supply chain for the wind industry. As demand for clean energy has grown it has attracted additional suppliers.
Nowhere has clean energy demand grown faster than China itself and so, surprise—surprise, the Chinese have ramped up production of wind turbines and used it both to satisfy domestic needs for wind energy as well as grow exports by scaling market share around the world driving down the cost of wind turbines. As prices for Chinese equipment put pressure on manufacturers in other countries we have seen a consolidation in the industry and the growing purchase of cheaper Chinese equipment by domestic installers eager to keep their deal flow going. The result is in country after country pursuing clean energy China has become a major supplier of wind turbines, solar PV panels, and is using its capital to invest in projects.[2]
While Senate Democrats are screaming bloody murder over US stimulus money going to foreign wind companies the very same thing is happening for solar photovoltaic projects as well—so expect a second wave of wailing on Capitol Hill.
FiT Flashback
The other reason this should be no surprise is the same thing happened in the EU where the aggressive use of feed-in-tariffs (FiT) in Spain and Germany were used to rapidly grow market share in hopes of creating jobs for local vendors and reducing the EU dependence on Russian gas. It worked for a while and Spain and Germany became world leading markets for solar energy. Then the recession hit and the cost of the FiT subsidies became an increasingly unbearable burden. Spain blinked first and cut the subsidies claiming, in part for political cover, that the lion’s share of the FiT subsidies were being suctioned up by Chinese suppliers of cheap PV panels.[3] Spanish installers caught with an oversupply of PV panels in a market the government was no longer willing to subsidize dumped their PV panels cratering prices on the global market for a while as supply swamped demand. Germany followed reducing its FiT subsidies. [4]
So what?
This food fight over beneficiaries of stimulus payments is coming at a very bad time for Congressional Democrats who look increasingly feckless so finding a common enemy to hammer is the oldest of Congressional traditions. Today it happens to be Senate Democrats going after the US Treasury and US DOE over the practical implications of American stimulus payments and subsidies being pumped into a global market for clean energy technology.
The answer, however, is not a “buy American” trade war since the US benefits greatly in the long run if China drives down the global price for wind turbines and solar PV panels to grid parity (sustainability in clean energy-speak) so they can be competitively installed by domestic dealers—without the need for a stimulus payment or a FiT.
I know this is not politically correct but it is good economics.
[1] http://investigativereportingworkshop.org/investigations/wind-energy-funds-going-overseas/story/renewable-energy-money-still-going-abroad/
[2] http://insightadvisor.wordpress.com/wp-admin/post.php?action=edit&post=723
[3] http://insightadvisor.wordpress.com/wp-admin/post.php?action=edit&post=526
[4] http://insightadvisor.wordpress.com/wp-admin/post.php?action=edit&post=682
