Post Free Market Economy

The U.S. Economy: In Search of Solutions

November 12, 2015

Trickle Down Economics Explained
Source: The Randy Report (April 3, 2015) www.randyreport.blogspot.com

In a previous article, “Underemployment Sabotages Millions of Americans,” we briefly looked at what is one of the biggest problems in the U.S. economy: underemployment and unemployment. We looked at some of the causes, including: automation, outsourcing, and greed. In this article, we hope to look at possible solutions.

The System is Broken

Right now, the foundation of the U.S. economy is built on the trickle down economic theory: that providing economic advantages to the upper-level incomes will benefit society as a whole through wealth investment that leads to jobs creation for lower income people. Unfortunately, the trickle down theory does not work.

Not only does it not work, it’s a complete joke. The trickle down theory began as a quip by humorist Will Rogers who, during the Great Depression, said,“… money was all appropriated for the top in hopes that it would trickle down to the needy.” Hopes, here being the operative word. More recently, trickle down economics has become synonymous for Reaganomics.

According to a January 2015 article on CNN Money, “Wealth does not trickle down from the rich to the poor. Period.” For a short article on why trickle down economics doesn’t work, written from the viewpoint of a wealthy venture capitalist, click here.

Some of the reasons the trickle down theory doesn’t work are obvious:

The minimum wage is unlivable, forcing low paid workers to live below the poverty level (underemployment), or hold multiple jobs to make ends meet.
Tax breaks often put the burden of taxes disproportionately on the middle class.
Greed is an unfortunate consequence of being human. And greed needs to be checked, much as dishonesty (fraud, perjury) and anger (violence) are checked through laws.

Creating Jobs is Expensive

Even if greed were eliminated, however, the system still wouldn’t work. Often, jobs creation is prohibitively expensive. The amount of capital required to create a self-sustaining job, both from experience in Europe and the U.S., is $1 million. According to this formula, creating 50 million jobs would require over $50 trillion. Of course, this is well beyond the capabilities of a U.S. $15 trillion GDP (gross domestic product), or beyond the liquidity of the 0.1% wealthy.

Therefore, even if the wealthy wanted to trickle down their wealth, the result still would not eradicate the underemployment/unemployment problem.

A Solution

In order to create a meaningful solution, we must:

Reduce the cost of creating jobs; and
Reorganize the access to the distribution of jobs.

One way to reduce the cost of job creation is to organize communities, where the remuneration for work will be money, plus participation in equity and in communal intangible rewards. This is the foundation of self-sustaining economic communities (SSECs).

The reallocation of the jobs is a much more difficult task. First, the service industry will have to be reallocated to the small local communities (global villages). In order to this, we have to want to care for each other.

Currently, it costs, on average, $560 per day to keep a family member with Alzheimer disease in an institution. In SSECs, family members can take better and more compassionate care of their loved ones at a much lower cost. Global villages will also reduce the cost of Medicare.

This bears emphasis: We are not talking about the redistribution of wealth. We are not suggesting a Robin Hood solution. What we are hoping for is reallocation of jobs with equal access to all. But, for this to be politically feasible, our basic attitudes must change. Greed, as the basic operating force, must be regulated.

We may have to forego some efficiency and profit to create jobs. For example, if the use of robots on the assembly line leads to 5% efficiency increase and cost reduction for the shareholders, but it comes at the cost laying off equivalent valued workers, we will have to choose to keep the workers. Another example is supermarkets. Self-checkout doesn’t benefit customers. And it certainly doesn’t benefit the workers who lose their jobs. It only benefits the corporations’ bottom lines. Eliminating such automation is taking a step backward in one way, but a stride forward in another.

As our consumption is at the cost of our common resources, we have to examine the nature of our consumption. There are some fundamental needs—food, shelter, and energy. Than there may be some wants and desires, like trading in the iPhone 5 for an iPhone 6, buying a new car every three years instead of every six years. Having these types of priorities could actually benefit the economy if this type of consumption leads to more jobs. In other words, we, as a society, need to shift from me, me, me to we, we, we.

Unemployment and underemployment lead to increased need for economic support from the government (food stamps, jobs training programs, etc.) and social services. Unemployment costs taxpayers. Poverty kicks off a whole set of non-economic consequences.

Therefore, in order for our country to thrive, we must find a solution for unemployment and underemployment.

I don’t have all the answers. What I’m hoping is this website will engage you in meaningful discussion and, together, we can help create solutions.

Communes: In Search of Utopia

October 25, 2015

In his 1933 Utopian novel Lost Horizon, author James Hilton created a mystical, harmonious community, Shangri-La, in which all citizens were vital contributors to the welfare of each other. The highest common good for all prevailed, everyone’s talents were maximized, and everyone benefited from the community. The novel, set in a fictional, isolated and sheltered valley among the high Himalayas, was reportedly inspired by the travels of Russian artist Nicholas Roerich, who was one of the first westerners to explore Central Asia. And it’s said that Roerich, who traveled through India, Tibet, Nepal, Mongolia, and surrounding countries, was in search of Utopia.

From the beginning of recorded time, Utopia has been an idea promoted through storytelling and philosophy:

Genesis—the first book of the Bible (5^th/6^th Century BC)
Plato’s Republic (380 BC)
Thomas Moore’s Utopia (16^th Century AD)
Edward Bellamy’s Looking Backward (19^th Century AD)
G. Wells’ A Modern Utopia (1905)
Eric Frank Russell’s The Great Explosion (1963)

Ever since humans were metaphorically tossed from the Garden of Eden, we’ve longed to create paradise on earth. And while paradisiacal ideals differ from person to person and culture to culture, the one thing theme that remains constant is this: All members of the community are equally afforded the opportunity to thrive mentally, physically, intellectually, and economically.

Caroline Myss, in her book The Sacred Contract of America: Fulfilling the Vision of Our Mystic Founders, offers the theory that the U.S. was founded specifically with the intention of becoming a Utopian community. If that’s true, obviously the experiment is failing.

However, smaller scale Utopian societies—communes—have been successful in other parts of the world. This article takes a quick look at the history of communes with the view of taking what has worked and moving it forward to create successful self-sustaining economic communities (SSECs) today.

Communes

The Massachusetts Bay Colony—Established by the Puritans in the 17^th century, this might have been the first attempt to establish Utopia in the Americas.
Kibbutz—Perhaps the best-known communes are the kibbutzim of Israel. Kibbutz is Hebrew for “communal settlement.” The prevailing philosophy of the kibbutz is “from each according to his ability, to each according to his need.” The first kibbutz was formed in 1908, 40 years before the establishment of the State of Israel. Today, 270 kibbutzim, with memberships ranging from 40 to more than 1,000, are scattered across Israel.
Mondragon Corporation—A federation of worker cooperatives (meaning, worker owned companies) based in the Basque region of Span, Mondragon was founded in 1956. It is the 10^th largest company in Spain. For more information: http://www.mondragon-corporation.com/eng/.
Eleanor Roosevelt’s commune initiative—The former First Lady attempted to create a government-supported, back-to-the-earth commune in West Virginia. While unsuccessful in creating the commune, Eleanor Roosevelt’s socialist initiatives sought to create economic equality for racial minorities and women.

Despite the failure of the commune system of the 1960s and 70s in the U.S., versions of communes not only still exist, but actually thrive today. One of the most successful communes, San Francisco’s Rainbow Grocery, a worker-owned co-op that has grown steadily over the past 40 years despite Whole Foods opening a store in every neighborhood, proves that we as a society can come together for the common good. For more information: http://www.sfchronicle.com/food/article/S-F-s-Rainbow-Grocery-a-counterculture-6433041.php.

In future articles, we’ll look at a key missing component in previous commune systems—profit—and how profitizing communes can help create the economic equality needed to bring true harmony and happiness to all.

Underemployment Sabotages Millions of Americans

October 22, 2015

Source: www.nationofchange.org

Gloria, who is an assistant manager at Rite Aid in Scranton, PA, earns just above minimum wage. Her 40-hour workweek nets her $80—give or take—above what she pays for childcare. The logical questions are: Is it even worth working to earn a mere $80 a week? Why not stay home with the kids? The answer is one millions of Americans can understand: Because $80 is $80, and Gloria needs that money.

The most important measure of any economic system is how well it can provide jobs for all its citizens. A successful economic system is able to provide an environment of equal opportunity that supports workers in developing their talents, skills, and experience.

Right now, the biggest problem with the U.S. economy is not unemployment. The biggest problem is underemployment.

Jobs growth in the U.S. is an illusion. Numbers can be spun. For example, if we read the most recent weekly employment report we find that that the unemployment rate is 5.1%. That number sounds pretty good—a distinct improvement over the double-digit unemployment rates of a few years ago. Unfortunately, that number does not tell us the true story.

The weekly unemployment report is determined according to the following criteria. Take the total population of the U.S., which, in the summer of 2015, was 321 million. According to the definition of labor force, 62% of the population, or 201 million people, are in the labor force. This number includes both working and unemployed. As we’ve said, according to data provided by the government, 5.1%, or 10 million people, are unemployed. 6.3%, or 13 million people, are employed part-time. And an additional 6.4%, or 13 million people, are currently looking for a job.

Therefore, if we add the numbers of unemployed, part-time employed, and job seekers, we find that unemployment in the U.S. is nearly 18%.

The millions of Americans who, like Gloria, are working full-time and yet still underemployed because they’ve taken jobs below their skill and education levels for pay that cannot sustain them economically, are not even counted as part of the statistics.

Since the turn of this century, 10 million manufacturing jobs that entailed skilled labor have been lost. Most of these workers are now employed in service jobs, earning half of what they earned 15 years ago.

When broadening the definition of unemployment to include the underemployed and the employed living below the poverty level, we find that nearly 1/3 of the U.S. population is affected by unemployment. 50 million Americans are either unemployed or underemployed.

What Happened to American Jobs? They went overseas, yes, but not necessarily for the reasons you think. Automation is a big culprit, but do we really want to halt technological progress? Let’s take a closer look at the problem.

AUTOMATION

Take, for example, the auto industry. 10 years ago it employed close to 10 million middle class workers who earned good wages. Today, the industry is making the same number of cars with about 1 million workers, shedding 90% of the pre-automation work force. Not only that, but the quality of cars has improved. We don’t need to replace cars as often. Inexpensive cars, today, can easily rack up 200,000 miles before incurring significant repair expenses.

The same story is repeating itself in other industries. If we look at cell phones, human hands could not even assemble them. What is the answer to this problem? Certainly we cannot abandon automation.

OUTSOURCING

Outsourcing gets a bad rap, deservedly. American corporations have exported many good jobs to places with low wages. But not always purely to save a buck.

For example, let’s look at an industry that I am very familiar with, making solar panels. The main reason that the Chinese are making 90% of crystalline PV modules, c-Si, is not the low labor costs, but, rather, the availability of capital. Wall Street is not willing to put up the necessary capital needed to kick start many progressive industries. Chinese investors, on the other hand, are willing to provide capital. Thus, they own the c-Si PV module manufacturing industry.

FORMATION OF CAPITAL, WEALTH INEQUALITY

As we have discussed above, the reason the SPV module manufacturing has moved to China is because the government insured the availability of capital. It is indeed odd that the land of capitalism loses out to a government supported capital formation in a socialist (Marxist inspired) China.

Why do our capitalists, who now have too much cash on hand, allow this to happen? The short answer: Because trickle down economics does not work.

With trickle down economics, the theory is that the rich who keep getting richer will trickle down capital that will lead to jobs creation and more abundance for the masses. By now it is obvious to all impartial observers that this is not happening.

Nobel-prize winning economist Joseph Stieglitz clearly demonstrates why economic inequality is leading to job losses. Explained in a simple way, the upper 0.01% find it safer to make money with financial manipulations, where they can better control the outcome, than to invest in job-creating industries, where the success depends more on people and forces out of their control.

The bottom line bears repeating: Trickle down economics does NOT work. Economic inequality continues to spiral out of control.

LACK OF COMPASSION, MORAL ISSUES

Finally the least accessible reasons for the lack of job formation have to do with our collective human nature. The whole economy is focused on productivity and efficiency because those lead to maximum profits. The latest socio-economic traditions, that greed is good and the primary goal is to maximize profit, totally ignores the loss of jobs and the compassion toward the people without jobs.

WHAT IS THE SOLUTION? IS THERE A SOLUTION?

The problem seems hopeless. Millions of kids graduate from college each year with tens of thousands of dollars in student loan debt, unable to find jobs in their fields of study. Industries—newspapers, for example—continue edging towards extinction.

There is a solution, but it’s not easy and it’s not quick. And it requires critical thinking, combined with action. It requires carving out one’s own destiny. We’ll look at the Post Free Market solution—self-sustaining economic communities—in depth in the next post.

The 11th Commandment: Compassionate Humanity

August 31, 2015

If Your Primary Goal In Life Is To Be Part of the Common Good, You’ve Come To The Right Place

The oldest written version of the 10 Commandments are the set of laws of Ur-Nammu, 21^st century BC, that the first Sumerian city dwellers established (about 5000 BC, even much earlier than the written code) so that man can live together in harmony.

In writings during the period of Ur-Nammu, the word “equity” is central to the code of living together. We transpose this to the meaning of “common good.”

For all to thrive, the code of the American way of life must be modified: “Life, Liberty, and the Compassionate Pursuit of Happiness.”

Post Free Market (PFM) World

Our present free-market political/economic system prevents the majority of earth’s population from enjoying the bounty of our world. The system is certainly not optimized for the common good. On the other hand, there is much good in what we have and in the tradition of history. We do not want to watch our world to be swept away by violence or revolution. We wish to transition to a PFM world without violence and with evolution.

Failings of the Free Market
How to Keep What Works & Improve What Does Not Without Violence

Professional economists did not formulate the present analysis. These are the observations of a retired Physicist, who was born a peasant in Hungary before the Second World War. With God’s help I survived wars and communism and enjoyed the golden age of free-market capitalism in the US in the 1960s. I have also witnessed the decline of the free market economy to the degree where life in the US has become difficult for an ever-increasing portion of the population. We ask you, our friends, with your inquiring minds to comment on the ideas advanced here.

The opportunity to work in equity and generate a livelihood for us and for our loved ones does not exist any more. Joblessness is epidemic, and many of us who are working are underemployed, under utilizing our educations, intelligence, and experience.
The distribution of wealth is not fair, and this distribution prevents job creation and is counterproductive.
Making money with money is interchangeable at will with creating value by labor leading to a collapse of the standard of living for majority of Americans.
Measuring the value creation of the economy by measuring the magnitude of consumption not only destroys the value of labor and corrupts our moral fiber, but also destroys our environment and the planet in the process.

Is There a Better Way?

God created the genius of man: Man has the ability to evolve and overcome. The technology for a better world already exists. Just as a changing climate caused by overuse of fossil fuels has taken us to the verge of disaster, we created the solution: Solar PV.

This website can not offer a simple solution, but we would like to start a dialogue focusing on issues that may lead to a post free market—PFM—world where most of us will feel at home, adding the 11^th commandment: compassionate living for all.

Here are our starting points for beginning this evolution:

We form small Self-Sustaining Economic Communities (SSECs).
These communities can start like a franchise model, to be reproduced across the country.
Within the community all will own part of the wealth, will work for the common good, and will be employed to the level of their education, experience, and skill set.
The community will take care of those incapable of caring for themselves.
All economic activity will be created to be profit making, competitive, and self-sustaining.
The SSECs will communicate seamlessly with each other and with the necessary establishments.
Within the SSECs, productivity will be superseded by the desire to create the maximum number of jobs. All this with restrains, recognizing that there are products and jobs where automation does a better job, or is able to perform jobs humans cannot.
SSECs involve a hybrid economy, where the collection of the SSEC franchises will live in harmony with the automation and established big business.

This hybrid economy will reflect itself by the exercise of democratic tools also in a hybrid political order, where the SSECs in proportion to their increasing size can be partners of the government of increasing importance. Some of the expensive functions, such as caring for the sick, the old, and the unemployed can be outsourced and can be done with compassion at a lower cost in the SSEC communities.

If you think this is UTOPIA, you are correct. Let’s start a dialogue to make it reality.

The Day The Central Bank Powers Ended

August 17, 2015

Summary

Central banks in the developed world have just about thrown everything and the kitchen sink at the forces of deflation, with fairly little to show for it.
After the US and the UK, the Swiss have now been the third to throw in the towel.
Is this a general retreat? Are we going to succumb under the forces of deflation? Is there nothing else we can do?

There are powerful forces of deflation swirling around much of the developed world, the origins of which can be traced, in no particular order, to:

Deleveraging after asset bubbles burst
The half baked design of EMU producing a strong deflationary bias
Chinese over investment and overcapacity
Rising inequality
Stagnant or even declining populations

In a highly leveraged environment, deflation is very dangerous. It can lead to outright Fisherian debt-deflation spirals, or even in milder forms, (as has been on show in Japan for the best part of two decades and more recently Italy, for instance) it can wreck havoc.

In much of the developed world, it has been up to central banks to combat these forces. Central banks have chosen to embark, first on zero interest rate policies and then on forms of unconventional monetary policies, that is, buying large quantities of assets.

The results of these have been rather moderate, and that can be little surprise. In the face of deleveraging, monetary policy becomes rather powerless as households prefer to pay off debt, rather than take on new debt, despite record low interest rates.

But the forces of deflation haven’t been beaten and the unconventional monetary policies have unfavorable side effects. They also have their limits, and it seems that we’ve just been hitting one. The Swiss central bank (SNB) has ended its 1.20 floor to the euro.

This was really unconventional monetary policy, comparable to buying sovereign bonds. What the SNB did was buy unlimited amounts of euro in order to defend the 1.20 floor for the Swiss franc.

Switzerland is a small, open economy, so this policy made sense in times when its safe haven status made it very vulnerable for very large capital inflows. These flows can be so large as to wipe out the competitiveness of much of the Swiss export sector overnight, clearly the SNB could not stand idle letting that happen.

In principle, central banks can sell unlimited amounts of its own currency (like the SNB was doing), that is, they can buy unlimited amounts of assets (sovereign bonds, foreign currencies, whatever).

But, apparently, the SNB deemed there were limits to this, and they did have something of a point:

The Swiss monetary base five-folded from 80B francs to 400B francs.
Credit rose from an average of 145% of GDP to 170% of GDP.
A real estate boom is ongoing, flat prices have risen 60% since 2007.

None of this seems to have reached some ultimate limit. The real estate boom precedes the currency peg by four years, the credit expansion is considerable, but not yet alarming and can be dealt with by other means. The rise in base money is not in and by itself very worrying.

But the prospect of the ECB embarking on full QE and the inflow of Russian (and Greek and Italian) money, together with the prospect of large losses on its foreign currency holdings made the SNB sufficiently uncomfortable that it ended the peg to the euro by surprise.

Switzerland may now well turn into the proverbial bird in the mine as this will unleash the full deflationary vortex into the Swiss economy, and we will have to see whether they can come out alive at the other side of this.

Switzerland is only a small country though, there is a wider picture here, which seems to be telling that the world’s central banks will ultimately be powerless to stem the deflationary vortex that is threatening their economies. The Swiss were just the first to realize this.

Before we draw such dramatic conclusions we must first point out a few ifs and buts. The Swiss were the only ones practicing a special form of QE, the SNB didn’t buy long-term bonds, it bought euros instead.

The advantage of this is that it has direct traction in the real economy via the tradable sector. But even so, it hasn’t prevented deflation to set in.

The disadvantages are that it constitutes a direct ‘beggar-thy-neighbor’ policy (or, if you like, a first salvo in a ‘currency war’), even if large enough purchases of sovereign bonds (or even the expectations of such) will more or less achieve similar currency effects.

But currency markets are large and liquid, and Switzerland is a small country. Bond purchases would have been easier, especially considering the fact that Swiss debt/GDP ratio is just 35%, one of the lowest ratios in the developed world.

It’s curious that we might have reached the deep end of diminishing returns to QE just when the ECB seems to be embarking on this policy, even more so because the Eurozone is where it could arguably have been of most benefit a few years ago.

QE effectiveness

There are three main transmission mechanisms of QE:

Stimulating credit demand
Producing a wealth effect
Lowering the exchange rate

The first two work through lowering long bond yields, but when these yields are already very low not much can be expected here, especially where private sector deleveraging is the major problem.

Alternatives?

There is another mechanism which works on expectations. This is basically producing some sort of ‘regime change,’ such a drastic policy change that it affects inflationary expectations. This is what Japan achieved in 1932 by getting off gold and embarking on a reflationary policy that got them out of the economic depression.

In the words of Krugman, who, based on the Japanese experience in the 1990s constructed a model assessing the requirements for monetary policy effectiveness in a liquidity trap, this only works if central banks “credibly commit to being irresponsible.”

The BoJ looked on course of doing this, until they were denied traction by an ill-timed tax hike. The Swiss managed to pull this off by drawing a line in the sand at 1.20 francs to the euro and in a more limited way, Draghi has pulled this off with his 2012 “whatever it takes,” quelling a peripheral bond debt-spiral without actually having to intervene.

But Draghi’s intervention didn’t signal a drastic (‘regime change’) in monetary policy, it just signal that the ECB would be like any other central bank functioning as a lender of last resort. And the Swiss have given up their fight.

There are a few things monetary authorities could try to fight deflation, stuff like NGDP targeting or inflation targeting. In order to achieve credibility, massive actions are likely to be needed so it would be more of the same with the difference of an explicit effort to anchor expectations.

Perhaps this makes a difference, perhaps not, it’s certainly difficult to say, and it would be interesting to see a country trying it. Japan does have a 2% inflation target but they greatly compromised their own credibility by the tax hike.

Helicopters to the rescue?

There is one card that monetary authorities could still draw, which would be some variant of Milton Friedman’s famous ‘helicopter money.’ That is, central banks print money, which would finance a tax break for households (‘helicopter droppings’) and/or public expenditures (infrastructure, research, education, etc.).

Compared to the QE policy experience, this seems to have considerable advantages:

It injects money directly into the veins of the economy.
QE depends on further financialization of the economy, all these financial machinations aren’t very effective, suffer from large diminishing returns and considerable side effects.
Instead of purchasing paper, we could have gotten real stuff, stuff that is useful, infrastructure like bridges, roads, power lines, a smart grid, research, education, pipelines, whatever.

Basically, we could have gotten more traction in the real economy at a fraction of the sums involved. Why? Because it is actually more like fiscal policy, and we know that fiscal policy becomes very effective in economies suffering from large output gaps and rates at the zero lower bound, certainly fiscal policy that is financed with new money.

But, unless despair sets in completely, we don’t expect this to happen anytime soon.

Liquidate?

There is of course another alternative and that is to stop all the ways to combat these output gaps and actually embracing the resulting deflation. This is basically the position of many people who take their clues from Austrian economics.

What they have in common is a great belief in the efficiency of markets, these will automatically balance demand and supply and find the appropriate levels of prices, wages and interest rates to achieve that.

While we do not deny the efficiency of markets, it’s simply an experience that these do not always achieve macro-economic equilibrium. The basic innovation of Keynesianism is simply to depart from the given that large output gaps and high unemployment can persist.

Let the excess capacity liquidate itself, say the Austrians. Well, that’s possible, but we strongly doubt whether it’s less harmful than efforts to reflate the economy, especially under conditions of high leverage.

We know from Japan how pernicious deflation can be once it has set, and we know from Fisher that markets can spiral down in self-reinforcing feedback loops called debt-deflationary spirals. Do we want to risk this?

As observers, we like economic experiments as they put ideas to the test, but this is one experiment we would be highly apprehensive about. We’ve seen in the early 1930s what those deflationary spirals can achieve.

Austrians tend to argue that rates are way too low as well due to central banks, below ‘market rates,’ spurring all kinds of bubbles. But QE has ended in the US and despite economic growth picking up a bit, rates have trended downwards, not upwards.

The few cases in which rates were increased (Sweden, the eurozone) post 2008 does nothing to inspire confidence that this is the way to go, these decisions were reversed pretty embarrassingly.

Conclusion

The unconventional monetary policies seem to suffer from greatly diminishing returns, unwanted side effects, and general exhaustion. The US, UK, and Swiss central banks have given up. The Eurozone QE effort, looks dead on arrival, and the Japanese shot themselves in the foot with a tax hike.

There are a couple of choices left. Do nothing and risk the destruction of deflationary forces, or try to inject more direct means into the veins of the economy, there where necessary (basically Japan and the Eurozone).

The Solar PV Market

June 6, 2013

Challenge For Investors

Following a large increase in the price of the stock of Sunpower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR), solar investment is under the magnifying glass again. In the present essay I would like to elaborate on my forecast in a previous article on Solar PV: that the cost of PV-generated electricity will decrease toward $0.01/kWh by the middle of the century. I would further like to connect the macro view expressed in that article to the realities of PV trading today.

In this article the sun as the source of our energy is discussed, followed by a look at some of the negative effects of the energy industry, including PV, on our environment. Next, we examine the investment climate surrounding solar PV and try to explain why there is no Exxon presently in this field, commenting on some existing companies. Finally, we outline forward opportunities for investment, where solar PV can be a vehicle to make a lot of money and do some good at the same time. The approach in this article is to outline some of the underlying forces determining the progress of PV rather than cataloging the details of the history or the detailed present state of individual companies.

Here Comes The Sun

The PV industry is already a half of a century old. During most of this time, the industry was engaged in R&D to develop the right technology. This process still is not completed. In spite of the fact that R&D is still continuing, the commercial phase of the PV industry is well under way. In the last decade the industry grew from sales under $1 billion to over $100 billion in 2012 and is forecast to grow another 100 fold before the middle of the century. Cumulative installed PV power generation capacity worldwide reached 100 GW in 2012.

Man’s economic progress is primarily characterized by how much energy he uses to live his life. Worldwide, the average power a human being consumes today is 100 watts, equivalent to 1000 kWh energy in a year. Let us call this “100 watt servant equivalent” 1 Holon (from Arthur Koestler’s notion of the autonomous subunits of a society). Our average energy consumption per person in the U.S. is 10,000 kWh per year, or 10 Holons serving us day and night throughout the year. In some parts of the developing world, people only have 0.2 Holon helpers, their per capita use of energy just one fiftieth of ours in the U.S. Our use of energy also determines our interference with nature. This is the intersection where we poison our water, pollute our air and overheat our globe.

With the exception of nuclear and geothermal energy, all our energy comes from the sun. In an article, “Solar energy, a global view”, the effectiveness of the sun’s efficiency (defined as the energy that can be extracted from different products of photosynthesis divided by the sun’s energy falling on the product) is listed in growing the different crops by photosynthesis. The most efficient biomass (like algae) has an efficiency of the order of 1%. On the same scale, the efficiency of forests is 0.1%, of crops (like corn) 0.01% and meat 0.001%. Note the PV efficiency, direct conversion of the sun’s energy into the most usable form of energy, electricity, is 10% to 50%. The conclusion is that to harvest biomass energy will require at least an order of magnitude larger land area than to harvest the electrical energy by PV. Another interesting comparison is that when we convert crops to biofuels thereby introducing an additional factor of efficiency loss, we use the sun 10,000 times less efficiently than when we use Solar PV.

The Cost of Electricity From Different Sources

(click to enlarge)

This basic fact of solar PV’s relatively high efficiency can be seen in figure 1, which compares the cost of electricity generation from different sources. The cost of PV depends on the insolation of the location and can vary more than a factor of three (800 hours for Alaska vs. 2400 hours for parts of Arizona). The PV curve on figure 1 is for insolation 2000 hours of equivalent peak sunshine per year.

The Energy Industry and the Environment

All energy sources have to be subject to the same rules and limitations. They have to provide the lowest cost energy with the least adverse effect to the globe. Comparative costs were discussed in the article mentioned above and shown in figure 1. The use of any of the sources of energy have environmental consequences. Nuclear fuels are still waiting for their graveyards. Fossil fuels are spewing their pollution directly into the air, mostly as CO2, while they heat the planet. Solar PV may also cause disaster unless we recognize and guard against contamination at this relatively early stage of the industry. The first world conference on environmental problems in Solar PV took place in Fukuoka, Japan. The findings are published in a paper from University of Stuttgart. Two toxic ingredients are identified in the use of PV, lead (PB) in cSi and cadmium (Cd) in CdTe.

To fully understand potential contamination by the use PV, we have to address the end of life issues of PV projects. If PV will end up as a dominant component in the energy mix, the industry will have to be accountable for its complete cycle. Ultimately, PV installations may cover 1% of the world’s land area, which translates in the U.S. into approximately 100,000 square km (half the area of Arizona). At the end of the life of the PV installation, the field will either have to be dismantled, or it will go into the landfill. The dismantling cost of a PV field is comparable to the installation costs, presently about $0.4 per watt. Today the owner of the PV field is responsible for this cost. So far, no manufacturer has accepted this obligation. (FSLR has a recycling program, but it does not include dismantling the installation). Recycling will only take place if it is economical . For cSi modules, the value of wafers is about $0.25. The dismantling cost is substantially higher. For CdTe, the value is less than $0.1 per watt, even less economical than cSi. The overall conclusion is that the dismantling of PV modules will consist of removing them for landfills. Hence, it is absolutely essential that the PV modules destined for the landfills do not contain water soluble pollutants, not to contaminate our water tables.

Where is the Exxon of the Photovoltaic industry?

In this section, we examine the complex nature of PV technology, influenced by the politics of the energy industry and the large reward associated with the potential of finding the primary replacement for fossil fuels.

To harvest the sun’s energy, man has devised many different tools, all part of the renewable energy industry. Wind energy, hydro energy, ocean tidal waves, solar thermal process, concentrating solar thermal (power towers), concentrating PV (CPV), and solar PV are all renewable technologies in use today. Photovoltaics are made with a number of different materials, grouped into two categories: crystalline Silicon (cSI) and thin film PV. Among the thin films, there are amorphous Silicon (aSI), cadmium telluride CdTe and copper indium gallium diselenide (CIGS). There are different type of thin film devices, single junction and multi junction. There are other set of PV materials and devices as well, specially developed for the space industry. This is the matrix from which we have to pick a winner.

Modern PV R&D goes back to work carried out after the Second World War. Most of the R&D was funded by the U.S. government in the industrial laboratories on the East coast of the U.S., including Bell Labs, IBM (NYSE:IBM), GE (NYSE:GE) and RCA, and in universities across the country. Crystalline PV, an outgrowth of the semiconductor industry, was first commercialized and used in the space program. The first large scale commercial players in the industry were oil companies like Amoco who picked up Solarex. Arco, Shell (NYSE:RDS.A) and Chevron (NYSE:CVX) followed the pattern. The oil companies did not have the patience to stay until the industry matured and the PV effort was passed on to technology companies like Siemens (SI), glass companies and utilities.

The first thin film technology was developed at RCA and commercialized by two companies, Chronar (in a glass to glass sealed package) and ECD (on a stainless steel substrate). ASi has the flaw that, due to light induced degradation, the stabilized efficiency leveled off at around 7%, not competitive in the power market of today. Both companies are out of business, though a number of companies make aSi today, including Schott Solar, Masdar PV, and others.

First Solar, a CdTe based thin film company, was founded in 1996. It became the largest thin film company (and for a while the world’s largest PV company), trading on the Nasdaq. FSLR has manufactured and installed over 6GW of PV, spreading 1 million Kg of cadmium across the globe in the process. The main funding for FSLR came from the Walton family, founders of Wal-Mart (NYSE:WMT). CIGS companies have been funded primarily by venture capital from Silicon Valley. It is shocking to realize how unsuccessful their efforts have been. After investing more than $2 billion into companies like Nanosys, Nanosolar, Miasole, Solyndra and others, not one winner was found.

Governments have also played an important role in the development of this new energy industry. Until 1990 the U.S., where most of the technology was invented, was the unquestionable leader of the industry. Next Japan started a major commercialization called the Sunshine Project. Following that, Germany introduced a very successful Feed In Tariff (FIT) and over five years, 30 GW PV was installed, currently representing about 5% of German electricity generation. Finally, with the help of government funding, a dozen companies in China have built about 40 GW of PV module manufacturing, gaining about 60% of the world’s production capacity. This rapid expansion of capacity caused an imbalance between supply and demand, the prices of PV modules collapsed, and today all cSi manufacturers are operating at a loss. In spite of the current chaos, we should not forget that PV electricity generation today is often competitive with other sources and heading towards becoming the lowest cost source of electricity. The industry worldwide employs over 1 million workers and its total sales volume is over $100 billion. In comparison, the combined employment of Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and Yahoo (NASDAQ:YHOO) is less than 100,000 and their combined annual revenues are $85 billion.

The first 40 years of the PV industry is a story of waves of investment by large industrial capital concentrations, oil companies, technology companies and Silicon Valley venture capital, only to lead finally to the domination of the industry by today’s most effective concentration of capital and political power, China.

The story of Solyndra might be instructive as a case study in picking a winner. It started in Silicon Valley as a stealth startup. It was heralded as the “destructive game changing” technology in PV. It was not the government that picked Solyndra as a winner, but Silicon Valley venture capital that invested over $1 billion in the company before it had a mass producible product. One fatal flaw in Solyndra was a primitive technology error, that neither the investors nor the Nobel Prize winning science advisor to the President picked up. That technology error was evident in the first filing to the SEC: its device was made of an array of cylindrical tubes, that only covered half the illuminated area, claiming to collect more light than a continuous flat plate that covered all the area. As it turned out, it only collected about 70% of the available light. It is no wonder that with this 30% handicap, it ended up in bankruptcy.

Solar PV seems simple. Light falls on one side of a glass sandwich and two wires carry out around 200 watts of electricity for every square meter. But in the current market, it is not so simple to pick a winner. First a selection has to be made from a 10×10 matrix of technologies (e.g., solar thermal vs. CPV vs. PV?). Let us assume that one was smart enough to pick solar PV. Next comes another 10×10 matrix within solar PV to pick the right material, the right devices, the right structures and the best manufacturing processes. Next pick the right business strategy and finally pick the right country and political system, which will best help you to replace fossil fuel in the energy mix. May the best matrix win.

This is a very different scenario from the knowledge economy, where a bright teenager writes a suitable computer program, venture capital blesses it by putting up more funding than the young man needs, at the same time arranges with Wall Street a suitable exit scenario making an untold number of new millionaires in the process. Take Facebook as an example. It has raised $16 billion in a public offering, valuing the company more than 20 times sales. It employs 4000 people. Solar PV is not this type of investment. Investors at different stages of the solar PV company do not have control up to the point that they can exit. These factors may explain why at this stage there is no Exxon of solar PV.

The Present Investment Vehicles (“The Dark Side of Solar”)

A major article came out in the New York Times, entitled the “Dark Side of Solar”. In the article, on one hand, the looming trade wars between China and the U.S. and between China and Europe are described. On the other hand, none too transparent allegations of poor quality Chinese PV modules are advertised. These trade wars are the cruelest indictments of our dysfunctional economic system. The Chinese were willing to make the investment in the PV industry that we in the West were not willing to, and we are the ones who are benefiting primarily from low cost clean PV electricity using Chinese made modules. We should examine our motives and reexamine our economic interests before we condemn the Chinese for unfair trade practices.

It is indeed time to examine both sides of the solar PV industry. On the sunny side, we have installed 100 GW of PV, the cost of PV electricity generation has come down to $0.10/kWh and PV from the present 1% penetration of the energy market is heading to be the largest component in the world’s energy mix

On the dark side, the industry is in total chaos and a major trade war is looming. But another great danger comes from the largely overlooked end of life issues for PV systems. Many PV modules contain significant amounts of toxic materials, principally Lead and Cadmium. 1000 tons of toxic Cd is already spread over 100 square km (EPA allowed levels are 5 micrograms/liter. 1000 tons of Cd is adequate to contaminate the total U.S. fresh water supply above this limit). Some cSi products also contain Pb (lead). Lead is less toxic than Cd, and smaller amounts/watt are used than in the CdTe modules, but a far larger amount of cSi modules have been installed so far than CdTe. To expose the environment to these hazards is inexcusable. With minimal responsible regulations, these hazards can be eliminated. At the same time, there other PV devices can be substituted that do not carry these dangers. Many cSi manufacturers have eliminated lead from their modules. We have to introduce regulations on module wastes to set acceptable limits on pollutants and set uniform end of life conditions (decommissioning) for all manufacturers and users. Europe has recently passed such “waste electrical and electronic equipment” directive (WEEE) to take effect for PV products at the end of 2013.

If we examine the companies that are trading on the market, unfortunately, all the major players in crystalline silicon show losses. From their financial statements, one can conclude that the true manufacturing cost of crystalline silicon modules is close to $1/watt. Today cSi modules sell as low as $0.50 per watt. In spite of this as the industry gets rid of excess inventory, the prices will firm up and the remaining Chinese companies will survive and prosper: Canadian Solar (NASDAQ:CSIQ), JA Solar Holdings (NASDAQ:JASO), JinkoSolar Holdings (NYSE:JKS), ReneSola (NYSE:SOL), SunTech Power Holdings (NYSE:STP), Yingli Green Energy Holdings (NYSE:YGE), etc. It is clear that the Chinese government has decided to stand by the “dozen” remaining cSi companies. One quality American cSi company is SunPower (SPWR). It has the highest efficiency modules and game plan to match it. The surviving cSi companies should be a good long-term investment in spite of the difficulty of the industry today

Among thin film PV manufacturers, the largest public company, FSLR, remains a short-term opportunity. A fine upcoming Thin Film company is a subsidiary of Showa Shell of Japan, which operates under Frontier Solar in the U.S. It manufactures Cd free CIGS modules and has the most efficient thin film product.

FSLR has been the flagship for solar PV investors. Unfortunately, the company is carrying a fatal flaw that CdTe is carcinogenic and soluble in rainwater. This brings with it a contingent liability associated with contaminating the soil where it is erected and a liability associated with the announced recycling of Cd. This issue has been debated in several previous comments on the pages of Seeking Alpha. For further detail, the reader can review that debate. First Solar shareholders and the PV community until now seem to have decided to ignore the liabilities associated with carcinogenic CdTe.

Two potential competitors of FSLR, GE’s Prime Solar in Colorado and Abound Solar, also of Colorado, have abandoned the market. The two have invested well over $1 billion. At this point, GE has no plans to start production and Abound Solar has declared bankruptcy. More worrisome news is that Colorado health and environment officials have designated the Abound site as a hazardous waste site due to Cd, and suggested encasing the modules in inventory in concrete, similar to nuclear disposal procedures.

On the First Solar financials, the liabilities associated with the use of hazardous CdTe show up as an approximate $0.02 per watt of set aside (at the end of 2012, this represented $212 million). This amount, which directly affects the true cost of the First Solar modules, does not include the dismantling (decommissioning) cost, which far exceeds the set aside. In the long term, investors should be aware that the liability associated with the choice of a toxic material is a most serious and tragic flaw, a major disaster for the environment and unforgiving to the balance sheet of the company and its shareholders.

Even if not in the public markets, the PV industry has been an excellent opportunity as an investment vehicle for project financing. In the last decade, 100 GW of cumulative PV power has been installed worldwide. This represents about $500 billion total project financing, of which about $200 billion came from subsidies. The primary beneficiaries of this industry were the institutions providing the funding. In addition to profits associated with the construction of these projects, the 20 year guaranteed payments under the feed in tariffs (FIT) resulted in some cases in long-term RRI in excess of 20%. This investment opportunity remains in the future. Goldman Sachs (NYSE:GS) recently announced that they will participate in this business in Japan.

Solar PV in the Future (the ability to do good while making money)

If the forecasts for the PV industry are correct, we are at the very beginning 1% of the industry (installed 100GW of the eventual 10,000GW to be installed). How can we participate in this largest of all industries?

Let us call the Crystalline Silicon technology the first generation PV, the existing single junction thin film PV, the second generation PV, and the coming multi junction thin films as the third generation PV. The first generations have brought us to about $0.10/kWh cost, the second generation with 20% efficiency will bring us to $0.05/kWh by 2020, and in the second half of the century with above 40% efficiency thin films we should reach $0.01/kWh PV electricity cost. This vision will only happen if there is political and financial support of the development of this third generation technology. Third generation multi junction thin film PV companies are not yet public. There are some known private companies as examples, like Stion Solar working on multi junction thin film PV products based on CIGS, Alta devices working on GaAs, and others. Finding and funding these early third generation PV companies will be one of the great opportunities in PV Solar. I hope to introduce some of these companies to SA readers.

The main conclusion of this essay is that we only now are embarking on the largest opportunity of this century, replacing the majority of fossil fuels with clean, sustainable renewable solar PV. Clearly such a major shift will affect our social fabric in many ways. One of the great challenges of our time is job creation, and solar PV is one of the greatest sources of new jobs of this century. Slowing climate change depends on our use and sources of energy. How and where is the energy produced and delivered, whether we continue to use the centralized model of the utilities or we focus on distributed power generation, all needs to be reexamined. How rapidly can we move to the large scale use of solar PV will depend on available capital and political will. Members of the financial community and readers of SA will play an important role in determining this future. Whatever our political affiliation or social status, we all are part of the human community and we should accept the responsibility not to poison our air and water as we develop the needed energy resources for future generations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Outline of Post Free Market Economy

January 1, 2013