At the circus, you are sometimes treated to the spinning plate act where a performer tries to keep an improbable number of plates spinning at once, racing from one plate to the next as their wobbles indicate the need for another dose of momentum. Considering the number of spinning and wobbling plates that our central planners are managing, it's easy to be both amazed and anxious at the same time.
The difference between the spinning plate analogy and real-world economic and financial systems is that if a failure occurs out in the real world, it has a very high chance of spreading across and through the other elements of the system. Contagion is the fear, as if in finally toppling, one plate will crash into its neighbor and set off a chain reaction of falling plates.
To carry this metaphor, Japan is a wobbly plate.
For those who are in a hurry today, the bottom line is that Japan is in serious trouble right now and is a top candidate to be the next black swan. Here are the elements of difficulty that concern me the most, each one serving to reduce Japan's economic and financial stability:
- The total shutdown of all 54 nuclear plants, leading to an energy insufficiency
- Japan's trade deficit in negative territory for the first time in decades, driven largely by energy imports
- A budget deficit that is now 56% larger than revenues (!!)
- Total debt standing at a whopping 235% of GDP
- A recession shrinking Japan's economy at an annual rate of 2.3%
- Renewed efforts underway to debase the yen
As I wrote shortly after the earthquake in March 2011, Japan is facing an economic meltdown. If it is not careful, it may well face a currency meltdown, too. These things take time to play out, but now almost exactly a year after the devastating earthquake of 2011, the difficulties for Japan are mounting – as expected.
Exacerbated by the earthquake and tsunami, Japan’s current predicament has been developing over many years and represents the aftermath of a burst financial bubble (involving stocks and real estate), an inability to let failed institutions actually fail, and repeated and stubborn attempts to preserve what ultimately could not be sustained.
Where many analysts predicted that the tsunami would be GDP positive because of the re-building that would follow, I predicted economic difficulties would be the main result due to broken supply chains, reduced factory output, and increased drag due to rising energy imports.
The Big Story – Energy
Japan is like the world’s largest petri dish, and the experiment at hand is about what happens to an advanced, industrialized economy when its electricity production is cut. As always, my view is that energy is the master resource. My observation is that complex systems behave in unpredictable ways when starved for energy, but directionally, they tend to shrink and "simplify."
Electricity is a critical form of energy, and thus the amount of electricity produced and a country’s GDP are very highly correlated. Sure, there is always some easy conservation that can be done that would allow an electricity shortfall to be met without any serious economic impacts. Street lights can be turned off, air conditioning and heating can be moderated, and other low-impact conservation efforts can reduce electricity consumption without doing much more than lowering utility revenues.