Speculations in the Wake of a Disaster

Even as the catastrophe at the Fukushima nuclear power plant was unfolding, and the Japanese emergency services were uncovering the true scale of the country's human tragedy, commentators were waking up to the implications of the disaster for the world economy. It has already started reverberating through financial and commodity markets everywhere, with often perverse, counterproductive outcomes, illustrating the unstable and irrational global system we now inhabit.

Japanese savers have for some time funded a large part of the West's government debt, especially that of the USA. Now the need for Japan to rebuld its stricken north-eastern coastal towns will mean that much of this money is likely to be repatriated. Even if that does not happen on the scale anticipated by Peter Hadfield in his article on Wednesday's Guardian, the prospect of the Japanese treasury needing more of its citizens' savings (they already supply most of the funding for its massive overdraft), both to deal with the nuclear clean-up and for reconstruction, has already beenenough to spook the markets.

First, fears that Japanese insurance companies would repatriate funds to settle post-tsunami claims, and that construction companies too would disinvest globally to begin recovery projects, led currency traders (i.e. speculators) to buy the Japanese yen, driving up its value. This led to the co-ordinated intervention of the G7 central banks, to sell that currency, pegging it back - they claimed - so as not to disadvantage Japan's trade in manufaactured goods, already badly hit by the tsunami's effects.

Then commodity 'investors' (i.e. speculators) started to sell their futures in wheat, on fears that Japanese consumers would not be able to afford bread and other import-based products. This drove down the world price of the grain by £30 a ton, directly affecting the prospects of UK farmers' returns on this summer's harvests.

In other words, the effects of the Japanese tragedy on the rest of the world are mediated by the activities ( i.e. speculation) of global traders, using vast sums to make money out of money. Governments in turn are forced to react to these shifts in markets, before they can find space to contribute to the real-world issues of Japanese people's suffering, or the predations of the Gaddafi regime in Libya.

According to Hadfield, the longer-term effect will be a boom in the Japanese economy, as the reconstruction effort injects funds and citizens replace lost possessions, reversing the deflationary forces which have caused 20 years of stagnation. But the rest of the world will take the hit, because trillions of yen which had been loaned to governments (especially the USA's) or invested in global companies, will be substantially withdrawn. Borrowing will become more expensive for states - the real fear behind the G7 intervention - and companies will have to scale down their expansion plans.

So the credit extended to governments and consumers in the USA and UK courtesy of thrifty Japanese (and Chinese) savers will no longer be available, and we will have to tighten our belts by two notches instead of one.