The recent earthquake and tsunami in Japan has wreaked havoc on Japan’s infrastrutcture and economy. And the aftershocks are still being felt. Not only are there geophysical aftershocks to deal with, but aftershocks in the Japanese economy and the ripple throughout the rest of the world’s financial markets.
Of particular concern in the timing of the event, as the world economies were showing a few signs of life after a three year period of economic devastation. Japanese Auto production has been shut down. The Germans have shut down their older nuclear plants. The markets have tumbled. What are the long term impacts likely to be?
For one, as Japan must now focus its capital on rebuilding, the net worth of the world will not grow. Using capital to expand and build can be engines for growth. Rebuilding what already existed but now is lost is a net-net absorption of wealth.
The Bank of Japan has already released capital into the markets to boost rebuilding efforts. This will surely have ripple effects on US issued treasuries and the debt of foreign governments all over the world.
The Japanese disaster is very unfortunate, and our hearts go out for all the families affected in this crisis. While I struggle with grasping the implicaitons of what the horrendous event may have caused– ripples that will be felt long into the future– when looking at the anemic economies of the world, the unrest in the middle east, and the devastation on Japan, it’s no wonder that the markets are spooked.
Aside from a few bright spots here and there, there is major unrest, major natural disasters, hyper-inflation on our doorstep, and governments, both domestic and foreign, that are basically bankrupt.
The next several months will tell the rest of the story…