“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy


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Sep 22 2011

Dictators, Money and Freedom

C.M. Phippen

As the Arab Spring recently swept across many dictator-led countries and multitudes cheered for the reforms to soon be in place, I have to wonder how much of the reality is known to us and how much is no better than the cruel dictatorships of the past.

I recently engaged in a conversation with someone who has international commodities contacts, and he mentioned to me that he had received a request for a contract in Libya. He spoke with his supplier, who told him that only certain individuals are allowed to arrange contracts to bring this particular commodity into the country of Libya. If someone there was looking to buy, they were probably one of the individuals who had been buying for, I don’t know, 10, 20, 30 years. The contract they were requesting was worth between $250 million and $500 million, so even though Gadhafi is supposedly no longer in power, I had to wonder who the end buyer on this product could be and how closely he must have been connected to the old regime.

Like Russia and many of the countries that made up the Soviet Union, there is probably a good chance that those who will hold power in these newly “free” North African and Middle Eastern countries will be the same people who held the power previously with their dictator friends. If not, chances are it will be others just like them who are more interested in seeking control over the citizenry and the ability to drain them of their resources rather than fight for their freedoms.

Not long after the country of Czechoslovakia was freed through the “Velvet Revolution” of 1989, I was living there. Because the means of production had been in the hands of the “people” for the previous forty years (in other words, in the hands of the only rich people in the country – the Communist leadership, who certainly lived very differently from their working brothers), the decision was made to distribute ownership in industry in the form of vouchers. These vouchers could then be exchanged for stock in state-owned companies.

These vouchers were being handled by individuals who were used to having all necessities of life provided for them by the government and who, for the most part, knew nothing about investing and long-term financial planning. What they did know was that when the government fell they were on their own, and the reality of the situation for many was dire.

According to what I was told repeatedly, the events that then transpired make up the great tragedy. Those who had held power for the previous 40 years knew that most of these citizens who had lived behind the iron curtain had been shielded from witnessing economic realities and had limited resources (after all, the government gave you little more than what you needed to live, unless you were a friend to someone in power).

Those who had been high-ranking Communists and had access to massive government resources then went to these citizens and offered to buy their vouchers for far less than they were worth. Not knowing any better, many sold and were left with nearly nothing. Those who had held power in government for decades now morphed into “capitalists,” exercising their newly-found power through control of industries they had done nothing to build.

Let’s hope the changes taking place across the ocean this time are more than superficial, and result in freedom and prosperity for people who have been so long brutalized by savage dictators. Unfortunately though, with very few exceptions, history teaches us to expect little more this time around.

Sep 6 2011

Government Business v. Private Business

C.M. Phippen

We all heard the news last week that yet another company on the President’s tour of success has declared bankruptcy. Solyndra, a solar panel manufacturer and, according to President Obama “a testament to American ingenuity and dynamism,” has sought bankruptcy reorganization.

In December of 2010, with less than one month’s reserves on hand, Solyndra sought to refinance by asking the Energy Department to subordinate $385 million of the $535 million guaranteed by the government. This would allow them to obtain an additional $75 million from outside sources. The Energy Department agreed, putting taxpayers behind new investors if things were to go wrong.

T.J. Rodgers, founder of Cypress Semiconductor and former Chairman of Sunpower, said on The Kudlow Report that on the day of President Obama’s visit to Solyndra in 2010 a secretary asked him what it meant that the President was there, visiting their competitor. He says that his response was, “Set your watch. That company will be out of business in one year.”

According to Solyndra President and CEO, Brian Harrison, “Regulatory and policy uncertainties in recent months created significant near-term excess supply and price erosion.” Regulatory and policy uncertainties? Huh, hadn’t heard that anywhere before. Looks like it might be a deeper problem than that, though.

According to Rodgers, the thin-film technology used by Solyndra is “lousy,” low efficiency and the cost per watt is double other technologies. He noted that the typical Silicon Valley startup is full of great ideas in a “crappy” building; Solyndra, on the other hand, built a palace which, according to reports, cost $700 million. The company also made the mistake of building their manufacturing facility in California, the worst state in the nation to manufacture, Rodgers added.

Solyndra’s cost per job amounted to $1.5 million, and now those workers are without jobs at all. Money well spent, or simply another attempt to override private markets and supplant them with an uninformed bureaucratic vision of utopia?

Rodgers, on the other hand, knows a thing or two about the solar panel business. In 2001, he invested $750,000 in SunPower, a solar panel manufacturer which uses a technology much more efficient and easier to manufacture than most others. Within a matter a months, Cypress Semiconductor, the company he built, had invested $168 million in SunPower, including the purchase of additional plants and equipment (Solyndra’s new plant alone cost $700 million . . . in this economy?). That company, by the way, is still around and growing despite management and R&D shakeups over the past couple of years.

Reminds me of the comment made by the Social Security judge, David Daugherty, who pretty much hands out Social Security Disability like candy (nearly 100% approval rate v. an average of 60%), “Some of these judges act like it’s their own damn money we’re giving away.”