Thursday, July 14, 2011
Hoo Hah! An Italian Lunch!
Oh, yeah, and Bernanke says "I didn't mean that!" (Added) This immediately put pressure on oil, although all the theorists are still crawling around claiming that bond purchases have nothing to do with oil prices. See, they raise stock prices, because those are special assets, but commodity prices are a different thing altogether!
Among the specials on today's banking menu are commercial mortgage mystery meat patty w/ covered bond gravy, but I recommend the Texas/Italian fusion cuisine offering of Pasta Paul-Tremontino with a side salad of bruised munis (you can't have this move on Treasuries without further pressure on the so-so munis).
On a completely different note:
I have been following the green energy/no nukes progression in Germany. The current situation is that they have to build new gas and coal plants to replace the loss of energy supply from the nuclear plants. But they can't build them quickly enough to avoid blackouts, and they can't afford to build them. So if you go to that link, they are tapping climate funds to build new coal plants. Germany doesn't have the transmission capacity to route the power around to make up for the shut nuclear plants, so it is using portions of grids in neighboring countries. Everybody is suing everyone. The Greens are complaining about power prices, because they just don't grasp the fact that the production cost of wind has nothing to do with the cost of incorporating a very highly variable power source into the grid. The Greens are also very unhappy about the new coal plants. The neighboring countries are very unhappy because when winter hits, Germany's transmission problems may cause them problems - their lines will be flooded and they might face blackouts themselves. The auto companies in the south are very worried because they may be forced to shut down this winter to conserve power.
Oh, yeah, and just look at where Germany's household electricity rates are. And they have to go higher! The entire boondoggle in Germany would make an Austrian economist weep buckets. The way for a German household to escape the high electricity costs is to install solar panels. They do not produce much power in Germany due to low insolation, nor do they match well with overall yearly power needs (although they are pretty decent with daily peak in summer), but they do make money for the household because the utility is forced to buy the power at 54 cents a kwh. Now, if you have to buy at more than twice the rate at which you sell, something's gotta give, so the utilities distribute that subsidy in the form of charges to other households. That boosts the cost of their energy, and encourages them to do the same thing. The feed-in tariff for new solar projects was reduced this year, but these costs are guaranteed for decades by German law, so Green power is damned expensive power for German consumers.
Anyway, I don't have time to cover this topic thoroughly, but it is one of the reasons why German retail sales have been so poor. This will cost the German economy for decades. It's sad, because Germany was just coming out of a very long period of suppressed economic performance due in large part to reunification costs. The entire situation is highly regressive. Energy mistakes are one of the things that destroy economies. The German economy is particularly vulnerable to high energy costs because it is reliant on heavy manufacturing.
However Germany's idiocy is quite good for the Poles, the Czechs, and possibly the Hungarians. It is likely that more heavy manufacturing will be moved from the country to the eastern bloc.
It's because Austrian economists have big hearts and care so much! :-)
"However Germany's idiocy is quite good for the Poles, the Czechs, and possibly the Hungarians."
Well, it may be quite good for *some* of them. For others it may mean that their cost of goods goes up because instead of buying what used to be inexpensive German made goods they now have to buy slightly more expensive Polish goods. For the system as a whole (all of us here on planet Earth), it is generally a bad thing whenever anyone anywhere uses resources inefficiently. It's easy to make out winners and losers where those wins/losses are concentrated (e.g., jobs directly gained/lost), but the more dispersed wins and losses (e.g., price changes, indirect changes in wages, employment and resource allocation, etc.) tend to be ignored (or only selectively considered) by most people such that they reach an inaccurate evaluation of the total outcome, often with an unsound tendency to see such situations as zero-sum games. The pain caused by the German moves may hit hardest in Germany, but to some degree it will negatively impact people across the globe.
(But speaking of Polish goods... Go Poles! I buy all of my computer games from Poland -- gog.com -- because they're all DRM free so my computer doesn't get root-kitted or otherwise hosed up, and I don't have to put a CD in to play, and I can make backups, and I don't have games refusing to run because of other installed programs, and I don't have to go online to register or play, etc., etc. DRM -- one more thing driving jobs out of the USA.)
We can all stand around and cry about what we conceive to be our rights to nice lifestyle, but Mr. Market will just fart in our general direction and move on.
It is not that markets are perfect. If you let them work absent any legal constraints, they will produce highly efficient destruction. Lord and History knows that credit markets are inherently, disastrously unstable.
But legislation to reduce damage to other entities' property values (for example, by pollution) conserves a future value, and just futzing energy markets does not. Therefore when you take a longer time view, China is currently screwing itself with some of its manufacturing processes, and they will bear the costs in the future.
I know, I know, CO2 IPCC theory says that we are all gonna die because of rising atmospheric CO2 levels, but since the direct atmospheric effect is concentrated at the lower levels, and since higher levels of CO2 produce much less effect, my take on the evidence is that Mr. Reality trumps the UN every single time. On the evidence as it now stands, no changes we are currently likely to make regarding CO2 emissions will alter the earth's climate in any detectable way (aside from any alteration from the earlier rises), so it seems to me that Germany is beating its own head with a mallet purely for the fun of it.
It beats Triumph of the Will, but I've got to think that their next hobby is going to be more fun. I am really curious about when they'll wake up to what they are doing.
I agree that creative destruction is real. However, I disagree with this part:
"If the production moves, the inefficiency created will tend to be erased from the global economy."
The global economy will *try* to erase it -- it will tend *towards* that "goal". More often than not though, it will not achieve 100% erasure.
Say your starting state is energy costs 1.00 in Germany and 1.04 in Poland. And say you have some shop in Germany whose costs are 50% energy. Now Germany pulls a bonehead move and drives their energy prices up to 1.30. Yes, creative destruction will enter into the picture, that shop may go out of business and get replaced with a similar shop in Poland, or maybe the shop owner actually moves there himself. That erases *most* of the inefficiency created, but *NOT* all. Say the shop owner moves. In this example the added inefficiency was a 0.3*50% = 0.15 increase in his cost of doing business. He can move to Poland and get rid of (0.3-0.04)*50% = .13 of that increase, but he ends up stuck with the other .02. So his new situation is a permanent 2% drag that he did not have before Germany made its bonehead move. Furthermore, there are costs associated with making the move that will need to be amortized in. And now anyone anywhere in the world that buys this shop's goods is likely negatively impacted as the shop owner passes on some or all of the cost increases.
You could ask "well, what about the opposite case, where the starting energy costs were cheaper in Poland than Germany -- wouldn't the creative destruction result in a net gain in that case?". But you have to take into account that the tendency in that case would be for the shop to have *already* been located in Poland rather than Germany. Or another way of putting it -- businesses had some reason, some perceived advantage, to being in Germany rather than in Poland before the change, or they would have set up in Poland in the first place. Getting "forced" to move (due to changing energy costs) means they lose whatever that perceived advantage was. If that perceived advantage was in fact an accurate assessment of the total costs of doing business, then total costs just went up even if the energy component went down.
"For the system as a whole (all of us here on planet Earth), it is generally a bad thing whenever anyone anywhere uses resources inefficiently."
I was talking efficient use of resources in general (as in proper allocation of resources, as opposed to misallocation of resources). Government intervention in markets (such as Germany subsidizing the solar industry) causes a misallocation of resources, and therefore results in *less* efficient use of resources.
You must have thought I was talking about florescent bulbs or something. (I've already purchased a life-time supply of halogens so I don't have to deal with crappy lighting after the dumb-!@# light-bulb ban from DC kicks in. And even that act of "creative destruction" isn't 100% because it's costing me space to warehouse all these bulbs, and I will miss out on any future efficiencies that might have been made in the incandescent realm, and I may not have gotten the amount of inventory just right because I don't know how long either I or any given bulb is going to last.)
I was just thinking to myself: I wonder what new advances in incandescent lighting could lead to higher energy efficiency. Well, the inefficiency is due to the transmission of non-visible light, mostly in the infra-red area. Maybe you could use a mirror that reflects infra-red but passes visible light so you trap the heat, effectively 'recycling' that energy into keeping the bulb element hot and doing its black-body-radiation thing while not needing so much electricity to maintain temperature.
With thoughts of setting up such a system myself, I then google "reflect infrared" and find this wikipedia article on mirrors which talks about exactly that kind of mirror, called a "hot mirror". I then think maybe someone is already working on this so I google: "efficient halogen "hot mirror"" which leads me straight to here:
"The key to energy-efficient halogen is a hot mirror coating that allows wasted heat produced by the filament of a halogen lamp to be converted to white light, thus reducing the amount of electricity required to produce the desired light output."
The comment is linked to a paper which goes into more detail. Figure 1 is interesting because it shows how the bulb element's output energy is distributed across the spectrum, breaking it down into UV, visible, and infra-red portions. (Figure 4 is hilarious just because it's a "before and after" type picture and the "after" looks like someone's kid just modified a copy of the "before" with a crayon.)
Unfortunately, by using a ban rather than a tax congress has already scared me (and a lot of other people) into stocking up on current halogens -- and I ain't just throwing them out. So even if they manage to bring these new halogens to the market and deliver on all their promises, I'll still be burning power like it's 2011.
High-efficiency lighting is best when its increased energy density lets you do something you couldn't already do. LED flashlights have pretty well taken over the market, for example, even though they're much more expensive than incandescent. The light bulb ban is misguided as a matter of economics, politics, and technology too.
You can say the same thing about a lot of "green" technology. It's interesting stuff, but it's been pushed too far, too fast. I'm worried that any really good technology will get forced on the public before it's ready.
Specifically, home owners that install solar panels receive a subsidy from the other users of electricity. If EVERYONE installed solar panels, there'd be NO ONE to pay the subsidy.
It is analogous to the toll-free car pool lanes on the Golden Gate Bridge. If everyone car pooled, they wouldn't have revenue to paint the bridge and it would fall down from rust (eventually.)
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