Essential Scepticism

Fools Gold

Our father used to tell us that a fool and his money are soon parted.  Every scam that hits the gullible is an old one.  It has been used countless times before.  Everyone who gets caught is either wilfully ignorant or they stupidly believe that this time it will be different. 

Back in the eighties we had in New Zealand a grand scheme of central government's confabulation.  It was decided that economic nirvana would descend upon New Zealand if agricultural production picked up.  It was decided by the wise that what was needed was more bush covered hills being converted into farmland, and we needed more types of cropping and animal husbandry--such as goats and alpacas.  To encourage people to undertake these inevitably risky ventures, the government promised subsidies, cheap credit, minimum prices for agricultural products, tax write-offs and a host of other government supports. 

A speculative agricultural gold rush commenced that rivalled the Kalgoorlie and Otago rushes, mutatis mutandis.  Enterprising individuals began farming government subsidies and hand outs, not agricultural goods.
  The government eventually ran out of money and had to scrap all the agricultural supports.  Hundreds went bankrupt; others lost countless amounts of money.  The lesson: never invest in a government subsidised scheme.  At best your business will exist by means of non-market, artificial props that deny true demand and supply forces.  You will never be able to compete over the longer term.  At worst, government will pull the rug and you will go into bankruptcy. 

Two examples of oh-so-quietly-forgotten government scams have hit briefly the headlines this week.  The first was a Kiwi entrepreneur who has nearly gone down the gurgler when government subsidies stopped (due, of course, to unforeseen global economic constraints).  The inventive Kiwi engineer noticed a market opportunity: if household water heaters could be connected to a specially designed heat pump, the costs of household water heating would drop substantially.  He designed the product and began to sell it.  Government loved it: less energy consumption, lower carbon footprint, yada yada.  It all fitted into the "Big Plan" for humanity. This from the NZ Herald:

Another helping hand came from the government, which began offering a $1000 grant to consumers who bought the device, which retails for about $4000, in March 2009.  But Econergy had the rug pulled out from beneath it that year when the government killed the grant.  "I told them, 'No you can't do that - we've taken on staff'," Senn said. "They just sort of laughed at me."

A $500 government grant was offered for the product from February last year until June this year but Senn said it never drove sales as much as the $1000 grant.  He said the experience had taught him a thing or two about state subsidies - namely that they could not be relied upon.

There is no such thing as a new scam--and governments are expert at devising them, subsidising them, then (oh-so-regretfully) withdrawing just when you are exposed.  Here is another: same principle, different scam--although equally influenced by the global warming mega-scam.

New Zealand decided it had to set a global example of rectitude so that the rest of the world would be convicted of its own sins and follow our example.  Consequently, we were one of the few countries outside the EU bloc to set up a carbon trading scheme.  Once again this involved governments trying to steer market behaviour in a certain direction.  The more it "steered" and "subsidized" the bigger the nascent scam.

In order to make our own homegrown Emissions Trading Scheme (ETS) work, NZ needed to make carbon credits (that is, bits of paper).  The clever government central planners decided that if they could persuade farmers with marginal land to lock up their land to scrub or forests the government would write them carbon credits since their "farms" were now soaking up carbon dioxide.  These industrious but gullible farmers (having long forgotten the rorts of the eighties) bit hook, line and sinker.   This, from Radio NZ:

Under the initiative, a covenant preventing the clearing of trees for a minimum of 50 years is placed on land in exchange for annual payments of carbon credits from the Government to the landowner.  One farmer spoken to by Radio New Zealand says he signed over half his farm to the scheme two years ago, when the price of carbon was $23 a tonne, which meant the Government gave him carbon credits he could sell for $200,000.

No longer.  The market bottom has dropped out for carbon credits.  The world is awash with them, and no-one wants to buy--apparently a global economic slowdown is to blame.  Consequently, oversupply means the price of carbon credit paper is dropping by the day.  The consequences for those that believed in a "sure thing" are dire:

Now, with the carbon price under $3 dollars a tonne, his credits for this year are worth just $30,000.  The farmer, who spoke under condition of anonymity, is locked into the scheme for 50 years and with no way of making up for that big drop in income, and a mortgage to pay, says he has little choice but to sell his farm.

We have seen all this before.  Father was right: the fool and his money are soon parted.  The Preacher was also right when he said, "There is nothing new under the sun".  Governments always run out of other people's money.  The moral (which will of course never be learned) is this: never, ever invest in any business where the government is subsidising the price--whether by grants, tax relief, legislative fiat, or subsidies--or in any other form.  The gold you will be rushing towards will be fools gold. 

Hat Tip: Maria