By Betsy Ross
We are now on the brink of the mother of all meltdowns in more ways than one.
Last weekend, The Times quoted Alan Hansen, a nuclear engineer and executive vice president of Areva NC, a unit of Areva, a French group that supplied reactor fuel to the Fukushima Daiichi nuclear power plan, who spoke before a private gathering at Stanford University. "Clearly," he summarized, "we're witnessing one of the greatest disasters in modern time." What the on-going release of cancer-causing radioactive fragments means in terms of human health and the environment is only beginning to come to light.
It's certainly not my expertise. What I do know is that, on top of the terrible calamities brought on by the tsunami and the scary portents of the radiation spewing into the air, the ocean, and into the ground surrounding Fukushima and beyond, we are facing an economic juggernaut that is likely to shatter the world's fragile recovery. You don't take out the world's third biggest economy -- until recently, the second -- with no impact, despite the recent assurance by that reliable sage Timothy Geithner that the crisis in Japan would not hinder the U.S. recovery. (Meanwhile, Tim's banking buddies are busy reviewing their clients' exposure.)
Up until the last few days, media and stock market pundits continue to drool over the prospect of some $310 billion worth of new business anticipated to rebuild earthq uake and tsunami-ravaged Japan. Newsweek featured an article by Bill Emmott, a former editor of The Economist, stating:
"Typically, if economic effects are measured simply by gross domestic product, natural disasters cause a short-term loss in output, thanks to the destruction of offices and factories and the disruption to transport links, but after just a few months they actually act like an economic stimulus package."
Needless to say, these are far from typical times, and this is no typical disaster. Faced with the loss of a critical supply partner, many companies around the world are confronting a quite different reality. Japan is suffering huge shortages as production capacity shrivels and logistical issues mount--particularly in the are of transportation. The Financial Times reports that Japanese manufacturing activity plummeted to a two-year low in March, according to the Markit/JMMA purchasing managers' index, which hit its worst low since its inception in 2001.
We're not just talking about the now infamous Japan-made five components that go into the iPad 2 or the wafer material needed to manufacture semiconductor chips or the metallic paint needed to produce shiny red and black cars. I can attest that companies of all sizes find themselves in the same pickle, with normally efficient Japanese production and transportation chains hobbled by power interruptions, radiation fears, earthquake damage, and severe after-shocks. These days, many global shipping lines won't even dock at Japan's busiest ports, Tokyo and Yokohama, for fear of radioactive contamination. And that's not just being paranoid. If their hulls pick up any radioactivity, they could be barred later from other ports, for example in the US.
Meanwhile, we're scrambling here in the US. I can tell you first-hand, it's not so easy to just trip over to Europe or China, and duplicate parts and processes proprietary to the secretive and justifiably possessive Japanese. It will take at least some months or more for global factories, big and small, that rely on their goods and expertise for even a small fraction of their processes to retool.
March's U.S. employment numbers may look good to some, but wait until the impact of this economic tsunami starts to hit. Already, automakers as far afield as Louisiana, Mexico and Belgium are facing temporary shutdowns due to lack of parts. What happens when government treasuries already drained by the global banking industry have only empty hands to show the long-term and newly unemployed? That's if the government is even open for business.
Worse, we face the specter of growing inflation as goods grow scarcer and the costs of developing alternative supply chains start to kick in. Semiconductor chip prices, which affect the price of everything from cars to iPods, already rose in March as a direct result of earthquake-induced scarcities, according to iSuppli Market Research. Compounding the problem, China is already resorting to price controls in a futile bid to quell its soaring inflation and, equally contrived, the U.S. Fed continues to pump cash and dump it into our non-performing banks.
Oh, and what about that big payday when we all get to rebuild the land of the rising sun? This goes way beyond scorched earth, people. Even if that private gathering of nuclear wonks at Stanford was wrong, and the environmental and health impacts in northern Japan prove to be negligible, there is still the question of how they are going to muster the moohlah for a vast reconstruction project. That's on top of sharing the insurance burden of Fukushima with Tepco, the utility that owns the plant.
Newsweek's Emmott is sanguine on this score: "Insurance pays for some of it, government spending and private investment the rest." Already, the Japanese central bank offered a loan program worth $11.7 billion to financial institutions in the disaster area. But, bear in mind that the Japanese government has the highest debt of any developed country, running 200% of GDP.
Of course, Emmott has an answer for this too, suggesting the Japanese simply "borrow more" (sure "nuff) and impose a "special reconstruction tax", assuming that the "Japanese people will be entirely prepared to make sacrifices and share the burdens". Go tell that to the angry hoards gathering daily outside Tepco headquarters.
It's possible the government will have to start cashing out their U.S. T-bills, which is a whole other story, since Japan and China have financed our government's profligate ways for the past decade or so. One thing for sure is that foreign governments are not likely to rush into Japan with huge coffers of cash any time soon. The U.S. and European taxpayers are in no mood to spring for someone else's Marshall Plan. And given their wretched history, China would be an unlikely savior for Japan, although strange things do happen.
To be fair, Emmott did get one thing right when he asserted, "The first, and most fundamental, lesson from other natural disasters is that the economy is the least important thing to worry about." Under the circumstances, it's not all that comforting a thought.