Friday, May 20, 2011

Japan, Disasters Natural and Economic

Let’s start, not with economics, but with the scare of the century: nuclear energy.

Japan has now demonstrated that it is no more advanced or science savvy than any other country in the world. Its politicians are picking up on the irrational fears of a portion of the population and have begun pushing the country toward energy policies that will not only take them away from the safest and (if allowed to be) cheapest energy source, but will lead the country toward bankruptcy much faster than their current pace.

One thing that really astounds me, angers me, too, is that the media and popular frenzy over the problems at the Fukushima Daiichi power plant has apparently overshadowed the real, desperate plight of hundreds of thousands of their fellow citizens.

Further there is such a disparity between the real and, at best (worst?), potential danger. Where is the disaster? Think of it, all of the deaths and missing from the earthquake and tsunami versus all of the deaths and missing from the nuclear accident. Wait, what deaths? What missing. So the actually dead and missing from the actual disaster have been shuffled aside because of uneducated, poorly founded, hysterical fear of a potential. (At this time three employees of the electric company have died, two from the tsunami. I have not seen a report as to the cause of the third death.) Even the property damages are not comparable. The tsunami destroyed, obliterated, thousands of homes, businesses, and all of the infrastructure for over five hundred thousand people. Around the power plant, all of the homes and belongings are there, and, at this point, there has been no scientific suggestion that the contamination from radiation that there might be is anything but short lived. Some of the radioactive material that has been mentioned has a half-life of a few months and much of the material that has reached the ground around the plant will be washed away. Of course, we will not know the actual damage until the problems at the power plant have been solved. But that is what is missing here, knowledge. We have hysteria, not thought.

Granted, one has to recognize that Japan, alone among nations, has some reason to feel more concern about radiation. It has its own history. I do not want to belittle or underestimate the personal feeling many Japanese may and do feel. But I think that the Japanese who are voicing their fears and declaring nuclear energy to be evil have not given their personal connection to radiation proper respect, either. Rationally, you would expect someone to do research and learn about the reality that concerned them. Knowledge is the first and best way to deal with a subject, especially one that has such a scientific foundation. But, no, there is no evidence that the protestors or whimpering, crying “victims” have made any attempt to gain knowledge. They expend all of their energy beseeching the government to protect them and make Japan nuclear free. Instead of knowledge they went for dumb and are unquestioningly giving more power to the politicians, who go for dumb by definition (by choice).

Also ignored is the fact of the unprecedented size of the earthquake and tsunami. The earthquake is one of the largest man has experienced. There hasn’t been an earthquake to rival the recent one for over a thousand years in Japan. The tsunami was equally out of the ordinary. The preparations at the Fukushima Daiichi Power Plant protected it from a wave three houses high. What it got was one four houses high. One wonders that if the planners had proposed protection from such a massive tsunami, and insisted on funding the required cost, would the government regulators in Japan have allowed such an expense. The entire controlled planning process is ignored.

We see the same type of reaction from hysteria and ideology in California. People are shown on TV trooping down the beech near a nuclear power plant, claiming that if there were to be a big earthquake there, the power plant would suffer the same fate as the one in Japan. Yet, if you were to discover that the power plant has been built with a 8.5 magnitude earthquake and not a 9.0, you would still have to wonder about the protestors. If such a disastrous earthquake occurred along the California coast, the fatalities and missing from the earthquake and tsunami would be enormous. Where is their concern about the actual event? The fact that they are ignoring the obvious real, immediate consequences and worrying about what would be a mere potential, a maybe, indicates that they really aren’t concerned at all, but are engaging in thinly veiled ideological attacks on nuclear power, technology as part of the industrialized world, and capitalism.

At least those people in California can be ignored, since they would be swept out to sea by the tsunami never to be heard from again. They wouldn’t have to worry about potential radiation. But, in Japan, it is disheartening to see such ignorance paraded in a country that was so proud of their educational system and their recognition of technology as an important foundation to their prosperity and liberty. It indicates that the attack on the mind epitomized and lead ay Immanuel Kant has spread far and wide. His influence is not merely a Western phenomenon. When someone says that Western culture is spreading we know now that the spread includes the entire package. (I do realize that the historical culture in Japan isn’t particularly supportive of independent thought and learning. So the Japanese are being intellectually undercut by both influences.)

We can also see the spectacle of supposedly modern Western countries banning Japanese products without regard to the actual area of potential radiation. Apparently the Europeans do not have maps of Japan or have a clue as to its size. It is certain that there is little regard for science or reasoning in Europe, only the appearance of the authorities “protecting” the public. And by protecting, we mean stopping international trade and prohibiting free, voluntary exchange of goods and services. In the name of safety, we get lowering standards of living and a more rapid move toward poverty.

In the face of the reaction of Western Europe, one can hardly criticize a backwards country like Russia or even other Asian countries for similar hysteria.

Back to Japan, look at what is happening economically because of the earthquake and its consequences. Before the March 11 earthquake, the Japanese government was talking about finding new sources of revenue to cover the growing needs of the elderly and retired. They knew that the current arrangement, and the debt they expected to require would not be sustainable. They were headed for major difficulties. Now, with a small, but significant part of the country almost completely destroyed and over a hundred thousand evacuees living in shelters with their lives completely disrupted, not to mention the businesses of all kinds that no longer exist, plus the other consequences of the disaster, the Japanese government is being asked, demanded, to do much more. The government is being asked to backstop the damages that the utility company that owns the Fukushima Daiichi power plant in paying damages to the people and companies forced to evacuate from the area immediately around the power plant. (One hopes that there were actual dangers involved and not government hysteria.) The government is intent upon cleaning up the areas destroyed by the tsunami, building temporary housing, and, no doubt taking care of the survivors for some time. Communities across Japan are asking that their nuclear power plants be closed, and that the national government provide compensation for the resulting economic cost. The list of new demands on the Japanese government just keeps growing without any regard for reality.

The government is now asking for a supplemental budget from the Diet to cover their initial expenditures. At the same time, the current government is getting a lot of criticism. It appears that the governmental leaders haven’t spent enough or made sufficient promises.

The Japanese government just released figures that show their economy going into recession earlier this year (meaning output is falling). They expect the decline to continue throughout most of the year. So, the government is spending more, borrowing more, receiving less in taxes (or taking a greater percentage of the national and personal income in new, higher taxes) in a declining economy. They think that the governmental expenditure will help turn the economy around. They have not noticed that governmental expenditures haven’t help much over the last twenty years. No one there actually looks at the results of what the government does. They just make demands.

Japan is the world’s third largest economy. On a per capita basis, it is also a prosperous one (national figures don’t mean much, really). That it is in decline means a great deal internationally. It will hurt the Asian economy. It will hurt everyone. We are seeing again how the world economy, world production, is interconnected.

But one thing that you won’t see internationally from Japan is a government credit default. The problems we see in Europe won’t happen in Japan. Greece, Ireland, Spain, and the others have sold their debt, government debt, to a great extent to non-citizens, mostly foreign banking institutions. If Greece were to default on its debt, the problem would be felt in other countries, and we would have an international banking crisis, as we have had in the recent past.

Almost all of the Japanese debt is owned by its citizens, not by its banks (although I am sure that some is), but by individuals. Much is owned by the elderly. No wonder the elderly are dependent upon the government. They invested heavily in government bonds (the Japanese were, are, great savers) and the government has been repaying them by keeping the interest rate very low, about 1.25%! Japan doesn’t have a lot of price inflation, but it isn’t a cheap place to live. Getting 1.25% on your investment has got to make life very difficult.

When the Japanese government gets into trouble, because of all of the obligations it has, the people who will suffer will be its own citizens. The government will not be able to support them, pay their medical bills, or pay them the interest or principle on their savings. It is going to be a very great tragedy. The March 11 earthquake and tsunami will be relegated to secondary importance (Of course, a nuclear accident, with no deaths from radiation, will always be bigger than any other event. Just ask about Three Mile Island!)

When the U.S. gets to the point where its debt is so large that it can no longer support it, we will go more like Greece, and take the world with us.

Monday, May 16, 2011

The Downturn in Commodity Prices

So here is an opportunity for a lesson in observing the economy. In the last few days some commodity prices that have risen significantly in the last couple years, including oil prices, have backed off their highs. I have seen several articles claiming that this price drop proves that the Fed and other inflationary forces are not to blame for the price rises.

Now anyone who has read this blog may remember that I am not convinced that the the Fed's activities  the primary cause of the rise in oil and other commodities’ prices. I see real, actual economic causes at work. But I can not allow my analysis to then infer that recent lowering of those prices proves me right, or proves anything particularly at all. Short-term changes in prices offer little evidence of anything.

Frankly, I think that looking at short-term events is an indication of a lack of thought. It is a knee-jerk reaction. It is a sign that the source has little understanding of actual economic processes and is instead seeking to support his own predetermined ideological position.

Of course, the recent downturn could become something more than short-term, meaning that it is too early to tell if the drop in prices means anything.  If the declines continue, then we have something to consider.

Suppose the drop in prices becomes a trend. We would need to ask why the drop is taking place. The first thing to do is to look at production. If production has increased, then we can regard that as a significant element of the price drop. As government actions, especially money creation, haven’t changed much, changes in production would be the major factor.

If there has been no change in either production or government activity, then we are faced with a weakness in the actual demand for the product. That is, economic activity is lessoning, and we may be seeing the first steps toward a downturn in the world economy.

What changes in commodity prices, prices that are more responsive to market changes than most, means depends upon the details. We should never accept knee-jerk reactions that look solely toward the government.

Thursday, May 5, 2011

A China Update

The Chinese government is rightly concerned with the rising level of prices within their economy. (Some here blame China’s problems on our own Federal Reserve System. While the economic actions of our governmental bodies certainly add to the economic problems in the world outside our own borders, we should not underestimate the ability of nearly all other governments to make decisions as bad or worse. China’s problems are mostly of their own making.) China has certainly been creating new made-up money with gusto. And don’t forget that the banking sector in China consists of (at least mostly) banks owned and controlled by the government. The Chinese equivalent of the Fed is aware that domestic prices are rising faster than is good for the economy (as if any consumer price inflation is good for anyone). They are now trying to slow the price rises and not bring their real growth to an end. It is going to be difficult, especially since they are using the same tactics that the Fed would use in the U.S.

To slow things down the Chinese government has been trying to reduce the growth in bank lending. They are not only using interest rates but are also trying to take cash out of the system. Their problem is that there is just too much cash running around. They will have to tighten up a bunch more to have sufficient impact, and that might, probably, increase interest rates sufficiently to reduce growth. When interest rates start up, they will then begin attracting money from other sources, which will not help their situation. That attraction will mean that other borrowers will have to compete and raise interest rates, maybe the U.S. will, also. Most countries are deathly afraid of rising interest rates. Higher rates are associated with slowing growth. This is just the opposite from actual economics. In a free economy, higher interest rates would signal that there was significant demand for capital. Higher interest rates would attract more savings and the rates would tend to do down. In this world controlled by central bankers and based upon fantasy economics, the supply of funds to loan is controlled by governments, and the supply is unlimited (and worthless, ultimately). Higher rates means that the governments are trying to slow the rise of prices and the fears of “overheated” economies, read worsening price inflation.

China’s problems are worse, however. According to one report, the real estate price boom has been raging. It said that prices for condos in the big cities has risen by over 50% in the last two years. 50%!!! One city has passed a law restricting the people who may buy these properties: not people from out of town nor speculators (plus a few other types). Real estate in China has reached the extremes of a boom market. It will reach a point, and I would think soon, that the last buyer will have bought (this is even more likely since many potential buyers are forbidden to purchase!). When that last buyer buys, the market will begin to fall, just like it did in the U.S. a few years ago. The fall will wipe out a lot of apparent value (paper profits) and will have significant, adverse consequences for the fake Chinese banking sector (fake because the banks are hardly real, independent actual banks). It will be interesting to see what happens. It certainly will be difficult for any company doing business in China. It will be difficult for Asia, coming on top of the Japanese losses due to its natural disaster (natural vs. man-made in China). It will be difficult for the BRICS, as tied together as they are. It will be difficult for Europe and North America, as dependent as we are for Chinese products. Maybe China will realize that a currency valued openly has some merit?

Whatever the actual results, what matters is how people understand the causes of the Chinese mess. More than likely, many people will point to the apparent greater amount of freedom the Chinese have had, i.e., the more their economy appeared to be capitalistic. They will ignore the degree of control the Chinese government continued to have, especially within the banking sector. Some may point to the currency controls the Chinese had, but many will also blame the Fed (not that it is bad to heap blame on the Fed – just be accurate). It is important that the proper cause be identified. We are the only ones who can do it.