For months we’ve heard nothing but great things about ethanol.

And true to form, the experts here at Money Morning have ignored most of the resultant investor buzz.

The truth is that ethanol’s a farce and we’re our own worst enemy when it comes to refining the technology anyway – literally.

For one thing, ethanol – in its current state – is anything but the road to energy independence. Sure it can help out, but even if we were to convert 100% of available corn crops to ethanol production, our gasoline dependence would drop a mere 12%.

In order to get some serious leverage, and truly displace gasoline in this country, we’d need 120% of all available cropland – meaning we’d give up planting anything else. No beans, no fruits, no potatoes … you get the idea.

Here’s another fact most folks riding the ethanol bandwagon seem not to know: Because the U.S. government required oil refineries to use more than 4 billion gallons of ethanol last year – regardless of how much it actually cost – wholesale prices were more than double the cost of conventional gasoline. And that doesn’t even include the costs of delivering the ethanol, which boosted its "real" price even more.

That leads us to gasoline prices at the pump, which include federally mandated  subsidy taxes in designated "clean air" areas that boost the price by 60 cents or more per gallon.

As a taxpayer and free-market advocate, I’m hopping mad, because what’s really at stake here is the trillion-dollar "porkfest" laid out by the Beltway Boys [in my view, they deserve to referred to as "The Beltway Bandits"]. It’s just one more example of badly squandered capital – money that could have done some real good if spent correctly, but is instead wasted to support yet another technology with dubious prospects.

In all fairness to ethanol proponents, marked improvements in the refining process that are not yet commercially marketable could conceivably transform ethanol into a profitable product. Were that to happen, U.S. consumers and commercial interests would obviously use more of the new fuel.

But that brings us to the second problem. And that problem is…well…us.

As it turns out, most people in the U.S. Corn Belt love the idea of growing more corn, but they’d rather not have an ethanol distillery in their own back yard.

Unfortunately, in the world of alternative energy, that "I support it, so long as you put it somewhere else" is a common sentiment across much of the U.S. market right now. It doesn’t matter what form of alternative energy you’re talking about – either solar farms, with angled solar panels arranged like crops in furrow-like rows, or sprawling wind farms, each with a battalion of windmill towers, their propellers spinning at a hypnotic pace – communities want them built elsewhere.

People are resisting wind farms in the gorges here in Oregon. Along the coasts, citizens are resisting liquid-natural-gas (LNG) facilities. Many can’t agree on independent power production sites. And they sure can’t get it together for the biggest boy on the block, nuclear power.

Seems we’re our own worst enemy.

Guess we better bank on doing business with the OPEC folks (Organization of Petroleum Exporting Countries) awhile longer and continue pouring our hard-earned tax dollars down the garbage disposal so that Congress can continue to finance its trillion-dollar pork-fests.

It’s a shame. This doesn’t happen in other countries, which have sound energy policies. It’s yet one more reason why the U.S. economy will continue to fall even further behind the rest of the world, since low-cost power and energy are one of the best economic-development tools around.

Let’s hope that we wise up, before we fall too far off the pace.

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Officials at solar-cell-maker LDK Solar Co. Ltd. (LDK) were apparently confused about the quality of the silicon in the firm’s inventory- just as an ex-finance official has alleged- according to an audio recording of an internal conference call obtained by The Wall Street Journal, the newspaper reported yesterday.

LDK, based in southern China’s Jiangxi province, makes the silicon solar wafers used to convert sunlight into electricity. But it depends on a mix of both new and recycled batch silicon, and that requires the company to be very specific about the source and the age of the silicon that’s in its inventory.

However, in e-mailed messages to regulators and to KPMG, Charley Situ, LDK’s former financial controller, has accused the solar-cell maker of reporting inflated figures for its silicon feedstock, The Journal reported. Specifically, Situ alleges there is a discrepancy between LDK’s reported inventory and the amount of "usable" silicon that’s actually available.

And The Journal says the recording of the Sept. 13 conference call that it obtained seems to support the contention of Situ, the ex-LDK official. In the recording, Situ and two other LDK officials- Yao Qiqiang, the vice president of accounting, and Liu Yizheng, an accounting manager- openly discussed the quality of the "feedstock" silicon with Jack Lai, LDK’s finance chief.

On the call, Situ estimates that two-thirds of the feedstock in question is older than 180 days, making it unsuitable for use producing the solar-panel wafers- something LDK should reflect by taking a write-down that will appear on its financial statements, affecting its financial position, the newspaper reported.

After finance chief Lai ask why that feedstock isn’t usable, account manager Liu explained that the inventory is leftover bits of the silicon that had already undergone testing by the production team. According to The Journal, Lai then said that "I think you should do some careful data analysis" to determine the quality of the inventory.

Yao said that "what the accounting department needs to do is a categorization of the inventory in terms of life and ways in which it was purchased…and hand it over to the technology team for a review. Let them decide whether it is usable or not," stated the newspaper report.
LDK says that Situ’s allegations are without merit, and described him as a disgruntled ex-employee who was fired. He says he resigned, the newspaper reported.

In its initial public offering on June 1, LDK raised nearly $500 million. By Sept. 26, the shares hit their all-time high of $73.95, leaving the company with a market value of $1.3 billion- nearly a three-fold increase. It paved the way for a handful of other China-based solar-power firms to go public, as well. [To read Money Morning's full report on all the China-based solar-energy firms that have gone public in the past year, please click here. The report is free of charge.]

LDK’s shares plunged $3.24 each, or 7.24%, to close at $41.51 yesterday (Thursday). Some U.S. shareholders are traveling to China to visit the company’s headquarters to assess LDK’s prospects, the newspaper reported.

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• Forbes.com:
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• Money Morning:
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• ExpansionManagement.com:
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• Reuters:
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• Money Morning Investment Analysis:
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• Money Morning News:
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• Money Morning News Analysis:
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• Reuters:
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• Reuters:
  German Solar Firms Boost Capacity to Meet Demand.

You can’t help but feel a sense of deja vu.

At least I can’t.

The last time the dollar fell this low and energy was this costly, traders were concerned about a massive recession, we were talking about a scary new economic syndrome called "stagflation," and the Major League Baseball’s Pittsburgh Pirates and Baltimore Orioles were actually perennial contenders.

It was the 1970s. The economy – then as now – was slowing as investors realized that Washington’s tough-talk and economic policies were nothing more than smoke and mirrors.

But the world has changed in the three decades that have followed. What’s different now is that we have a situation where our three largest creditors – Japan, South Korea and China – also are our largest trading partners.

And one of those trading partners – China – is extremely displeased by the weakening dollar.

In fact, all three partners are so upset that they’ve been making some very public noises about diversifying away from the greenback, or – and this is a huge deal – even dumping some of the $1.3 trillion worth of dollar-denominated debt instruments they hold.

China’s Greenback Angst

The gloom-and-doom crowd has labeled this scenario as China’s "nuclear option," because having China dump dollars on a wholesale basis would be akin to China lighting off a hydrogen bomb in the worldwide financial markets.

Come to think of it, I recall reading something in China’s press that employed the same slang term, so it’s not clear just who used it, first.

Anyway, from the way the media has reported this to date, you’d think the world was about to end.

Well, I don’t think so and when you get down to it, I really don’t think China’s "atomic saber-rattling" is much of an actual threat. In fact, I think it’s pretty benign.

For one thing, what China is supposedly saying is really nothing new, despite how the press is treating that country’s recent commentary on this issue. The truth is, China has been making noises about this for years, and so much of what’s being reported right now is really just ‘standard operating procedure,’ or S.O.P., for both U.S. and Chinese diplomats whenever they get together.

The manner in which the remarks were made is also a business-as-usual because the Chinese often use academic types to make what are essentially pending policy level announcements. That way, the official apparatchiks can remain unscathed should there be some unforeseen global backlash, which prompts a retreat or a potential loss of face.

Why There’s Bluster, Not Blasting, to Come

How this ultimately all plays out remains to be seen, and is really impossible to predict (though I doubt it will be as bad as some fear). But even if nothing comes of this, there are some things that need to be understood:

First, there is literally not another currency on the planet capable of absorbing a few hundred billion dollars. Therefore, even if China actually decides to dump the dollar, there literally isn’t any other currency that could stand in and absorb the excess capacity if China were to go shopping for alternatives to the greenback.

The European euro is at record levels and EU governments are struggling with how uncomfortably high it’s become. The Japanese yen, which would have been a good candidate in the past, has effectively been neutered by what’s left of the carry trade. Other countries are either unstable, or too small, for to be relied upon. The Middle East, Russia and Africa are hardly the poster children for stability, so they’re out too. As for the rest of the Asian Rim, those countries are too small to have meaningful places in the fiat currency arrangements relied upon by world bankers as a source of checks and balances which is why they’re not included in any of the major currency trading "pairs" in the FX markets at the present time. The bottom line: If China were to start dumping dollars, it would simultaneously put at risk every other currency it its basket in the process. It knows this. Therefore, by making such seemingly vitriolic pronouncements, what China is actually doing is to cement in place its own version of Mutually Assured Destruction – which helped keep the United States and Soviet Union out of a nuclear throw-down during the Cold War.

In doing so, China is attempting to create enough fear to make sure the world will never want to square off against it. And the Democrats who look increasingly likely to inhabit the White House next year will be fearful of enacting the punitive tariffs they’re talking so toughly about right now.

At the end of the day, China knows just how dependent they are on exports, so dumping dollars is hardly conducive to continuing those relationships, particularly since the last time I checked more than 50% of Chinese exports were headed straight for the U.S. market.

To be clear here, though, there is an element of truth to what the gloom-and-doom crowd alleges. China will continue to posture and undoubtedly will engage in short-term allocation changes designed to make clear its point. But, beyond that, nobody in Beijing is going to push the financial nuclear "button" as long as we’re all mutually engaged.

Over the long term, however, if we can no longer claim mutual engagement, then, frankly speaking, we’ll have bigger fish to fry. And currency dumping won’t even be on the radar screen.

Second, for all of China’s noise about how low the United States is letting the dollar sink, China has to share some of the blame. For that reason, I’d even go so far as to suggest that China’s threats are really a call for help.

For all its growth and prowess as an emerging world power, China’s financial markets remain remarkably primitive by world standards. What’s more, their capital markets remain woefully underdeveloped for the economic structure that’s being developed. As a result, the Chinese are actually uniquely dependent on a falling dollar to succeed over the long term.

And that brings me to my third point, which is that China is really an overvalued economy masquerading as a highly developed one. Like others before it, China will realign its interests and, at a time when the market chooses, the value associated with it will revert to longstanding norms.

What’s more, despite the fact that neither party will admit it, both the United States and China will emerge as stronger beings for having danced this financial Lambada together.

Deja vu All Over Again

Are you skeptical of my scenario?

If you are, I can’t blame you.

But, as Yankee great Yogi Berra used to say, "it’s Deja vu all over again." In other words, we’ve seen and heard this whole "currency dumping" hypothesis at least once before. If you think about it for a minute, you’ll know just what I mean.

What’s going on now is really just a replay of the 1980s, when Japan was viewed as an unstoppable juggernaut, and the Yen as the currency that would soon dominate the worldwide economy. People have apparently forgotten that Japanese businessmen were regarded as modern day samurai. Words like ruthless, cunning, and predatory were bandied about.

They’ve also forgotten that many the charges presently being levied against the Chinese now were levied against the Japanese then.

I think you know where this is going, but let me close the loop anyway.

Long story short, the Japanese waded into financial markets around the world, snatching up prime assets in nearly every country at fire-sale prices. There was a huge, emotionally driven backlash at the time when such assets as the Pebble Beach golf course and Rockefeller Center office building went up on the auction block and were snapped up by Japanese suitors. Later in the game – toward the end of Japanese hegemony – they were actually paying irresponsibly high premium prices for the assets, but that’s another story.

What’s vitally important to remember is that the Japanese Yen, as powerful as it was at the time, actually played an important role in setting the foundation for one of the longest, most profitable bull runs in history as the excess value they brought to the market was absorbed by other economies, including our own.

Will the same thing happen this time?

I don’t know for sure. But having participated in the great Japanese buying binge firsthand, I’m betting that if you follow the money, as Money Morning advocates, you’ll profit this time around, too.

You’ll also get a potential two-for-one deal at the same time that’s likely to result in higher returns, too. The reason is that by purchasing Chinese firms on the prowl as well as their intended targets in the natural-resources, financial-services and hi-tech sectors, you not only set up your investments for some healthy appreciation, but you also hedge your investment dollars from further decline by owning shares denominated in other currencies.