"In Tokyo, good things [like affordable housing] have been created through private initiative.”

EMERGENT TOKYO: “This book demystifies Tokyo’s emergent urbanism for an international audience,
explaining its origins, its place in today’s Tokyo, and its role in the Tokyo of tomorrow”

"'As the Japanese government attempted to rebuild their devastated capital city [after the War], they initially drafted a comprehensive plan, but soon concluded that they lacked the budget to carry it out. And so, in areas where neither the government nor the country’s real-estate and transportation mega-corporations could properly fund reconstruction efforts, whole neighbourhoods instead rapidly rebuilt themselves. Working on a small scale, residents rebuilt homes and shops using scraped-together funds while relying on little more than their collective grit and inventiveness, and black markets full of micro-entrepreneurs sprung up around the city’s major train stations. These neighbourhoods were not initially planned, per se—they emerged, and their ramshackle, spontaneous spirit can still be felt today when walking Tokyo’s backstreets.
    "'This approach was adopted out of harsh necessity, but the resulting neighbourhoods have a striking charm: intimate townscapes with exceptional vitality and liveability, featuring a fine-grained urban fabric comprised of numerous small buildings.' ...
    "Because of Japan’s light touch, zoning it is relatively easy to build housing in Tokyo, and thus the city is not as 'unaffordable' as you might expect.*  Tokyo has also avoided the bland uniformity of the major cities in China....

    "Two full-time workers earning Tokyo’s minimum wage can comfortably afford the average rent for a two-bedroom apartment in six of the city’s 23 wards. By contrast, two people working minimum-wage jobs cannot afford the average rent for a two-bedroom apartment in any of the 23 counties in the New York metropolitan area. . . .
    "Some cities, like Singapore and Vienna, have bucked the trend by using public money to build affordable housing. Almost 80 percent of Singapore residents live in public housing.*
    "In Tokyo, by contrast, there is little public or subsidised housing. Instead, the government has focused on making it easy for developers to build. A national zoning law, for example, sharply limits the ability of local governments to impede development. . . .
    “'In progressive cities we are maybe too critical of private initiative,” said Christian Dimmer, an urban studies professor at Waseda University and a longtime Tokyo resident. “I don’t want to advocate a neoliberal perspective [sic], but in Tokyo, good things have been created through private initiative.”

~ Jorge Almazan, from his book Emergent Tokyo, NY Times from their article on 'How Tokyo Achieves Affordable Housing 'and Scott Sumner, from his post discussing both: 'Emergent Tokyo'

* 

RELATED:

 

Fix spec building to make Auckland affordable again - NOT PC, 2013
"The key to making Auckland liveable is to make it affordable—a fairly complicated and heavily politicised subject, so let’s try to make it simple: we won’t have an affordable Auckland until the model for “spec” building is viable once again.
""Spec building being 'speculative' building—a builder buying land, building a house and “speculating” he can sell it to a buyer for a reasonable profit. This is how the vast majority of NZ’s cities have been built, by small builders hoping to make a modest profit.
""But in recent years this model has broken. A simple back-of-the-envelope analysis demonstrates why...."

 

Exorbitant Money Creation + Unhampered Government Spending = Stagflation

Too much government spending and too-loose monetary policy lead to rising prices, and falling economic growth rates. The Keynesian theories on which continuing monetary expansion is based lead not to continuing prosperity but to stagflation. Keynesian garbage in, garbage polices and economics destruction out. The 

The problem is not just local, it is worldwide. Again and again, the belief has been proven wrong that central bankers could guarantee so-called price stability, and that fiscal policy could prevent economic downturns. The looming inflationary crisis is one more piece of evidence that interventionist monetary and fiscal policies are disruptive. Instead of a permanent boom, explains Antony Mueller in this guest post, the result is stagflation....

Stagflation—a Keynesian Curse

Guest post by Antony Mueller

“Stagflation” characterises economies that are plagued by inflation, combined with economic stagnation. This is where most of the world is right now, because of the failed (and failing) economic policies they have all followed. In this case, the conventional Keynesian macroeconomic toolkit of monetary and fiscal policy, that offers no help in fixing the crisis it has caused.

Rising price inflation rates and tanking economies are the results of the policy mix that has dominated past decades. It has become common to believe that decades of expansive monetary and fiscal policies would not cause price inflation; that the expansion was 'all under control'; that policies of so-called price stability had somehow 'tamed' the inflation caused by the state's usual money printers. 

As recently as 2020, economic policy worldwide followed the false consensus that combatting the fallout from the lockdowns with additional money creation and higher government spending would lead to an economic recovery without higher price inflation. It was blithely assumed that what appeared to work in 2008 -- flooding economies with newly-minted cash -- would also function in 2020. However, policymakers ignored the difference between the two episodes.

In the aftermath of the financial crisis of 2008, the stimulus policies did not immediately turn into price inflation, as it's commonly measured, because the newly-created money remained largely in the financial sector and it only spilled over into the real economy in a big way in rocketing house prices (exacerbated in NZ by sclerotic land and housing policies). Outside of this generational calamity, the main effect of the policy of low interest rates was to support the stock market and to provide a windfall to financial investors. While Wall Street flourished, Main Street was left on the sidelines -- and while profits surged, wages remained stagnant.

But this time it's different. In 2008, the production side of economies were 'mismatched' due to the earlier credit expansion, but still intact; but this time, they are severely damaged by a major pandemic.  The crisis of 2008 left the capital structure of the real economy intact. Due to the lockdowns, however, this is no longer the case. Consequently, severe interruptions of the global supply chains have happened. In such a constellation, new stimulus measures further weaken already fragile economies. 

The present situation is less like 2008, which most of of us still remember, and more like the oil price shock in 1973 -- which too many current economic practitioners and advisers have forgotten. At that time, like now, the external shock hit an economy rampant with liquidity. Stimulating the economy by fiscal and monetary expansion produced not prosperity but long-lasting stagflation. Back then, along with “stagflation,” the term “slumpflation” was coined to characterise an economy that is mired in a deep slump that then gets devastated by price inflation.

When stagnation and recession show up together with price inflation, the conventional macroeconomic policy becomes impotent. Applying the Keynesian recipe to an economy whose capital structure is still intact inflates bubbles; but applying it to one who capital structure has already been ravaged invites disaster.

Intentionally or by ignorance, policymakers neglected the long-term effects of their doing. Going this wrong way led to such aberrations that policymakers and their intellectual bodyguards even tended to believe that some truth could be found in the alchemy of the so-called modern monetary theory and market monetarism.

The consequences of these policy errors have now come to light. They are particularly grave because they were committed by all major central banks and the governments of all leading industrialised countries. They all follow the concept of “inflation targeting.” Other than timing, there has been not much difference among the policies of major Western economies. Japan is a special case only insofar as its policymakers have applied the Keynesian recipe for over three decades by now.

Let us have a look at Japan first and then at the United States -- who both offer lessons for New Zealand.

Japan

Japan began applying vulgar Keynesianism as early as in 1990. Faced with a slight downturn after the boom of the 1980s, instead of allowing things to cool down, the Japanese leadership instead insisted on going on with the show.

Yet, the more the government began to accelerate public spending and increases the fiscal stimuli, the less its spending policy produced economic recovery. Even when monetary policy fully supported the government’s expansive fiscal policy, the hoped-for recovery did not materialise.

John Maynard Keynes, on whose theories this "rescue" was based, once advised that policy-makers should ignore advice that such loose spending would lead to destruction in the long run -- "in the long run," he quipped, "we're all dead." But Japan's short run is now the long run: its policy mix of fiscal and monetary expansion has been going on now for three decades. In recent times, the Bank of Japan even doubled down, setting extremely low-interest rates and finally resorting to negative interest rates (NIRP). In the meantime, public debt as a percentage of the gross domestic product (GDP) rose to a whopping 266 percent (see figure 1).

Figure 1: Japan: Policy interest rate and public debt as a percent of GDP

Source: Trading Economics.

Despite its magnitude, this stimuli did not lift the Japanese economy out of its quagmire. Instead, economic growth remained anemic for a quarter of a century (figure 2).

Figure 2: Japan: Annual economic growth rates of real GDP

Source: Trading Economics.

As an “early starter” in applying vulgar Keynesianism to its 'macroeconomy,' the Japanese economy was also early to suffer from productivity stagnation. Unlike economies like the United States, France, Germany, and many other industrialised countries, which have continued with productivity gains over the past decades, after it had begun with its extreme Keynesianism in the 1990s Japan's has moved sideways (and New Zealand, for slightly different and equally tragic reasons, has followed a similar path -- figure 3).

Figure 3: Productivity per hour worked: Germany, United States, France, Japan, New Zealand

Source: Our World in Data.

It is important to note that one of the most devastating effects of the Keynesian policy mix is its effect on productivity. A country’s long-run economic progress (or growth, as it's often called) is mostly the result of productivity gains. Labour productivity is the main determinant of wages. A slowdown in productivity precedes the economic decline. When the output per unit of input tends to fall, even lower interest rates will not stimulate business investment. The marginal productivity of debt, already low, diminishes even faster -- and further. 

And when government then jumps in to compensate for this “lack of aggregate demand,” things get even worse because governmental enterprises are fundamentally less productive than the private sector.

The United States

Confronted with the financial crisis of 2008, the US government abandoned any sense of economic responsibility and decided instead to launch a series of stimulus packages. The American central bank provided full support, drastically reducing its interest rate.

As a result, the ratio of public debt to GDP rose from 62.6 percent (in 2007) to over 91.2 percent just three years later (in 2010), reaching a full 100.0 percent in 2012. The next two boosts came in the wake of the policies to counter the effects of the economic lockdowns, when the ratio of public debt to GDP rose to 128.1 percent in 2020 and to 137.2 in 2021 (see figure 4). It took less than fifteen years to more than double an already barely-sustainable debt -- and, unfortunately, New Zealand governments chose a similar destructive trajectory.

Figure 4: The United States: Policy interest rate and federal debt as a percentage of GDP

picture4.png

Figure 4a: New Zealand: Policy interest rate and government debt as a percentage of GDP

Source: Trading Economics.

In the face of the crisis in 2008, the American central bank brought down its interest rate quickly from over 5 percent in 2007 to under 1 percent in 2008 (NZ's meanwhile dropped its rate from 8% to 2.4% over the same period). After a short-lived period when the American central bank tried to raise the interest rates, the consequent market reaction of falling prices of bonds and stocks induced the Fed to resume its policy of “quantitative easing” that combined low interest rates with the massive expansion of the monetary base. 

Then, in early 2020, still trying to escape from the bear-trap of quantitative easy, it also began trying to "ease" the economic effects of the lockdowns with its patent brand of monetary salve, deciding to continue with its expansive monetary policy. And not just to continue, but to accelerate! In due course, the central bank’s balance sheet rose to $7.17 trillion in June 2020, reaching $8.96 trillion by April 2022. Once again, New Zealand's Reserve Bankers followed the lead.

Figure 5: Balance sheet of the US Federal Reserve System & NZ Reserve Bank

Source: Trading Economics.

As figure 5 shows, the Fed had tried to trim its balance sheet somewhat from 2015 to 2019 when it had brought down the sum of its assets to $3.8 trillion in August 2019. Yet beginning already in September 2019, many months before the lockdown was implemented, the balance sheet of the American central bank began to expand again and reached over four trillion before the additional big increase happened due to the fallout from the lockdowns. (And, once again, NZ's central wbankers followed their 'expansive' lead.)

Since the time before the financial crisis of 2008, the assets of the Federal Reserve System rose from $870 billion in August 2007 to a whopping $4.5 trillion in early 2015 and to around nine trillion US dollars in early 2022.

Even when inflation rates began to rise towards the end of 2020, the US central bank had kept its policy of tapering small and refrained from tightening. The monetary authorities had simply abandoned the objective of reining in the money supply, becoming instead almost Wall Street's banker. Each time they tried to tighten monetary policy, the financial markets began to tank and tended to crash. As soon as the central bank began to raise its policy rate of interest, the bond market began to tank and took the stocks down with it. In 2022, it was not different. Yet in early 2022, the policymakers could not shrink back. Different from the episodes before, the price inflation had begun to skyrocket (see figure 6, and NZ following in almost lockstep, figure 6a).

In the first months of 2022, stagflation became fully visible. While price inflation rose, the rate of real economic growth began to fall. In the first quarter of 2022, the US inflation rate moved up to a rate of 8.5 percent, while the real annual growth rate fell by 1.4 percent. Similar things were happening in the South Pacific.

Figure 6: United States: Policy interest rate and official consumer price inflation rate

Figure 6a: New Zealand: Policy interest rate and official consumer price inflation rate

Source: Trading Economics.

Of course, none of this should come as any surprise. With global supply chains in disarray, and national protectionism on the rise, the assistance that came from the expansion of international commerce after the crisis of 2008 is no longer with us. The lockdown of economies has severely hurt the global system of supply chains -- and now, a huge monetary overhang meets a shrinking production. The war in Ukraine, which started in February 2022, is not to blame for the distortions, albeit it will make them more severe.

Conclusion

The levee broke. Price inflation is on the rise. This is the result of the accumulation of liquidity that has been going over decades. There is the risk that things will get worse because the world economy has been severely wounded by the lockdown. More so than only mild stagflation, a “slumpflation” looms on the horizon as the world economy gets mired in the morass of a deep slump combined with steeply rising price inflation.

But the problem was not inevitable -- it is a result of specific policies followed out on the basis of flawed economic theory. Local politicians are right in one way to blame the problem on global issues -- the problem is that this destructive Keynesianism is everywhere, and as long has it is, so will the problems.

* * * * 

Author: Dr. Antony P. Mueller is a German professor of economics currently teaching in Brazil. See his website and blog. A version of this post previously appeared at the Mises Wire.

Japan’s Abenomics Death Spiral

The Berlin Wall hasn’t been the only near-scientific experiment in recent decades testing political and economic ideologies to destruction. As Peter Schiff writes in this Guest Post, in recent years Japanese Prime Minster Shinzo Abe (pronounced Ar-Bay) has turned his country into a virtual petri dish of Keynesian ideas. The result, as even he has now had to concede -- and as has been reported many times here at NOT PC --  is a rolling economic disaster.

As Japanese Prime Minster Shinzo Abe has turned his country into a petri dish of Keynesian ideas, the trajectory of Japan's economy has much to teach us about the wisdom of those policies. And although the warning sirens are blasting at the highest volumes imaginable, few economists can hear the alarm.

Data out this week shows the Japanese economy returning to recession by contracting for the second straight quarter (and three out of the last four quarters). The conclusion reached by the Keynesian apologists is that the benefits of inflation caused by the monetary stimulus have been counteracted, temporarily, by the negative effects of inflation caused by taxes. This tortured logic should be a clear indication that the policies were flawed from the start.

Although the Japanese economy has been in paralysis for more than 20 years, things have gotten worse since December 2012 when Abe began his radical surgery. From the start, his primary goal has been to weaken the yen and create inflation. On that front, he has been a success…

Shinzo Abe and the Three Magic Arrows

Japanese Prime Minister Shinzo Abe is in New Zealand this week. If there aren’t questions about his economic management, says Andy Sirkis in this guest post, there should be.

Despite claims to the contrary in the mass media, Japan’s economy is continuing to suffer mightily under the leadership of Prime Minister Shinzo Abe. Abe is from a famous family and he’s a convincing talker, so he was able to bamboozle people into believing that he could make Japan prosper with his three arrows. These metaphorical arrows stand for “monetary stimulus,” “fiscal stimulus,” and “structural reform.”

When Abe was elected using his “three arrows” symbolism to attract votes, I thought the Japanese people were beginning to believe in magic. Perhaps they were gullible or a little lazy in thinking or thought they would receive “free stuff” from Abe. No matter, Abe became Prime Minister in December 2012 and shot off his arrows.

With his “monetary stimulus” arrow, Abe arm-twisted the central bank into doubling the money supply in just a few months time. I could just imagine Abe rubbing his palms together and fiendishly muttering “We’re going to be rich, rich, RICH!” All that the central bank had to do was type a few numbers into their computers to make this happen. Naturally, the newly created money was distributed to politically powerful banks.

How did all of this money creation affect the common people? Despite claims that Japan has less than 2 percent inflation, I can assure you that the prices of many goods, especially imported goods like energy, have increased dramatically since the monetary stimulus arrow was fired. Wages, on the other hand, have remained depressed. With higher expenses to pay, Japanese people can’t afford other goods they would like to buy and businesses can’t afford to raise wages, hire, or expand. Only Abe’s bankster friends have profited from this scheme by speculating in the stock market with the counterfeited money that had been credited to their accounts with the central bank computer.

Japanese people are mostly smart enough to realize that typing numbers into a computer can’t make an economy strong, yet they just haven’t figured out that Abe’s monetary stimulus is nothing but a sneaky counterfeiting scheme.

At the same time as the monetary stimulus arrow doubled the money supply, Abe and his gang used their fiscal stimulus “arrow” to enormously increase spending on government works projects. Unlike capitalists who at least try to invest productive enterprises, the government allocates money based on pull and other political considerations. Wasting money on things like a new sewer system in Kobe, replacing a perfectly good Olympic stadium with an expensive new one, and handing out plum contracts for highways to nowhere will never generate a profit. Government investment is more like consumption, often creating a 100-percent loss.

These money-losing projects weigh heavily on the people. After all, just like the good people of Dunedin, they will have to pay for this waste in the form of higher taxes and higher debt service. Even if by some miracle the fiscal spending created a profit, the money wouldn’t be distributed to the taxpayer. Heads you lose, tails you lose.

Most Japanese people are smart enough to realize that investing in things that lose money can’t make an economy strong, yet they just haven’t figured out that Abe’s fiscal stimulus is nothing but a sneaky scheme to enrich his well-connected friends. After nearly twenty-five years and fifteen rounds of fiscal stimulus spending, you’d have to be totally bamboozled to still be a believer in this failed Keynesian claptrap.

To pay for his “fiscal stimulus” arrow Abe decided to raise taxes and take the money he needed by force. He raised car taxes and income taxes and he raised sales taxes by 60 percent, but he also announced plans to raise sales taxes by 100 percent. He is considering increasing taxes on married people and poor people. With each tax increase and threat of further tax increases, the economy has weakened further.

And what of Abe’s third arrow, “structural reform”? No one knows what this political slogan actually means. It sounds like some modern-day form of Soviet-era Glasnost, which was at least some kind of relaxation of controls, but there’s been no significant deregulation or loosening of government controls that have stifled rather than stimulated the Japanese economy.

We do know that Abe has spent a great deal of effort making enemies with the neighbours. Effectively, Abe’s aggressiveness in foreign affairs is the real third arrow.

As with the other arrows, this too seems aimed directly at Japanese feet – but could still have dangerous international effects.

Abe has severely damaged relations between the peaceful and industrious Japanese people and their business trading partners in the neighbouring countries of China, Russia, and South Korea. Business deals such as the effort to build a gas pipeline between Japan and Russia have been scrapped. Profitable trading in South Korea and especially China has been crushed by Abe’s undiplomatic actions. Via his confrontation with China and sanctioning of Russia, Abe has recklessly followed the dictates of the warmongering US government, all to the detriment of the Japanese people.

Abe’s arrows have been praised in the media by the economically ignorant, the politically motivated, and those who believe prosperity is parcelled out by some all powerful shaman. In the harsh light of reality, however, the arrows, turn out to be:

• a counterfeiting scheme,
• “investing” in money-losing ventures,
• taking money from the productive, and
• squabbling with the neighbours.

These counterproductive political actions won’t ever result in a stronger economy, and have instead left the Japanese people with even more crushing debt and a growing tax burden.

Don’t get taken in by the hogwash you read in mainstream media propaganda pieces. Abe’s policies are complete and utter failures.

---

Andy Sirkis is an American expatriate living in Japan.
This post first appeared at the Mises Daily.

How much is a quadrillion?

The question is, how much is a quadrillion?

Answer number one: it’s twice Japan’s GDP.

Answer number two: that’s how much the Japanese government now owes, after trying to lift up its economy by overspending on the back of rapidly expanding government debt.

One quadrillion dollars. More than seven-million yen per taxpayer.  One-thousand trillion yen in total, owed to Japanese’s aging savers.

Here it is in zeroes:

1,000,000,000,000,000.

And here’s the really sad thing: After twenty-three years of their government trying to fix their 1990 depression by borrowing and overspending , they’re still in it. And the debt they’ve amassed in trying to fix it has just passed the fifteen-zero barrier, and it’s accelerating.

But here’s what’s really, really sad: virtually every government in the west is trying to emulate them.

Think it will end well?

[Hat tip Riko Stevens]

Are Russel Norman and Bernard Hickey watching?

Japanese Prime Minister Shinzo Abe was voted in promising the electorate he would “print” money to infinity. The promise, premised on destroying his currency, was supposed to boost Japanese exports and throttle imports.

So five months after the election, you might be wondering how Abenomics is doing?  Well, he got his wish about the Yen. It is being destroyed…

But how about the promises he made when this happened—that it would produce prosperity and boost exports?

Japan's insane policy has so far pumped the stock market up by 35% and crushed the yen down by 22%. The results? Imports +9.4%, exports +3.8%. Their trade deficit fell to the worst level in decades.

Oops.

Says Reuters, “The result underscores the limitations of a weak yen in bolstering the trade sector, especially as external headwinds crimp demand for exports.”

In other words, destroying your currency does nothing to boost exports. And when exports themselves are relying on factor inputs that come from overseas—steel, oil, gas, etc.—and all these are now rocketing in price, turns out the costs of these imports go up, and the costs to export do too.

Turns out, in other words, you can’t print yourself rich after all. But you can pretend to by inflating the stock market.

I hope rabid inflationists Russel Norman and Bernard Hickey are watching.

And I hope when things turn really sour Shinzo Abe’s other promise, to militarise Japan, doesn’t turn out as some of us fear it might.

[Hat tip Mish & Keith Weiner]

Bubble finance brings Australasia a new world-historical moment

You might have noticed that the mantle of Australasia’s most highly valued company has been passed from one that produces resources from out of the ground, i.e., BHP, to one that creates credit out of thin air, i.e., the Commonwealth Bank of Australia. Close on the CBA’s heels is fellow credit-creator Westpac, said to be “within a good trading session of knocking BHP out of second position.”

Just so we’re clear, this is not normal. This is historically, a very important turnaround—a new world-historical moment. The turnaround has puzzled many people, but it shouldn’t have.

Well, that’s where you can thank Dr Bernanke and the [world] banking system. For start, banks can do something mining companies can’t – banks can create money from thin air in order to create an asset.
   Mining companies however, have to beg for money from banks, other financial institutions and investors. And rather than just stamping ‘approved’ on a loan form to create an asset, resource stocks have to spend millions to obtain their assets.

Financial Services Index – blue line; Metals & Mining Index – red line
Source: Google Finance

Get the difference: mining companies have to earn money;  whereas in the “new economy” created by the central bankers, banks literally create money—and in the last few “post-financial-crisis” years of central bank rule, they’ve been told to create as much as they possibly can.

And so they have. And so we arrive at this blessed moment in time, when profits are bought not by how much value you can produce, but by how close you are to the bankers’ printing presses.

It’s the same thing powering the “record highs” in US, Japanese and European stock markets. If you think the Nikkei, the Dow  and the Dax have risen this year around 35%, 20% and 10% respectively because US, Japanese and European businesses have got 35%, 20% and 10% more profitable, then I have a bridge, some government paper, and parcel of wrapped CDOs I can sell you.

Instead, each one has ridden to new highs on the back of an avalanche of paper promises exuded by central banks like the US Federal Reserve, and extruded out of lending banks like the CBA.

The idea that a central bank can artificially stimulate an economy without side effects is naive. The 1920′s and 1930′s saw huge leaps in industrial innovation, but it didn’t stop the Great Depression and more than a decade of misery.
    One problem with central bank meddling is that it creates an uneven economy.

This problem is magnified with every profit announcement favouring money printers over money earners—and exacerbated with every investor keen to ride this new bubble to the top.

Is present monetary policy rational? Only if you think it makes sense to deliver substantial short-term windfall profits to owners of stocks, bonds, and real estate—bought at the expense of any genuine long-term prosperity.

DOWN TO THE DOCTOR'S: The land of the sinking sun

Libertarianz leader Richard McGrath takes the new Japanese Prime Minister into his clinic for a once-over.

Japan Pumps More Money Into Economy - The Japanese government has a bold new blueprint for the economy that will create over half a million jobs. At least, that’s what the headlines tell us.

What a cunning plan! It's never been tried anywhere before. You see, they've come up with this great idea where if you fire up the printing presses and make lots of money tokens, everyone will be richer. There will be a vicious cycle of spending and an upwardly spiralling standard of living, an unstoppable chain reaction of wealth creation until the whole Japanese population are living like the Sultan of Brunei.

I hate to break it to the Japanese government but this won't be the first time governments have tried to "stimulate" their country's economy by producing money tokens. President Obama tried it with QE1 and QE2 - and is trying it on an ongoing and indefinite basis with QE3. Any recovery the United States makes will come at the expense of a collapsing U.S. dollar, and eventually the nightmarish prospect (for some) of the greenback being supplanted as the default world currency.

In fact, it’s not even the first time the Japanese government has tried to “stimulate” their economy with phoney money and phoney “stimulus.” They’ve been doing it for two decades since their economy first fell into a hole, and the result of their “stimulus” has only been to make matters worse. In fact, it’s not even the first time this Prime Minister has tried it: in his previous (short) term as PM he kept the printing presses going, as it was held by his economic advisers a good PM should.

Much of these new Japanese money tokens however will be used on rebuilding after the tsunami and earthquakes-- which wouldn't be an issue if all property was privately owned and responsibility for insurance lay with owners; on 'support for regional economies' (read pork-barrelling and cronyism); and on 'investment’ in education (why not let the private sector, and the pupils and their parents, provide their own solutions to educational demand in the affected areas?) and on social security (if you can possibly call that “investment”--probably needed for those who have paid taxes all their lives and are thus reliant on a government pension, especially once the govt chews through their savings, but what about making a start to liberalising Japan’s tumescent welfare system by stopping payments for people who don't work?).

The Japanese government, by the way, has already foisted upon its people the world's highest debt relative to GDP (at 236% in 2012) and the second highest absolute debt in dollar terms. Interest payments alone, even at the historically-low current rates, take up around half of the government’s current tax receipts.  The IMF can see no option other than raising the consumption tax to relieve Japan of some of its debt, but even this is much to little and far too late. And from a Keynesian point of view, won't that tend to depress so-called “aggregate demand”? Oh dear!

The classical liberal approach to the mess in Japan would be to stop government from intervening in the economy altogether—let  the market sort out its delinquent traders, allow them to be liquidated and their assets redeployed into more profitable ventures. Let prices fall to a sustainable level so folk can make use of the little real money they have left, and businesses can get going again properly on sustainable and more profitable footing.

Instead of which, the government’s  'support for regional economies' will prop up failed enterprises and allow them to continue to operate with an unfair advantage over their competitors (about which, when it happens in NZ, the Anti-Commerce Commission does nothing). And prices will continue to be propped up, putting them above what they need to be to make businesses pay.

In any case, the state should not need to print money—private banks are quite capable of doing this, as they do in Hong Kong and other jurisdictions where they produce real (asset-backed) money. Printing money tokens however that debase the currency and destroy the livelihoods of those on fixed incomes should be an offence worthy of imprisonment for any politician that tried it, not the basis for knighthoods and other rewards.

See ya next week!  
Doc McGrath

Will the catalyst be Japan?

Which country has the biggest government debt-t0-GDP ratio in the world?

Which country went into recession two decades ago, and has never really emerged?

Which country’s leader has signalled he intends to print money, QE to infinity, to monetise that debt?

The answer to all of these questions is not Greece, Spain or Italy. Nor is it the U.S.

It’s Japan.

With interest rates at zero and government debt more than double its GDP—and rising—and an aging population who have virtually denuded their savings in patriotically buying govt bonds, it has little hope of ever reducing that debt honestly, and no hope at all if interest rates ever rise.

Japan is the world champions at kicking the can down the road—zero interest rates and piling up govt debt for two decades in a desperate but vain attempt to create the “stimulus” theorists say should have resulted in prosperity—consuming capital and chewing up the pool of real savings like a shark at a city beach—producing only more debt, more “deflation,” falling wages, falling production, falling demand,  and two decades of stagnation.

And over the weekend, the Japanese election gave victory to the opposition Liberal Democratic Party, whose leader Shinzo Abe has for months been saying he will engage in quantitative easing beyond even the dreams of Bernard Hickey, printing paper money to monetise the debt and beyond—enough to turn “deflation” into raging inflation, and Japanese paper and government bonds into toilet paper.

‘He’s also on record as saying:

“he went into politics to help Japan ‘escape the postwar regime" and throw off the shackles of wartime guilt. In its place he has talked of creating a "beautiful Japan" defended by a strong military and guided by a new sense of national pride.

He also intends

to change the constitution to allow Japan to "have a proper military and defend its own territory, including every inch of Japan's sacred land and sea - including the disputed Senkaku or Diaoyu Islands”… Mr Abe belongs to that part of Japanese society that does not really believe Japan's wartime aggression against China and South East Asia was a crime.

The world is carefully poised for catastrophe. Something profoundly bad is going to happen somewhere to set it off.

Will the catalyst be Japan?

KRIS SAYCE: Bad News from the “Asian Century”

Guest post by Kris Sayce from Money Morning Australia 

Part 1: Bad News from the “Asian Century”

Writing in Melbourne’s Age newspaper, Climate change adviser Ross Garnaut

has lambasted Australian executives for destroying shareholder funds in the blind belief China’s demand for Australia’s big three mining exports would continue to climb.’ 

Perhaps Mr Garnaut should ask why company executives are blowing up shareholder funds.

Maybe it’s because for 30 years, Australian governments have spouted off about the Asian economic boom.

And now the Aussie government has just released the Asian Century white paper. The gist of the white paper is that Asia will undergo an economic boom for another 100 years.

But before you trust everything the government says, just remember that they can’t even correctly forecast their budgets six months in advance. So we find it hard to take a 100-year forecast with anything more than a pinch of salt.

Our advice? Ignore the long-range forecast and look at history instead. That’s because history tends to offer useful lessons for the future…including a lesson Australia could learn from previous Asian booms and busts…

Take this report from the New York Times in 1996:

‘Are East Asia’s fiercely competitive tiger economies starting to lose their fangs?

‘Things probably have not gotten quite that bad. But if the teeth are still intact, they have lost some of their sharpness of late. Export growth for many countries in the region – including the original “Four Tigers” of Singapore, Taiwan, Hong Kong and South Korea, as well as a half-dozen other countries that are following the same fast-growth path – has slowed sharply this year. And China’s exports have actually declined.

‘The deceleration in part reflects a healthy cooling off of economies that were running the risk of overheating. But it also raises questions about the staying power of East Asia’s export-driven economic boom. In particular, it translates into a deterioration of the region’s trade balance.’

One year later, the Asian Economic Crisis was in full flow. The Asian Tiger economies collapsed and their currencies were devalued. To rub the salt in, the International Monetary Fund (IMF) handed out bailout money.

In simple terms, the cause of the Asian Economic Crisis was over-investment, over-borrowing, and over-enthusiasm…

Asian Tiger Slaughtered

It was a classic bubble. An investment or economy begins growing on its own fundamentals. This attracts attention. So more people invest. Things get even better…imagine if growth continued at this rate.

Then the snake-oil salesmen arrive. In this case they called it the ‘Asian Tiger’. Businesses expanded and new businesses appeared. But because they hadn’t saved enough, they had to borrow money.

The banks cautiously loaned money at first. But when they started seeing the returns, they imagined what they could have made if they had loaned twice or three-times as much.

You get the picture. In the end, like every investment bubble in the history of mankind, the world runs out of fools who are prepared to buy into the bubble.

The euphoria that sucked everyone in disappears. Replacing it is fright as everyone rushes for the exit.

They sell the investment at a loss. Businesses can’t sell enough goods to repay the loans. That means loans go unpaid. The currency falls as investors abandon it for safe haven currencies…and finally, the whole economy collapses in a heap.

That’s the (abridged) story of the Asian Financial Crisis. And it’s the story of every other asset or economic bubble…and it’s the story of the Chinese economic bubble.

‘Oh, but Kris, China is different, it doesn’t have a bunch of external debt. It owns other nations’ debts, so it will be fine.’

We often hear that excuse.

But, it’s worth paying attention to an article in Forbes earlier this year:

‘Here’s some terrific news about China’s economy: at the end of last year, the debt-to-GDP ratio of the Chinese government, the key measure of its fiscal sustainability, stood at 16.3%. That’s an improvement from the already impressive 17% at year-end 2010.

‘Based in large part on Beijing’s low debt load, the Economist’s “wiggle-room index,” which ranks economies on their ability to afford stimulative measures, assigns a great rating to China. Of 27 emerging nations, only petroleum-blessed Saudi Arabia and Indonesia look stronger…

‘All this sounds wonderful, but none of it correlates with the facts. The 16.3% calculation excludes Beijing’s “hidden liabilities.” Once you add them in, China’s debt-to-GDP ratio increases to somewhere between 90% and 160%. And if you believe Beijing has been overstating its GDP recently – it has, at least starting from the last quarter of last year – China’s ratio approximates Greece’s 164%.’

Greece is Nothing Compared to China

Wow! The European Union is on the verge of collapse, and asset markets have crashed due to Greece’s debt problems. Given the relative size of the Greek economy to the Chinese economy…

Click to enlarge

…can you imagine what will happen to asset prices when the Chinese economy implodes? It almost doesn’t bear thinking about. Only you have to think about it because the Australian economy is handcuffed to the Chinese economy.

Now, we’re not saying that China won’t be an economic force…to a large degree it already is. But what we are saying is something we’ve said for the past couple of years.

That is, regardless of a country’s strength, economic growth doesn’t go up non-stop forever. Booming economies will always have periods of bust.

If an economy sees excessive credit growth and an economic boom, as sure as night follows day, that economy will see credit contraction and an economic bust.

Bottom line: 100 years is a long time, and anything can happen. But don’t fall for the spin that Australia’s future wealth is safe.

The Chinese economy is following the same path as every other economic boom…and it will soon follow the same path as every other economic bust.

History will show that the Asian Financial Crisis was nothing compared to the coming fallout from the Chinese Financial Crisis.

Part II: Is the “Asian Century” Already Kaput?

It’s getting tasty in China.

Yesterday, the Financial Times noted:

‘Chinese listed companies have reported a sharp rise in unpaid bills during the third quarter, in one of the clearest signs yet of the toll that China’s economic slowdown is taking on corporate balance sheets.’

We wonder how that will fit in with the government’s plans for the so-called ‘Asian Century.’ Not very well we’ll wager…

Last weekend, Australian Prime Minister Julia Gillard released the long-awaited Australia in the Asian Century white paper.

The paper notes:

‘The Asian century is an Australian opportunity. As the global centre of gravity shifts to our region, the tyranny of distance is being replaced by the prospects of proximity. Australia is located in the right place at the right time – in the Asian region in the Asian century.

‘For several decades, Australian businesses, exporters and the community have grown their footprint across the region. Today, for Australia, the minerals and energy boom is the most visible, but not the only, aspect of Asia’s rise. As the century unfolds, the growth in our region will impact on almost all of our economy and society.’

It sounds impressive, right?

The argument is that Asia will become the global economic powerhouse. Therefore, because Australia is on Asia’s doorstep the Australian economy will benefit.

As impressive as it sounds, it’s also completely misguided, and we’re sorry to say, woefully wrong.

But we look at it like this: it’s like a fat man thinking he’ll lose weight if he stands next to a skinny man!

But we’re not the only one to criticise the white paper. Michael Pascoe wrote in Melbourne’s Age that ‘the PM has offered a statement of the obvious.’

While Clinton Dines, formerly of BHP China, told the Age, ‘With a slowdown and budget deficit looming, one suspects that Ken Henry’s efforts are doomed to go the way of his tax reforms.’

We’re happy when the mainstream criticizes government policy. Only this time, the mainstream is wrong too…

The “Asian Century” is Already History

The reality is when we look back at today from the future, the Asian century (in the way the government envisions it) will prove to be nothing more than an Asian decade…or two decades at the most.

If the government, businesses and investors have pinned their hopes on the Chinese Dragon and Asian Tiger, they’ll be sorely disappointed.

By attaching their hopes to Asia, they’re in danger of missing out on the real story of the next 100 years. It’s what we call the ‘Wired Century.’  (This is a theme we wrote about in the latest issue of Australian Small-Cap Investigator.)

The fact is, in some ways the era of backing one geographic location over another are over. So are the days of benefiting from being close to a booming nation.

Let’s be honest, Australia’s closeness to China hasn’t been as important to the Australian economy as most think. What’s more important is that Australia has the natural resources that China needs – copper, iron ore, and coal.

But Brazil has a bunch of this stuff too. So does Canada, Chile and Africa. And the last time we checked, Brazil is three times as far from China as Western Australia is from China…and that’s as the crow flies. In nautical miles the distance is even greater.

And if we’re not mistaken, the US has relied on Middle Eastern oil for years. You could hardly call them neighbours.

Distance doesn’t matter compared to having a resource in demand. The fact that Australia has a bunch of resources and is close to China is just a bonus.

In short, anyone hoping that Australia will cash in on the supposed ‘Asian Century’ is kidding themselves.

Australia Needs to Exploit the Wired Century

Yes, there are benefits of being close, but there’s something much more import. And that’s technological innovation and global trade.

This is the real benefit for Australia.

So if you’re after a clue about the future, we suggest you take in the two following excerpts. First this from the Age:

‘The rise of the internet has killed the newspaper business model, but demand for television remains enormous.

‘According to The Cross Platform Report by researcher Nielsen, United States viewers still spend around four hours a day watching TV, barely down from record highs.

‘Does this make the battered shares of Seven, Nine and Ten cheap buying for potentially-rich stocks? No.

‘Australian television broadcasters are at the very same tipping point newspapers reached a few years ago, just before their problems became near-terminal.’

And this from the London Times:

‘The world is “drowning in data” and computing companies are running out of space to store it, one of the technology sector’s best-known – and most controversial – figures has warned.

‘Mark Hurd, the president of Oracle, said that the amount of data being produced by the nine billion devices connected to the internet had grown eightfold over the past seven years, putting incredible strain on the companies that need to process and store it all.’

New technology, new business practices, and new consumer behaviour is having a big impact on the local and world economy. And that impact will only grow.

As we wrote in the latest issue of Australian Small-Cap Investigator, 16 years ago the Sayce household only had one device connected to the internet (a desktop computer).

Today, between  this writer, the missus and two kids, we have 12 internet-enabled devices. And as far as we’re concerned, the world is barely 5% of the way through the technological revolution.

The Most Important Skills You Can Learn

Bottom line: forget the Asian century. Forget the nonsense about forcing kids to learn Mandarin, Japanese, Hindi and Indonesian.

Sure, those skills will be handy. But on the importance scale, they are far, far behind the most important skills any kid (or adult) could learn today. We’re talking about encouraging kids to learn more technological and web skills.

If Australia (or anywhere) has any chance of building a successful economy over the next hundred years it won’t be through foreign languages or as the mainstream economists seem to think, by building more houses, it will be by embracing and exploiting the Wired Century.

That’s the future for Australasia. But only if governments stops butting in and let schools and businesses get on with building those skills.

Cheers,
Kris

Kris Sayce is an Investment Director for Port Phillip Publishing and an editor for Money Morning Australia.

China, Japan, those islands--and the coming collapse of ‘the bargain’

The Middle Kingdom Problem

LAST WEEK I POSTED pictures of riots inside China against Japanese “occupation” of some rocks in the East China Sea the Chinese call the Diaoyu Islands, and the Japanese call Senkaku Islands. We might call them just islets, because these rocks (see them above) just don’t make the grade as islands.

So why is feeling running so high in China about the Diaoyu/Senkaku Islets that smiling car dealers can hold up banners with perky slogans boasting: “We will kill every Japanese person even if it means deaths for our own”? And Chinese movie theatres can have signs outside saying, “If you find Japanese men, kill them; if you find Japanese women, rape them”?  And hundreds and hundreds of thousands of Chinese can march in streets, burn Japanese businesses and beat anyone driving Japanese cars. 

A national wave of nationalistic sentiment is directed (at the moment) at the moment, at Japan—over a bunch of unimportant rocks that are not even habitable.

Why?

There’s clearly, you would think, something more significant going on here, something more symbolic than actual.  Historian Scott Powell pointed out, in the first of our online Chinese History lectures last weekend, that whenever you see such anger over something so apparently insignificant—whether it’s one person or millions of people--there is clearly something there deeply connected to that person’s—or those people’s—core values.*

So what core values could be involved here ?  And how might understanding them help us evaluate China’s future?

Scott’s answer was to go back 200o years, to something of which commentators (who talk just about oil and gas and geopolitiks) and economists (who talk just about trade ties and GDP and China’s manufacturing base) would both be unaware, but good historians will not. 

Scott calls it the “Middle Kingdom problem.” Which is to say that for over 2000 years, Chinese considered China the natural centre of the world.  Even the universe. For 2000 years they were the power in Asia—in the world; in the universe!—to which all others paid tribute. This has a powerful effect on a nation’s psyche.

Then came a shock from which the psyche has still not recovered.  First was the growing western impingement upon China—evidence, increasing with each contact, that China was a declining world power. Then came the serious shock: in its war with Japan of 1894-1905, when Japan first annexed these islands, China was beaten. Beaten by what, for 2000 years, had been a small tributary power but which now, through its emulation of western technology, had vaulted ahead.

For China, this represented a gigantic, barbaric, 200o-year-old loss of face. Symbolically, it represented the arrival of Japan on the world stage, and the end of the illusion of China as a great regional power.

This hurt. Deeply. It still does.

And this is the deeper significance of the Diaoyu/Senkaku Islets for both nations. For Japan, about to hit the economic wall, it symbolises the beginning of its own international glory days. And for China, now sinking in the economic mire, it symbolises the beginning of China’s embarrassing subordination in world affairs.

So why has this all bust out now?

Answer: Because both nations are sinking in the economic mire and so are retreating to their core values. Both of which rest, dangerously, on barbaric illusions about nationalistic pride.

The Collapse of the Bargain

A RELATED POINT, ONE becoming more relevant as economic shit hits Chinese fan, is the essential “bargain” Chinese people have so often made with their rulers. That bargain—made partly out of pragmatism, and partly out of a Confucian sense of duty—essentially allowed their rulers to be as authoritarian as they needed to be just as long as they delivered the national goals, be it national pride, military success or economic growth or prosperity. Chinese core values have never included freedom, but they do include having leaders deliver on their implicit promises.

This is why the most evil bastard in history, Mao Zedong, is still considered a hero in China—because, say Chinese, he “saved” China.  And this why the Chinese Communist Party have been so eager (so over-eager) to continue “stimulating” economic growth: because their bargain involves the state promising more wealth. So now that wealth is drying up, the ChiComs are doing everything they can to fake wealth creation—even if it means empty cities, empty savings accounts and a generation’s worth of malinvestment.

But what happens when stimulus collapses, and the “bargain” with it?  They could be as authoritarian as they liked as long as they delivered wealth/prestige/power/national pride/insert-latest-goal-here—but when delivery is not made, what then?

“The collapse of the bargain” will be interesting.

Time to enrol in a good course on Asian History—and as you’ll have read here before, I can highly recommend this one.

* Don’t believe me? Then ask yourself why so many grown men and women were chewing their nails so intensely around New Zealand last September about a few blokes throwing a pointy ball around?

When currency wars turn into the real thing, what will happen next?

What happens when economic recession depression turns into a crisis which can’t be kicked down the road—when the short-term “solutions” of bailouts, debt and money printing meet the medium-term consequences of this irresponsibility.

There will come a time when the debts can’t be paid, when paper money collapses, when real panic begins to stalk the corridors of economic impotence.

And then what happens?

There will be a flashpoint. There will be a flashpoint somewhere that will sooner or later—but eventually—transform the crisis from economic to geopolitical; a deeper, much more frightening stage of crisis. And it will happen quickly and apparently unexpectedly, as all such crises do.

Will it be set off by US govt default, where the ratio of Federal govt debt to revenue has leapt upward from 165 percent in 2008 to 262 percent this year (among developed economies, only Ireland and Spain have seen a bigger deterioration)?

Or Europe, where Germany is on the slide, stagnation is becoming contraction and governments now pretend to pay back debt and  other governments pretend to believe them?

Or China, with inventory piling up and still talking up an inflationary boom with growth figures only the Chinese government bureaucrats who write them could possibly believe.

Or Japan, the biggest nation that is deepest in the pooh, that “bug in search of a windshield” where very soon the Japanese govt could be spending almost 80% of tax revenues on just the interest on its bonds.

None of these situations is sustainable. None of them can last. And when they explode, as they will, with currency wars turning into the real thing —as it undoubtedly will when nationalism is on the rise and politicians respond to crises as they’ve always done by making them worse—the fallout could go anywhere.

Here’s the sort of place you need to look: places like the Senkaku Islands in the South China Sea, where historical enemies Japan and China have been sabre rattling for decades, and in the last few days starting to pull the sabres from their scabbards.

“China’s increasingly aggressive posture towards the South China Sea and the Senkaku Islands in the East China Sea is less important in itself than as a sign of things to come,” says historian Graham Allison. And only a historical perspective on China and Japan can inform you of how, and how dangerously, increasingly common situations like this might play out.

With an economically collapsing Japan unable any longer to trade for the resources it needs, and a China increasingly willing to project its power into the world, there’s every chance the flashpoint will be in Asia. And the only good signpost to what will happen next is to understand how things happened in the past.’

Time to enrol in a good course on Asian History—and as you’ll have read here before, I can highly recommend this one.

Now: Debt unsustainability in Japan and Europe. Next … ?

Kyle Bass made headlines last year when he talked about making money out of financial crises—especially in Japan and Europe. (As if making money for your clients when there’s blood in the street is a bad thing.). Things haven’t quite hit the skids yet, but he’s positioned when they do.

Japan is the next in line to face a sovereign debt crisis, says Bass, and very soon the markets’ focus will turn on it. He expects monetary deflation that will lead to a correction in equity prices because such economic shock will spread to the world economy .. leading to a stock market correction of 40-50%…. 
He mentions that Japan is next after Europe … and it depends on Japan and Europe, how long time USA has until a debt crisis. In his opinion it is 3-5 years away.

Here are his thoughts (from late last year) on the reason for the crisis: the total unsustainability of government debt in Europe and Japan. Japan, he argues, “is the most complex spring-loaded situation in history.”

GUEST POST: The Japanese Crisis

Guest post by Vedran Vuk, Bud Conrad and the Casey Research Energy Team

With the Japanese crisis unfolding, I’m thinking about the policy consequences ahead for the U.S and the rest of the world. I’m positive that Japan will rebuild itself. As Kevin Brekke pointed out yesterday, the market was back within a year after the Kobe earthquake. Of course, a nuclear meltdown would surely push this time line further out, but eventually the nation would recover. However, bad political decisions may stick around for as long as radiation. This is the perfect time for politicians to enact poor policies that could last for decades.
    So, let’s think through some of these possibilities. The Bank of Japan is already pumping billions into the system, and the yen is dropping. After the monetary stimulus, a fiscal one is sure to follow. Unfortunately, Japan is in no shape to add on to its already gargantuan debt level at 225% of GDP.
    The stimulus might not simply go toward infrastructure repair and construction. Consider that the already weak Japanese banks just took a huge hit. Loan defaults will doubtlessly skyrocket from the crisis. On top of that, depositors will soon be pulling cash out of their savings accounts, draining the banks from a second angle…
    If the Japanese government bails out the banks and insurers on top of enacting a fiscal stimulus, where will the debt level stand as a percentage of GDP? While the earthquake is a very literal crisis at the moment, the seeds of a financial crisis are being planted next. Well, to be fair these aren’t seeds at all, but rather emerging seedlings already apparent prior to the earthquake. These sprouting problems are about to receive an extra dose of fertilizer.
    So, are there any good policies that could result from the earthquake? Yes, one being improved immigration laws. With Japan’s unemployment rate at only 4.9%, they’re necessarily going to require outside workers to get the job done, and cheap. Afterwards, they may decide to let many of them stay. Japan has a serious demographic problem of the older generation soon to outnumber the young. An influx of immigrants could be positive for Japan’s fiscal situation.
    First, Bud Conrad will update us on the economic situation across the board from Japan to the U.S., to commodities. Then the Casey Energy Team will give us a briefing on the Japanese reactors: what’s the status quo and what’s the worst-case scenario, plus what should uranium investors do about it?

Japan’s Stock Market Crash
By Bud Conrad, The Casey Report

The Japanese quakes are the worst in decades and serious. The Nikkei 225 dropped from 10,500 to a low of 8,200 Tuesday, or by 22% in two days. It crashed over 1,000 points after a recovery from a low point of 1,400 points down. As the world’s third biggest economy with close ties to China and our own economy, we will all suffer the consequences.

    Certainly, Japan will need to find other sources of energy than nuclear. In my opinion, that will mean bigger imports of oil. Their refineries are damaged; as a result, their purchases will focus on gasoline and jet fuel rather than crude. And that will increase shipping rates. Natural gas could be an alternative fuel for electricity and might rise if it could be shipped to Japan as Liquefied Natural Gas (LNG).
    Across Japan, there are already shortages of gasoline, and store shelves are bare – only partly from panic and hoarding. The shortage of electricity means trains aren't running and many manufacturing plants can't operate. The loss of more power plants besides the Fukushima reactors has required rolling 3-hour power outages across Tokyo.
    The Bank of Japan (BoJ) has floated $180 B of new liquidity in two days to stem the panic, but panic has already stricken this low-priced stock market. Japanese government bond 10-year rates are down on BoJ buying and Japanese investors’ flight to safety out of equities. The U.S. stock market is down, and Treasury rates are also lower in sympathy. Japan will not be buying U.S. Treasuries and could become a seller to finance reconstruction.
    It is likely that the reactor and unit of Fukushima 1 that experienced a second explosion in the suppression pool below the reactor came from a breach of the containment vessel. The radiation rose to 400 millisieverts per hour, which is a level that is dangerous to health (compared to normal background levels of only 3 millisieverts). The situation is still getting worse, and it will affect attitudes toward nuclear energy for years. [Keep up to date on this news at the M.I.T. Nuclear Science blog]
    A scan of world stock markets this morning (March 15) shows Europe, Asia and the Americas reeling from the impact. While Japan recovered to only 10% down, Europe is 2% to 3% lower, and the U.S. Dow lost 200 points. Virtually all commodities took a hit, but not at panic levels. However, many commodities have been up as much as 100% since last year; so they could have further to go if world economies implode. The impact on worldwide confidence cannot be underestimated.
    Every major commodity has retreated, with gold losing $33 to $1,395 and silver losses approaching $2 to $34. Even oil eased to $97 for West Texas Intermediate, despite the potential demand for replacing the loss of nuclear energy with oil. Natural gas hasn’t participated in last year’s commodity boom and as a result is suffering the least. The simple explanation is that markets tend to move together, but the bigger implication is that world economies may be forced to slow down, decreasing demand for all commodities.
    Panic seems justified until the situation stops getting worse. This seems as serious as other events that triggered worldwide economic catastrophes in the past.
    Add to this the North Africa/Middle East protests and regime changes, and the situation gets worse. With Saudis moving into Bahrain, Syria sending arms to Qaddafi and the rebels losing to him, the traditional energy source of oil from the Middle East is hanging in the balance. (See more in my article in the latest Casey Report on this topic.) Our political response to the fast-changing events is only being taken one day at time.
    And then there is the continuing financial storm: the Fed is signaling that it will stop buying all the government debt by ending QE2. Since QE2 buoyed the market since last summer, its absence could send panic throughout the market. The Fed could have been pre-announcing the end of QE2 to defend the dollar against the yen ($1.22/100 yen) and euro ($1.40/E). Who knows how this will be played out? The Fed may continue QE2 to avoid internal panic. It is remarkable that Fed policy is only third on the list of current disasters.
    My conclusion is that we will see more financial aftershocks just as Japan is experiencing geological aftershocks (6.2 this morning, 75 miles east of Tokyo) for months to come. The long-term destruction of paper currencies is likely to be accelerated from government thrashing to fix all the problems. In the short-term, we should ride out these storms more comfortably in physical resource investments than in bank deposits.
The governments will try to paper over problems with more printing as the BoJ did with $180 B in two day $320b in three days, but the real-world limitations on energy supplies compared to population growth mean that long-term energy demand will still be with us and energy and precious metals will be important areas for investment in the long term.

Uranium and Japan
By the Casey Energy Team

The potential for a core meltdown at three of Japan’s nuclear reactors after a 9.0-magnitude earthquake and ensuing tsunami slammed the island nation is causing another onslaught, this one against every uranium-related stock in the world.
    Stocks of uranium explorers, producers and nuclear-reactor builders, and the spot price of uranium all fell dramatically on March 14 and 15, the first days of trading following Japan’s disaster. As the country worked to keep three reactors at risk for meltdowns contained, the world’s largest pure uranium producer Cameco (T.CCO, N.CCJ) watched as its share price fell as much as 22.7% in Monday’s intra-day trading. By the end of the day the loss had softened to 12.7%, leaving the company at C$31.70. By mid-day Tuesday, Cameco shares had lost another C$2.29 to trade at C$29.41.
    Uranium One (T.UUU), another major global uranium producer, fell harder, losing 27.7% on Monday. By midday on Tuesday, it had lost another 16.9% to sit near C$3.60. The world’s largest provider of nuclear equipment and services, France’s Areva (P.CEI), lost 9.6% on Monday and continued to fall Tuesday, sitting 9.2% down by the middle of the trading day.
    The impact reverberated all the way down to uranium explorers: Athabasca Basin junior Hathor Exploration (V.HAT) dropped 28.3% on Monday and continued the drop Tuesday, 15.6% down at midday, while producer-explorer Denison Mines (T.DML) lost 22.3% on Monday and had lost another 11.3% by the middle of Tuesday.
    The spot price of uranium, which is not traded on the open market but is represented by the average price of individual transactions, dropped 11% on Monday to close at US$60.75 per pound. By midday on Tuesday, it had plunged another 10.3% from there to sit at US$54.40 per pound.
    Germany suspended an agreement to extend the life of its nuclear power stations, Switzerland put some nuclear power plant approvals on hold, Taiwan announced plans to study reductions in nuclear power output, and Senator Joe Lieberman said the U.S. should put the brakes on new nuclear power plants until the Japanese situation plays out. Other nations voiced continued support for nuclear power, including France, China, and India, all nations wherein nuclear power is important and new reactors are being built.
    What does this all mean for uranium and nuclear power? To be blunt, there are two sides to this story: the objective, supply-and-demand side and the emotional, fear-of-nuclear-radiation side. Both are absolutely legitimate, because fear is a major factor in the uranium arena.
    That fear is certainly being stoked by news stories describing the situation as “the worst nuclear disaster since Chernobyl” and maps showing how winds could potentially carry radiation across the Pacific to North America. So before we get into uranium forecasts, let’s talk about what is actually happening within Japan’s damaged reactors.
    There are serious cooling problems and the likelihood of partial core meltdowns at three reactors within the Fukushima Daiichi plant, which is 270 km north of Tokyo. On Saturday, a buildup of hydrogen gas caused a major explosion at the No. 1 reactor; the walls and roof of the building blew off, but the containment vessel around the reactor itself remained intact.
    On Monday morning, the same thing happened at the No. 3 reactor. By Tuesday morning, the building housing reactor No. 2 exploded violently; this time the explosion seems to have inflicted some damage to the reactor’s suppression pool, which is a donut-shaped reservoir at the base of the containment vessel. Radiation levels spiked, then settled back to the low levels that have been the norm since the disaster started. On Tuesday night, a fire in the spent fuel pools near reactor No. 4 added to problems, but it was extinguished within a few hours.
    Now efforts are focused on keeping the reactors cores submerged in water, to keep them cool. The main challenges are that coolant and pumping systems have been damaged, personnel are short, and power supplies are inconsistent, especially after the three explosions damaged the plants’ power systems. Cooling efforts have yielded rewards at reactors 1 and 3, where temperatures are now dropping. Reactor No. 2 is still very unstable, and temperatures are starting to rise in No. 4.
    Despite everything, Japanese officials continued to express confidence that containment vessels will hold, keeping the high-level radiation that results from partial core meltdowns locked away. Operators have been venting steam that contains only low-level radiation. The reported levels have remained well below the maximum exposure limits set by the International Atomic Energy Agency.
    The take-home message is this: if the 8-inch-thick steel walls of the containment vessels remain primarily intact, things should be fine, and that is what we expect based on the events to date. The vessels are designed to stay intact even if the cores explode. However, if we are unlucky and one or more of the vessels burst (beyond the small breach inflicted by the explosion at No. 2), highly radioactive gases would spread for hundreds of kilometers, with the worst contamination hitting in a 50-mile radius.
    Really, no one should be mentioning Chernobyl because even the worst-case scenario at Fukushima would be nothing compared to Chernobyl. In the Ukrainian disaster, a nuclear reactor exploded while still in full operation, and its sub-standard containment unit was destroyed in the explosion, which meant radioactive gases and molten plutonium and uranium spilled into the surrounding countryside. Some 4,000 people would eventually die.
    In Japan, the reactors are shut down and the containment vessels have already held for four days. Experts say that longevity bodes well. Provided the vessels do hold, the situation will be much more like the Three Mile Island incident. That is also a difficult comparison, however, because many people misunderstand that situation. At Three Mile Island, a stuck-open valve led to major coolant losses, which led to a partial meltdown in one reactor. High-level radiation was confined to the containment vessel, and little radioactive material actually escaped. (The real problem at Three Mile Island was lack of training and protocol to deal with the situation.)
    Chernobyl instilled fear of nuclear reactors into the general population, and rightfully so. Three Mile Island was scary, and today’s precarious situation in Japan is also scary. But nuclear power is a mainstay of many countries’ green power plans and, provided this disaster does not escalate, that will remain the case.
    For one thing, there are 65 nuclear power plants currently under construction, and the builders cannot back out of the long-term contracts they signed to supply those plants with uranium. And as we’ve written before, global uranium supplies are not projected to meet growing demand, so if economics prevail, the price will rebound and uranium equities with it.
    If Japan’s nuclear troubles worsen significantly, however, fear may take over from economics. Governments wanting to reassure scared citizens will suspend nuclear power plans (as some have already) and institute heavy-handed permitting hurdles for new mines and reactors. In this scenario, uranium could drop back down into disfavor...

Vedran Vuk
Casey's Daily Dispatch  Editor

Image sources Casey Research, Objective Standard