Centralized Control Ultimately Loses

The approved version of the bailout bill DOES extend the production tax credit (PTC) for renewable energy by one year. This is good news.

Under current tax law, the PTC will expire on Dec. 31, 2008. Any renewable energy system that is not installed and running by the end of this year will not benefit from the PTC. This is negative toward the economics of renewable operations. It’s bad for future investment in renewable energy systems.

The American Wind Energy Association recently published an estimate that after Dec. 31, 2008, investment in renewable systems could fall by as much as 50% without the PTC. This would play havoc with the energy investment cycle and all but shut many things down next year. Losing the PTC will strangle the vendor base, disrupt the work force and curtail future output. Great, right? Let’s shut down investment in renewable systems just as the nation is going into a recession.

So there is at least one good thing about the gigantic bailout bill that was just passed through Congress. At least it’s positive for us since it legislates another year of PTC to the renewable energy industry. The PTC provisions are very good for the geothermal companies.

I know that some readers (you know who you are) don’t like the idea of “government planning” for the economy. Some of you have written to me and criticized the PTC for renewable energy systems. You say that it is disruptive to the free market. OK, I understand your point.

But really congress just approved a $700 billion bailout of the banking and finance industries. And you surely know that the U.S. energy industry is highly regulated. From the moose pasture of Alaska to the power switch in your house to the gas pump down at the filling station, the energy cycle is regulated. There is no free market in energy or energy systems. It’s just that some markets that are more regulated than others.

My view is to be thankful that there’s something in the bailout bill — the PTC extension — that might benefit our geothermal investment portfolio.

Speaking of Bailouts

Speaking of bailouts, did you ever read the classic book The Little Prince(Le Petit Prince), published in 1943 by the great French writer and aviator Antoine de Saint Exupery? In this gem of a book, the king claims that he has the power to order the sun to rise and set. But this power can be exercised only at certain times of day. Cute, right? It’s a children’s story, after all.

Here’s my point. Saint Exupery’s tale illustrates that an obsession with control may be only the illusion of control. You can try all you want to “plan” things to happen. But you still may not be able to accomplish anything that was not going to occur in any case. And it’s the same thing with the bailout legislation.

That is, Congress has worked to pass a large-scale bailout of Wall Street and the bankers. The justification is that the credit system is seizing up. Banks don’t trust other banks, and interbank lending is grinding to a halt. People and institutions are having trouble accessing even their own funds on deposit — allegedly on deposit, in some cases. Short-term commercial paper is drying up. You might have trouble getting a car loan, despite your own stellar financial background.

So Congress is empowering the Treasury to do something. (Do what? We’ll cross that bridge when we get there.) The “control” faction within the nation wants to shape the national economy, if not alter the national destiny. But the control types also want to avoid the Darwinian consequences that would normally befall individuals, firms and governments that have collectively made a whole lot of bad decisions.

So will the bailout work? Will the bailout change what was going to occur in any event? Will the bailout make things better? Or will it make things worse? Hey, we’ll just have to wait and see.

You Can’t Fool Mother Nature

“Don’t fight the Fed,” goes the old saying. And who am I to argue with that? But what’s that other famous old bit of advice? “You can’t fool Mother Nature.”

The tide is going out on a large chunk of the U.S. economy. For several decades, the U.S. has been a nation that favored net consumption over net production and savings. The U.S. imported oil, autos, electronics, food… you name it. U.S. consumers bought it all up and went into debt to do so. The U.S. paid for its imports with dollars — lots of dollars. And foreign banks accumulated the dollars and returned them to us via purchasing U.S. bonds, stocks and other kinds of assets.

The U.S. economy continually leveraged itself. Prices for a lot of things went up. And people called it wealth creation. You know what I mean. On Main Street, houses went up in price as if by magic — OK, it was financial wizardry. But the price increases came with nary a new coat of paint or a single yard of fresh concrete. On Wall Street, people swapped financial instruments back and forth, and everyone booked a profit. How does that work again? It was fun while it lasted. But it’s coming to an end now.

Things are starting to change, and they will probably change in ways that few of us can truly anticipate. So what do you do with your money, especially your investment funds? Take it all out of the market? Put your money in the bank? Stuff the mattress with cash? Buy gold? Move offshore and wait it out? These are just some of the ideas that I’ve seen in your e-mail to me.

I sure don’t blame you for being totally defensive. But you don’t want to lose sight of the larger picture, either. We’re at the edge of a deep ditch. It’s going to be tough getting through the ditch. But over time, we’ll get to the other side and climb out. And then you are going to have to deal with the previous issues — overshadowed by recent events — of depleting energy and mineral resources. We’ll be back to a world of energy and scarcity. In fact, we will never leave that world. We’ll just be distracted along the way.

That’s all for now.

Until we meet again…
Byron W. King
October 15, 2008

The Daily Reckoning