China Surpasses Japan — No Big Deal

By Rickety | Published: August 16, 2010

China has overtaken Japan as the world’s second largest economy. China’s over $5 trillion economy is now second only to the United States. But considering that the U.S. economy is over $14 trillion it will be a long time before China takes the top GDP spot.

So all the excitement today about China’s economy is just a lot of fuss about nothing. China will have to triple its GDP to overtake the U.S.

And in the meantime the U.S. will not be standing still.

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Euro Falls — Market Wins

By Rickety | Published: July 25, 2010

My uncle likes to say, “The market always wins.” For believers in big government who may not understand this neat little phrase I will explain with an untidy big phrase:

No matter how much government distorts the market with tax credits, subsidies, bailouts, etc., the market will eventually bring the financial system back to equilibrium. Or until the market collapses under a crushing bureaucratic weight.

Case in point: Apparently the sham called a stress test of European banks has done nothing but stress the Euro. It looks like the market continues to win.

And that is just as well. The alternative is for the market to totally collapse.

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American Savings Rate Increases

By Rickety | Published: July 25, 2010

For decades Americans saved ever smaller amounts of their disposable incomes. In 1980 the savings rate was 10 percent but by 2005 had fallen to minus 0.5 percent.

However, during the recession the rate rose to 1.7 percent in 2007, to 2.7 percent in 2008, and 4.2 percent in 2009. At one point in 2009 the rate hit 5.4 percent.

Some see this as bad for an economy predominantly dependent on consumer spending. But more savings translates into more capital for businesses to expand. Greater savings also provides a cushion for future downturns thus avoiding debt defaults.

More savings will eventually translate into a more robust and sustainable economy and less dependence on foreign investment in the U.S.

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Italy Seeks to Scrap Solar Subsidies

By Rickety | Published: June 16, 2010

Last month I wrote about Spanish solar subsidies suddenly shrinking. Now it is Italy’s turn to sever solar subsidies.

Italian utilities are awarded green certificates for megawatt-hours of power generated from renewable energy. If demand isn’t sufficient, the government buys surplus certificates at a guaranteed price. It’s that guarantee the Italian government wants to scrap. It is claimed that the government proposal will threaten $6.8 billion of loans made to wind and solar companies.

As I have written before, the fundamental problem is that without subsidies and mandates, the solar power industry is not economically viable. Unless support is continued almost indefinitely, solar power cannot sustain itself with current technologies.

Ironically it is the established fossil fuel economy that makes possible alternative energy programs.

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Show Me The Catastrophe

By Rickety | Published: June 7, 2010

Newsweek magazine this week, in writing about the Gulf oil spill, had this to say about oil companies:

And the list above doesn’t even include the fact that what the oil companies sell is one of the major contributors to catastrophic climate change.

There is a very specific error with this sentence. Can you see what it is?

If you said it is “climate change” being substituted for “global warming” you would have a point. If you take the stance that CO2 causes global warming then why alter the name to climate change? CO2 doesn’t cause global cooling so what else is left if the climate is not warming or cooling? So unless you want to hide something, say what you mean and call it global warming.

But that is not the error I speak of. It is the use of one word — catastrophic. There has been no catastrophic global warming. Where is the catastrophe? There is none. But the Newsweek sentence states the fact that oil is the major contributor to this fictional catastrophe.

No wonder The Washington Post wants to sell Newsweek magazine.

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Portugal Raises Taxes to Mollify Market

By Rickety | Published: May 30, 2010

After Britain, Italy, and Spain cut spending, Portugal would not be left out. Portugal’s legislature is planning a June 2nd vote to:

  • Raise income taxes up to 1.5%
  • Raise the Value Added Tax by 1% across all categories
  • Tax companies with more than 2 million euro in profits an extra 2.5%
  • Cut top government employees pay by 5%

This package is skewed to raising taxes rather than spending cuts. It is designed to mollify the market. When the United States finally joins the party we will see both spending cuts and tax increases. But don’t expect any real action soon. It will take an extraordinary emergency to get Washington to act.

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The Market Forces Spanish Cuts

By Rickety | Published: May 27, 2010

In my last two posts I wrote about Britain and Italy cutting spending for fears that they may turn into another Greece. Today Spain’s parliament voted to cut 15 billion euros by:

  • Increasing the retirement age to 67
  • Cutting state payments to parents of newborns
  • Cutting civil servants salaries
  • Freezing state pensions

The point to remember in all of this is that it is the market that is forcing these cuts. The same market forces will soon move in on the United States and give the government no choice but to cut spending. It would be better to tackle these reductions now while there are more choices.

Why wait to be forced to make tough choices? Why not exercise some initiate while there is some room to maneuver?

Because initiative is in as short supply as federal budgetary discipline.

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The Market Always Wins

By Rickety | Published: May 25, 2010

Italy will introduce cuts of 24 billion euros for 2011-2012. This is aimed to cut the deficit from 5.3 percent of gross domestic product (GDP) to 2.7 percent in 2012. The measures will bring Italy into line with an European Union limit of three percent.

Civil servants will have their salaries frozen for three years, ministers and other officials face wage cuts, and the tax on stock options and private sector executives’ bonuses will increase.

Last year Italy’s debt was 116 percent of GDP, even higher than the United States 86%. Italy’s intent is to reassure investors that it is committed to keeping its finances in order. It is hopeful that the cuts will shore up confidence amid the Greek debt crisis.

Soon the U.S. will be forced by the market to make even larger cuts to shore up confidence.

Eventually the market always wins.

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Britain Begins Spending Cuts

By Rickety | Published: May 24, 2010

With a new government the United Kingdom has moved quickly to cut their budget deficit. £6 billion in spending cuts is expected to be announced next week to cut into their £163 billion deficit, which is 12.6% of GDP. The cuts are modest, bringing the deficit down by only 0.5% of GDP. However, it is expected that more cuts will be coming in the future.

They will be needed because Britain’s debt-to-GDP ratio will hit 90% next year about the same as for the United States. So when is the U.S. going to cut its budget deficit? Not any time soon with the current congress.

What can be done? No much, except to remind Congress, via the voting booth, who is really in charge.

See you in November.

Posted in Deficit, Election | Leave a comment

Uncertainties over Solar Subsidies

By Rickety | Published: May 20, 2010

Earlier this month I wrote about Spain drastically cutting solar subsidies. Now, because of the Greek economic crisis, Germany has reduced new solar plant subsidies by 16 percent. In June, Italy will likely cut support for new plants by 25 percent. Because of the uncertainties over solar subsidies, it is harder for companies to secure funding for alternative energy projects.

There are very few wind or solar installations that can be profitable without subsidies. Projects that rely on government for funding welfare can expect the lights to go out on the money when budgets are strained.

In most cases it is best to allow alternative energy to proceed on merit. A simple concept but so hard for politicians to grasp.

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