Will First 'Atomic
Earthquake' Trigger Another Recession?
"Experts are most in demand when they know the least. Certainly when no one, including physicists and economists, really knows what might happen next. ... With the nuclear disaster, what if, instead of a loss of trust in the money supply, we confront a loss of confidence in the energy supply? As with the 2008-2009 banking crisis, this would affect every home and business worldwide."
Experts are most in demand
when they know the least. Certainly after disasters like the one that has put
Japan and the world in a state of shock for a week - when no one, including
physicists and economists, really knows what might happen next.
But the pattern of reaction
is always the same, whether after an earthquake, a hurricane, or a terrorist
attack as in 2001: Sooner or later scenarios on what the human tragedy will
mean for the economy - in the affected region and worldwide - begin to circulate.
At that point, there is always an expert who “cannot rule out” a global
recession - because everything is connected.
Scenarios of this sort seem
plausible at first glance, but as a rule they are contradicted by what follows:
Over the past few decades, almost no human or natural disaster has been severe enough
to negatively affect economic activity for more than a few weeks - and
certainly not on a global level. The question we should ask ourselves is why? And
could there be an exception this time that might apply to Japan’s “atomic”
earthquake?
After the nuclear meltdown at
Chernobyl in the Spring of
1986, the alarm bells sounded as far as Germany. This didn't keep Germans
from declaring that this was a great time, better than any other, for even
greater consumerism. More than 6,000 people were killed in the Kobe earthquake of
January 1995, a disaster that caused Japanese industrial output in that month to
decline 2.5 percent when compared to December, only to rally once again to pre-quake
levels by March.
The same applies to Hurricane Katrina and
the tsunami that hit Asia in late 2004. In Thailand, economic output declined in
the first quarter of 2005 - and returned to rapid growth immediately afterwards.
After the attacks of September 11, 2001, surveys show that the general economic
mood around the world went into a dramatic slump that fueled recession fears
for weeks. In reality, the opposite occurred. In the fourth quarter, the U.S.
economy ended the recession that had begun before the attacks.
Now like good statisticians, let's put these findings
of mild economic impacts into perspective: What the disaster
destroyed in the way of human life and buildings will by definition not be
deducted from the Gross Domestic Product (which in any case, would be a bit
macabre). The rebuilding process, however, increases growth.
But there are other reasons that disasters are routinely overrated. Damage estimates normally assume
that drops in growth roughly correspond to the growth generated by the
devastated region prior to the disaster. But many companies operate several plants,
not all of which are affected or running at full capacity. And even in the case
of highly-specialized mechanical engineering firms, there are always
competitors that can fill the gap in a crisis.
Moreover, governments and
central banks respond when threats of a market crash arise, compensating in
part for some of the consequences of a disaster. After September 11th, central
banks lowered interest rates and economic stimulus packages were introduced. In
addition, some global channels of transmission are not as globalized one might assume.
It’s true that pricing trends establish themselves quickly. But pure stock market
crashes like the one in October 1987 lead one to suspect that the real economic
impact of pure price crashes are rather small - because those affected are
rarely Hartz
IV recipients [welfare recipients], and are unlikely to run out and sell
their cars because of a change in stock prices. Even the crash of the New Economy [dot.com
bubble] was followed by a relatively paltry U.S. recession.
Part 2: Lehman Shocks Taiwan
The same applies to the real
economy. Studies show that even between countries that speak the same language
and have open borders like Canada and the U.S., there is significantly less
trade than between regions within each country. This is referred to by
economists as “home bias” - a tendency to invest at home, so to speak.
Economically speaking, all of
the above should be reason enough to sound the all-clear - if it weren’t for
the existence of a counter-example that, while it can only be considered a
natural disaster in the most limited sense, infected the globe at a breathtakingly
rapid rate: the Lehman
Brothers bankruptcy of 2008. Just the fact that Wall Street was suddenly
firing large numbers of people in the weeks after the Lehman bankruptcy caused
a 30 percent slump in exports from Taiwan.
Posted by WORLDMEETS.US
The American real estate
crash isn't enough to account for this. The U.S. real estate market makes up only
a fraction of global GDP. More plausible as an explanation is another
unexpected shock: Banks no longer trusted one another and would no longer grant
loans. This was previously unthinkable and led to a global end to pre-financed exports.
It was a systemic crisis of great consequence, because according to Holger
Schmieding, chief economist at the Berenberg Bank, no one
knew whether their own bank would still be there tomorrow. So they stopped
investing and took measures to safeguard liquidity. They were immobilized by
shock.
VIDEO: Assessing the
global economic impact of the crisis
in Japan, from the Financial Times, U.K., Mar. 17,
00:03:54
Direct damage, interrupted
supply chains or fluctuations in economic mood are not enough to turn a natural
disaster into a global crisis. This may be the difference between more-or-less inconsequential
economic disasters and those that have serious consequences: For the latter, there
must a fundamental disturbance to the system, as with the 2008-2009 crisis in bank
financing, on which everyone had shown a blind reliance.
The good thing is this: It’s
fairly implausible that Japan’s earth-atomic quake will lead to a renewed shortage
of liquidity among banks - in contrast to the period after the Lehman Bank
shock, when the banking sector was already in the midst of an acute crisis.
More threatening is the possibility
that a systemic shock could take another form. With the nuclear disaster, what
if, instead of a loss of essential trust in the money supply, we confronted a
loss of confidence in the energy supply? As with the lack of liquidity, this
would affect every home and business worldwide. This could lead to a similarly
abrupt halt in spending, which would very likely trigger a global economic
chain reaction.
Even experts don’t know
whether this will happen. However, after all the experience we’ve had with
disaster, it might be especially prudent to avert a systemic shock. Whatever
else happens will likely be economically manageable. That’s something, at least.
