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Think The Japanese Disaster Is Just What The Keynesian Doctor Ordered? Mo Says No

Tyler Durden's picture




 

That would be Mohamed El-Erian from Pimco, by the way, who first among the lunatic fringe (here's looking at you Goldman and Kudlow), admits that contrary to what all the Koolaid guzzlers claim, the Japanese quake may not be what the Keynesian doctor ordered after all. We urge readers to read this piece as a counterpoint to Goldman's stern defense that the Japanese quake is but a scratch, and one that will lead to world peace, prosperity and a doubling (give or take) of global GDP. In fact, El-Erian tells all the pundits who in addition to permabulls are also suddenly nuclear physicists and geologists, to shut the hell up, "as tempting as they may be, analytical shortcuts are best avoided
at this early stage.
It will take time and thorough analysis to specify
the true consequences of Japan’s triple calamity, including the
longer-term impact on its economy and that of the rest of the world. The Japanese have shown admirable courage in the face of unthinkable
tragedy. I have no doubt that a successful reconstruction program will
lead their country to recovery. In the meantime, however, the urgency of
restoring a sense of normalcy and hope to a dramatically wounded
society warrants thoughtful and deep analyses
." On this matter, we couldn't agree more.

From PIMCO:

Understanding Japan’s Disasters, by Mohamed El-Erian

  • Japan’s reconstruction challenge will likely be more difficult than after the Kobe earthquake.
  • Negative wealth and income effects this time around will be more severe, and the recovery process will probably take longer and be more complex.
  • Japan's disasters will add to the global economy’s headwinds.

As we all struggle to comprehend the economic and financial impact of
Japan’s calamity, it is tempting to seek historical analogies for
guidance. Indeed, many have been quick to cite the aftermath of the
terrible 1995 Kobe earthquake. But, while that example provides some
insights, it is too limited to understand what lies ahead for Japan, and
excessive reliance on it could undermine appropriate policy responses,
both in Japan and abroad.

First, let us consider the similarities between Japan’s current
tragedy and that of 1995. Both involved terrible earthquakes that
resulted in tremendous human suffering and large-scale physical damage.
Both required the Japanese government to display considerable agility in
its rescue efforts. Both triggered multiple offers of help from friends
and allies around the world. In both cases, wealth destruction was
accompanied by disruptions to daily economic life.

There are also important forward-looking similarities. As with the
aftermath of Kobe, the current focus on rescuing survivors will be
followed by a huge reconstruction program. Massive budgetary allocations
will be made (2% of GDP in the case of Kobe). Affected households will
receive financial assistance to help them restore some normalcy to their
lives. Roads, housing, and much other infrastructure will be repaired
and upgraded.

These similarities have led several economists to provide early
predictions of the national and global economic consequences, including a
sharp V-like recovery in Japan’s growth rate in 2011, as the initial
downturn is followed by a surge in economic activity, implying a rapid
recovery in Japan’s tax base and level of GDP. Such predictions counsel
caution against over-reaction by policymakers outside Japan. Rather than
immediately incorporating Japanese developments into their thinking,
policymakers should treat the effects on the global economy as
“transitory” – that is, temporary and reversible – and thus “look
through” them in designing their responses.

But there is a risk that this approach could understate the Japanese
disaster’s domestic and international consequences. As such, it could
contribute to insufficient responses in Japan itself – from the
government to individual companies and households – as well as in other
countries. Indeed, such a mal-diagnosis could delay what I believe will
be an eventual solid recovery in Japan.

Five factors suggest that Japan faces a uniquely difficult and
uncertain set of challenges. First, the economic damage from Japan’s
three calamities (a horrifying earthquake, a devastating tsunami, and a
nuclear crisis) may well be double that of Kobe. And, unlike Kobe, these
calamities did affect Tokyo – indirectly, fortunately – where some 40%
of Japan’s industrial production is located.

Second, Japan’s public finances are weaker than in 1995, and
demographic factors are less favorable. Domestic public debt today
stands at roughly 205% of GDP, compared to around 85% in 1995. The
country’s sovereign rating is AA-, not AAA, as it was 16 years ago. This
erodes the flexibility and ultimate effectiveness of fiscal responses.

Third, benchmark interest rates are already near zero, and have been
for a while. This undermines the potency of monetary policy
notwithstanding bold and imaginative efforts by the Bank of Japan to
inject liquidity into the economy.

Fourth, the addition of destabilizing nuclear uncertainty to the
terrible impact of the natural disasters amplifies the reconstruction
challenges. Given the damage and dangers, it will take time for Japan to
restore fully its power-generation capabilities, affecting the
potential GDP growth rate. Food safety is also a concern, as is the
economic impact of nuclear uncertainties on the Japanese psyche.

Finally, Japan’s external environment today is more challenging.
During the post-Kobe reconstruction period, world demand was buoyant and
global productivity surged, owing to China’s gathering boom, America’s
information-technology and communications revolution, and political and
economic convergence in Europe.

Today, aggregate demand in advanced economies is still recovering
from the global financial crisis, while systemically important emerging
economies like Brazil and China are tapping their policy brakes in order
to counter economic overheating. Meanwhile, on the supply side,
countries are dealing with high and volatile commodity prices, including
an oil-price spike as a result of the Middle East uprisings.

If this analysis proves correct, it implies that Japan’s
reconstruction challenge will be more difficult than after the Kobe
earthquake. Negative wealth and income effects this time around will be
more severe, and the recovery process will probably take longer and be
more complex.

At the national level, this calls urgently for a degree of unity and
decisiveness that has been absent from Japanese politics for years.
Without it, the authorities will find it difficult to communicate and
implement a medium-term economic vision that puts rapid sustained
growth, and not just reconstruction, at the core of the policy response.

Japan's disasters will add to the global economy’s headwinds – be
they the impact of the initial fall in consumption in the world’s
third-largest economy, or disruptions to global supply chains
(particularly in technology and autos). And Japan’s nuclear crisis will
mean greater uncertainty about nuclear power in other countries.

There is also a financial angle, the importance of which depends on
the mix of new government borrowing, debt monetization, and repatriation
of Japanese savings that is used to fund Japan's reconstruction
program. The greater the repatriation component, the larger the negative
impact on some financial markets.

So, as tempting as they may be, analytical shortcuts are best avoided
at this early stage. It will take time and thorough analysis to specify
the true consequences of Japan’s triple calamity, including the
longer-term impact on its economy and that of the rest of the world.

The Japanese have shown admirable courage in the face of unthinkable
tragedy. I have no doubt that a successful reconstruction program will
lead their country to recovery. In the meantime, however, the urgency of
restoring a sense of normalcy and hope to a dramatically wounded
society warrants thoughtful and deep analyses.

 

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Thu, 03/24/2011 - 11:28 | 1095355 The Axe
The Axe's picture

Dollar Destruction  = Markets UP!!!   thats all you need to know

Thu, 03/24/2011 - 11:57 | 1095500 curbyourrisk
curbyourrisk's picture

Dollar Destruction  = Markets UP!!!   thats all you need to know

 

Well, that and Buy The Fucking Dip.....

 

Thu, 03/24/2011 - 11:28 | 1095356 NOTW777
NOTW777's picture

market talk of us bank buying eur/usd

Thu, 03/24/2011 - 11:36 | 1095396 NOTW777
NOTW777's picture

wild eyed simon of cnbc preaching euro strength - things are great

Thu, 03/24/2011 - 12:21 | 1095563 ebworthen
ebworthen's picture

Yeah - he was bug eyed and almost jumping out of the screen - phew!

Dear Simon was totally oblivious to the guest comment that the Irish do not feel like swallowing austerity to bail out German and French banks - and that the German and French citizens don't want to bailout out the Irish banks - and this is what the politicians are dealing with. 

The comment went right over Simon's head who then reverted to an emotional appeal that the Euro was "a part of their lives" that they wouldn't let go of. 

Yeah, sure Simon.

Thu, 03/24/2011 - 11:58 | 1095501 asteroids
asteroids's picture

Then how about dropping a 10KT device on the secondary capitals of the US, UK, France, Germany. Surely the loss in GDP will be small and the stimuative effects massive if Japan is any example. Of course, the loss of life and property are unfortunate. Can we finally put our thinking caps on and admit there's nothing good to come from Japan. To do so defies logic.

Thu, 03/24/2011 - 11:30 | 1095370 Josephine29
Josephine29's picture

I had read this type of thinking a week ago Tyler on the Notayesmanseconomics blog where he pointed out that many were claiming a solution when we didnt even know the problem yet!

The news media has had various forecasts over the last 48 hours of the scale of the crisis and many of these also try to tell us the scale of this catastrophe and come with a promise of a recovery which is fast. I will leave you with one thought, exactly how do they know that?

http://t.co/SWBig7W

Thu, 03/24/2011 - 11:32 | 1095381 DonnieD
DonnieD's picture

Now I'm confused. I thought the slow poisoning of by far the largest metropolitan area in the world would lead to a worldwide economic boom.

Thu, 03/24/2011 - 11:37 | 1095406 johnQpublic
johnQpublic's picture

http://finance.yahoo.com/news/Toyota-tells-US-plants-cnnm-1619359983.htm...

 

 

toyota shutting down US plants on supply line issues

keynesian fail

Thu, 03/24/2011 - 11:42 | 1095428 johnQpublic
johnQpublic's picture

Spokespeople for Nissan, Honda and Ford all said those automakers are making no plans to shut down their plants at this time.

U.S. automaker General Motors has already had to stop production of a truck plant in Shreveport, La. and a related engine plant in New York State due to shortages of parts from Japan.

Thu, 03/24/2011 - 12:05 | 1095524 Oh regional Indian
Oh regional Indian's picture

As it turns out, the global Auto industry is one of the most incestuous of them all. The degree of part-supplier commonality would shock those who don't know. Given that and th epre-ponderence of Japanese parts in some critical parts (Engine Management, tires, batterys, wire harnesses).... the shock wave is probably just beginning to travel through th esystem. It will be a supply shock, demand shock, supply shock, demand shock.... an flurry of 1-2's on the nose of a JIT system. Watch for new car prrices the world over to SPIKE and used cars become a lot more desirable. 

ORI

http://aadivaahan.wordpress.com/2011/03/24/lets-start-from-the-very-beginning-a-very-good/

Thu, 03/24/2011 - 12:25 | 1095620 prophet
prophet's picture

Would a reduction of JIT be good for the economy and bad for profits?

Thu, 03/24/2011 - 11:34 | 1095387 NotApplicable
NotApplicable's picture

So Mohamed knows of Bastiat, I take it.

Thu, 03/24/2011 - 11:35 | 1095390 lizzy36
lizzy36's picture

I can hardly wait for oil to hot $125 and pundits to come out and say oil won't matter until it hits $150.

One believes that nothing will change, and dow 36,000 is in play until we see a failed bond auction. Then and only then will all hell break loose.

Thu, 03/24/2011 - 11:38 | 1095408 NOTW777
NOTW777's picture

$5 chairsatan gas is good - its not like people have to drive to work

Thu, 03/24/2011 - 14:45 | 1096238 PY-129-20
PY-129-20's picture

People don't have to drive to work. They can use a Mule instead.

http://upload.wikimedia.org/wikipedia/commons/e/e0/Juancito.jpg

Thu, 03/24/2011 - 14:45 | 1096247 PY-129-20
PY-129-20's picture

People don't have to drive to work. They can use a Mule instead.

http://upload.wikimedia.org/wikipedia/commons/e/e0/Juancito.jpg

Thu, 03/24/2011 - 11:36 | 1095394 mirac
mirac's picture

Not the last big quake to hit Japan, there will be more.  Two big quakes hit Thailand this morning.  No way out of this...the Pacific plate specifically is on the move.

Thu, 03/24/2011 - 11:48 | 1095450 kaiserhoff
kaiserhoff's picture

Hell yes.  Shake and bake season is on.  Before we worry about recovery, let's see what, if anything, is left.

Thu, 03/24/2011 - 11:36 | 1095397 Humpty Pundit
Humpty Pundit's picture

I believe the thing most people are overlooking is the timing of the stimulus provided by reconstruction spending in Japan could be just what the global economy needs in H2/2011. Also, according to the FT all of the Yen printing taking place right now could restart the Yen carry trade and give a boost to all risk assets.

Thu, 03/24/2011 - 11:40 | 1095405 Mercury
Mercury's picture

Yeah, Jeeez....at least wait until Japan is done falling down the stairs before you deliver a prognosis on her injuries...

(cue Eddie Murphy's Aunt Bunny fell down the stairs routine)

Thu, 03/24/2011 - 11:38 | 1095409 RobotTrader
RobotTrader's picture

As of right now, looks like the correction was merely a shakeout.

Back above both the 11-day and 22-day.

Amazing how this has happened with all that is going on in the world.

 

Thu, 03/24/2011 - 11:43 | 1095435 Snidley Whipsnae
Snidley Whipsnae's picture

Amazing or amusing?

I find nothing amazing in a rising stock market backed by POMO operations to the moon... If equities failed to respond it might be amusing... in the sense that benny would have to come up with some real tall tales by way of explaining what went wrong.

Thu, 03/24/2011 - 11:39 | 1095411 Jim in MN
Jim in MN's picture

Finally found a nice chart of the 'afterheat' problem in reactor cores.  Anyone who needs to understand why this emergency isn't going away needs to look at the chart on page 890 of this ancient tome (extra credit for reading the 2-3 page text starting on page 888):

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1911944/pdf/bullnyacadmed00086-0016.pdf

 

 


"For


 


a large reactor of the 1,100 MWe class, that is still about 3.5 megawatts of thermal power being generated by fission product decay a month after reactor shutdown."

For the Fukushima reactors it's about 2 MW each.  You can boil a lot of water with 2 MW of energy.  A month after shutdown. 

If they stop cooling any of these units for even a couple of hours it goes right back to hothothot.  No 'cool and forget' allowed.

Thu, 03/24/2011 - 12:07 | 1095530 Byte Me
Byte Me's picture

Nice.

and tnx Jim. Also shows why you wait years when decomissioning them.

.. They've lost a lot of inventory from at least the coolingponds it seems..

Thu, 03/24/2011 - 12:18 | 1095574 serotonindumptruck
serotonindumptruck's picture

Jim in MN,

Your comments and insight on this issue have been some of the most informative and educational at ZH, and I wanted to thank you for that.

As a hazmat guy and former firefighter, I have worked around radioactive fields and I am comfortable in that setting so long as I have my survey instruments and proper dosimetry. I can not say in good faith if I would feel the same way about working in a true "hot zone" like these guys from Japan are. I can think of very few (if any) worse ways to die, and the concept of such an accident in the USA terrifies me.

I read the entire thread about these Fukushima Fifty last night with great interest, and although I felt the urge to comment more than once, I chose not to. Having worked in the industry that I have, I honestly DO NOT believe that American firefighters and first responders would line up to sacrifice their lives in a similar manner. At least, not out of any sense of "patriotism" or blind nationalism.

Speaking just for myself, if TEPCO agreed to pay my survivors a sum of not less than 50 million in physical gold, at current spot price, I would strongly consider taking this job under contract and sacrifice my life for the future benefit of my family.

Thu, 03/24/2011 - 14:32 | 1096192 Jim in MN
Jim in MN's picture

I hear ya.  Pretty sure my family would veto that arrangement.  But I hear ya.

Thu, 03/24/2011 - 17:29 | 1096994 davepowers
davepowers's picture

thanks, Jim

I'd again suggest it would be nice if you (or someone for you) could post your posts on some website for ease of access. I've had several people ask if I knew of a site where they could get info from a person who was knowledgeable, but who doesn't try to claim they know more than what they know, talk out of their backside or scream and yell like they belong in a straight jacket.

I tell them it's a bear market if that's their standard.  :)

 

Thu, 03/24/2011 - 11:40 | 1095414 Snidley Whipsnae
Snidley Whipsnae's picture

Mo is right about this...

"Japan's disasters will add to the global economy’s headwinds – be they the impact of the initial fall in consumption in the world’s third-largest economy, or disruptions to global supply chains (particularly in technology and autos)."

The bobble heads on MSM are not telling people that the 'just in time' inventory chain has some broken links... right now, not in a few days or weeks.

Thu, 03/24/2011 - 12:01 | 1095514 Jim in MN
Jim in MN's picture

Not like anyone was buying any Sony Bravia TVs....or waiting for the Prius station wagon...or whatever GM was making....or....

Thu, 03/24/2011 - 12:10 | 1095537 Snidley Whipsnae
Snidley Whipsnae's picture

But lots of people need parts to fix their autos...even if they fix their own autos. No auto, no way to get to work.

Not to mention parts for aircraft, trains, buses, et al...bearings for motors gas/diesel/electric...Look around you and see how many parts are made in Japan or assembled in Japan from other Asian manufacturers.

There is a need to shift production to somewhere out of the danger zone of radiation...and reestablish supply lines.

 

Thu, 03/24/2011 - 11:40 | 1095415 doomandbloom
doomandbloom's picture

7.0 magnitude earthquake near myanmar

Thu, 03/24/2011 - 11:42 | 1095421 redpill
redpill's picture

Golden Triangle region, pretty remote (and pretty looking).  Might impact opium production, so BTFOD

Thu, 03/24/2011 - 11:41 | 1095419 KenShabby
KenShabby's picture

Geez - The broken window fallacy was debunked oh - 200+ years ago.

Thu, 03/24/2011 - 13:09 | 1095800 BearOfNH
BearOfNH's picture

Regrettably it seems to surface, zombie-like, from the carnage of whatever disaster happens. It's one of those convenient ways to avoid thinking.

Thu, 03/24/2011 - 11:44 | 1095431 ss123
ss123's picture

CNN is reporting that the number dead/missing now surpasses 27,000 and that the number of foreigners arriving at the airport has plummeted 60%.

http://news.blogs.cnn.com/2011/03/24/japan-quake-live-blog-major-expressway-between-tokyo-and-northeast-reopens/?hpt=T2

Thu, 03/24/2011 - 11:45 | 1095434 redpill
redpill's picture

IMHO it'll be 50k by the time all is said and done.

Thu, 03/24/2011 - 11:48 | 1095449 Cleanclog
Cleanclog's picture


The resources and energies that must be diverted from regular activities in order to deal with their multiple emergencies, horrible sufferings of their people, and an eventual rebuild equates to an enormous loss of productive capital and labor.

 

Japan will continue to consume and import but much of that will be replacing things lost.  Not “growth”.  It won’t have substantial onward production value, it will be getting back to where it was.  (Yes, some other companies and countries may benefit from supplying needed products, services, and labor)

Thu, 03/24/2011 - 11:50 | 1095461 kaiserhoff
kaiserhoff's picture

Mo's lithp ith getting worth.  Maybe he should athk Bahnie Fwank about it.

Thu, 03/24/2011 - 12:42 | 1095496 alangreedspank
alangreedspank's picture

 

Bastiat tackled this myth of prosperity trough destruction that war and natural disasters cause with the analogy of the broken window.

It might be tempting to think that by breaking the window, it activates the economy by providing business to the window manufacturer, but truly, the word is poorer after that window has been broken.

Before the broken window, World = Given ammount of capital (that includes the worth of that windows)

After the window has been broken, World = Given ammount of capital - capital needed to replace the window.

Thu, 03/24/2011 - 12:00 | 1095512 Seasmoke
Seasmoke's picture

Uncle Mo

Thu, 03/24/2011 - 12:03 | 1095516 NotApplicable
NotApplicable's picture

Jim Willie has a new article out concerning the Japan disaster. A must read (as always).

http://news.goldseek.com/GoldenJackass/1300910400.php

Thu, 03/24/2011 - 12:08 | 1095536 Zer0henge
Zer0henge's picture

The PIMCO gang may be on a string of bad calls so I take Mo's prediction with a grain of salt...or sand.  Since the day they finished selling their 30 year bonds the market has reversed to the upside...and the Japanese are far more resilliant than most think...the will go to work regardless of the consequences...

Thu, 03/24/2011 - 12:53 | 1095588 NumberNone
NumberNone's picture

Bullish.  El-Erian uses too many words and no pictures.  Makes my head hurt to read it.  Chipotle makes great burritos and Netflix is soon to be cable company to the world.  Market +150 today. 

Thu, 03/24/2011 - 12:40 | 1095697 chet
chet's picture

Anyone read that old book "Economics in one lesson"?  Despite it's title its actually illustrates a bunch of lessons from economics in two or three pages each.

One such illustration is why war and/or destruction doesn't really provide a Keynesian stimulus.  Mainly because you're spending money to replace things that you already had instead of investing in new productive capacity.  The money you would have used to buy a new thing is now spent on replacing something that, while perhaps a bit outdated, was still working just fine.  Furthermore, you're doing it with debt.

Thu, 03/24/2011 - 12:41 | 1095700 three chord sloth
three chord sloth's picture

The trouble with the "this will be good for Japan" crowd is their slavish devotion to the flawed economic concept called "GDP". The thing to understand about GDP is it really measures nothing, and does it badly.

If you just look at GDP in the weird way it is currently defined and measured, then selling wildly overpriced homes to people who cannot afford them is good for the economy. Importing millions of day laborers and then jacking up deficit spending to pay for their needed government services and their kids K-thru-dropout educations is a boon. Living large and sticking your grandchildren with the bills builds wealth faster than living responsibly and saving. And of course creating several hundred trillion in free-floating derivative debt is "doing god's work".

Thu, 03/24/2011 - 13:38 | 1095970 HedgeFundLIVE
HedgeFundLIVE's picture

seriously with all this going on, the market is rallying.  this is def. a shorting opportunity!: http://www.hedgefundlive.com/blog/recent-march-rally-a-shorting-opportunity

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