Japan is certainly struggling with one of the largest nuclear disasters in history and while the battle is far from over, we can already predict what the outcome will ultimately be.
My heart goes out to all my friends and their families in Japan but this article will focus on what the economic impact will be instead of writing about potential radiation fallout and those dire consequences.
Whatever happens to the Fukushima-Daiichi plant, Japan’s energy policy will take a 180-degree turn and away from nuclear energy, meaning that the current 30% energy supply will have to come from traditional fossil fuels or renewable energy
This dramatic change in energy policy will put an extra burden on an already deflationary economy and will have far-reaching repercussions for the global economy and specifically the US and China.
As a result, Japan will experience not only a change in internal energy production but the fallout will also dramatically reduce their exports and put pressure on their currency, as we have witnessed in the last two weeks. That will change the landscape of the currency markets and therefore affect the US even though we believe that China may be affected negatively as well, in which case we should brace ourselves for a double impact.
Japan has no choice but to start massive quantitative easing by printing trillions of yen and pump them in the system to keep their currency from becoming unsustainably strong. We already see this happening with the yen reaching pre-war levels of 79 to the USD and now hovering around the 81-82 level, which is still too strong.
That direct monetary intervention is affecting the US in the sense that the Federal Reserve, who’s intention was to implement their exit strategy in anticipation of an inflationary wave, will now have to postpone such and has no choice but to continue with QE in order to keep the dollar from rising too rapidly.
That in itself puts us in a bad spot given that our exit strategy and the planned interest rate rise during summer to keep inflation under tight control will now be postponed and replaced with a new wave of monetary easing.
Both contradict each other and one cannot battle high inflation with a forced upon monetary policy, so Bernanke is really in a pickle and has his work cut out for him to find a very narrow balance by trying to battle both at the same time.
The China syndrome or fallout will be different but will ultimately affect the US as well.
China will experience a much slower growth due to the Japan disaster and subsequent policy changes. While some, including Timothy Geithner, may view this as good news, we believe this to be a bad omen for the global economy.
When our global production engines slow down, then that is bad news for the largest consumer in the world, i.e. the US.
One solution could be when the US starts investing in manufacturing and production, but we are years away from this happening. Add to this the fact that the US remains indecisive in its fiscal policy with high budget deficits, high debt/GDP ratio and an ever increasing outstanding debt and one can easily see that these are not normal times.
The other impact for the US is how we will adjust our own energy policy after the Fukushima disaster and signs are already there that nuclear energy, dormant since the 1979 Three Mile Island disaster, will be heavily scrutinized and delayed.
Southern Company, through Georgia Power, who intends to get full permits to build two new nuclear plants, Plant Vogtle, at the Savannah River is already facing questions and delays because of safety issues.
The economic conundrum, which we thought would be resolved by now, is getting a long tail because of global circumstances that were unforeseen but nevertheless point out the fragility of our global economy. We can no longer think inside a closed circuit and we have to watch carefully what happens in the world before we implement a local monetary or fiscal policy if we wish to recover economically.
Today we wish to prepare and battle increasing inflationary pressures in the US and yet our hand is forced to do the exact opposite because of circumstances.
That is certainly not an ideal position to be in, to say the least, and one that can only be resolved by making a harsh decision.
Sitting on the fence at this point in time will not be an option and will prove to be very painful from a pure economic perspective.
Written by Nick Doms © 2011, all rights reserved.
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