“Wow. That’s all I have to say, just wow.”

Maybe someone can help me understand the following:

“Speculators are becoming increasingly confident about pushing the [dollar/yen] currency pair around,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “Everyone is curious to find out why they chose not to defend the 80 level. Wow. That’s all I have to say, just wow.”

The yen gained to 77.48 per dollar at 5:42 p.m. in New York after passing its post-World War II high of 79.75 reached in April 1995, from 80.72 yesterday.

“We’ve breached 79.75 and there was enormous support there initially and that’s given way with stop losses on a New York close in extremely thin conditions with absolutely no signs of the Bank of Japan and the selling has just snow-balled,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney.

For those who don’t follow the yen closely, 77 is an insanely high level.  Japan’s currency is showing amazing strength, and the BOJ is nowhere to be seen.  Tight money in an economy that shows no signs of overheating—unless you count nuclear power plants.    I don’t get it, but then I’ve never understood anything the BOJ did or did not do. 

It pains me to write this post, as I am a big fan of Japanese culture.  Although I have never been there, I love the country.  But the truth is that Japan is not particularly good at handling disasters (as we found out after Kobe), and of course has a very spotty record on nuclear safety.  On the other hand there may be a tendency for people to get overly emotional about nuclear issues, so I really don’t know whether markets are over- or under-reacting.  (Yes, I’m a typical two-handed economist.  Pay no attention to my forecasts.)

I almost threw a shoe at the TV when I heard a newsman say the nuclear power plants were built to withstand earthquakes, but that “no one could have predicted anything this severe.”  Really?  I think Chileans, Russians, Indonesians and Alaskans would have had no trouble predicting 9.0 or higher earthquakes–which are not particularly rare, at least not for a power plant built to last for many decades and located in one of the hottest parts of the “ring of fire.”  These “black swans” (which might as well be named the official bird of the 21st century) are coming more and more frequently.  The reaction of authorities makes me more likely to believe those people who warn about the possible effect of solar flares knocking out our electrical grid, or genetically-engineered flu viruses causing pandemics.

[BTW, I think my post “Stuff Happens” holds up pretty well.]

In some ways recent events remind me of the Great Depression:

1.  The central banks didn’t provide enough stimulus.  Some actions were taken, but they would only be effective if things went smoothly–no bumps in the road to recovery.

2.  There were lots of bumps.  More importantly, there were lots of shocks that wouldn’t have caused much of a problem had we not been in a depression.  Smoot-Hawley.  The November 1930 bank run. Credit Anstalt.  France delaying Hoover’s attempt to rescue Germany.  Britain leaving gold.  The election of 1932.  War scares in the late 1930s.  Often these shocks had effects that seemed quite different from what one might expect, for instance Smoot-Hawley was very deflationary in May/June 1930, despite the fact that economic theory says tariffs are inflationary.  (And remember how the Libyan uprising seemed to reduce nominal interest rates?)

I’ve indicated many times that adverse supply shocks can reduce NGDP, if they become entangled with monetary policy.  And that’s especially likely to happen in a depression, when traditional monetary tools are ineffective.  Of course just as with fiscal stimulus, the Fed can neutralize the effect on NGDP.  So why doesn’t that appear to be happening?  Partly it’s because the Fed is targeting inflation, not NGDP.  Fiscal austerity reduces inflation, something the Fed might well offset.  An adverse oil shock (or disruption of the production chain in Asia?) raises prices, and hence is less likely to be offset with monetary stimulus.  We saw the Fed fail to react to a drop in AD during late 2008, partly due to an unhealthy focus on headline inflation (which had soared with oil prices.)  Could the same thing be happening again?

I suppose some people will roll their eyes and say “Sumner thinks even nuclear meltdowns can be fixed with monetary stimulus.”  Actually, I don’t think we should react to nuclear meltdowns or any other situation by changing our monetary policy target.  I favor stable NGDP growth.  The problem isn’t that money is not becoming more expansionary, the problem is that monetary policy (in the US and Japan) is becoming more contractionary.  I’d be happy if they simply stayed put.

The article quoted above did find a few countries that still “do monetary policy”  Countries that actually have targets, that aren’t passive in the face of shocks:

The Australian dollar fell to as low as 97.35 U.S. cents, the least since Dec. 2, before trading at 97.89 cents as of 8:32 a.m. in Sydney. The kiwi dollar slid to 71.30 U.S. cents, the lowest since Sept. 2.

The Aussie tumbled 3.5 percent to 75.56 yen, while the New Zealand currency dropped 4.5 percent to 55.39 yen.

Krona Drop

Sweden’s krona dropped against most major currencies, falling 1.3 percent to 6.4826 per dollar and 2.7 percent to 12.28 yen.

Rather than say Sweden and Australia’s currencies are falling, it might be more accurate to say the yen and the dollar are rising. 

Some people have argued that this event might actually help the Japanese economy.  I doubt it.  Of course there’s the broken windows fallacy, but the more sophisticated arguments are that Japan will react with major fiscal stimulus, and that this will somehow force Japan out of its liquidity trap.  I find that implausible, and I’m pretty sure that Japanese stock investors agree with me.  Still, it is certainly possible, especially given the size of Japan’s national debt.  I hope I’m wrong.

PS.  Will Wilkinson has a good post on the economic effects of disasters.  But keep in mind my cautionary note on the Great Depression.  The effect of shocks is very much context-specific.

PPS.  I know that the 77 level was something of a blip–the real question is why the yen isn’t going much lower.


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37 Responses to ““Wow. That’s all I have to say, just wow.””

  1. Gravatar of Steve Steve
    16. March 2011 at 19:11

    NOT A BLACK SWAN!!!

    Great Japanese tsunami earthquakes:

    Sanriku, Japan
    1896 June 15 UTC
    Magnitude 8.5
    Tsunami 80 feet
    http://earthquake.usgs.gov/earthquakes/world/events/1896_06_15.php

    Kanto (Kwanto), Japan
    1923 September 01 02:58 UTC
    Magnitude 7.9
    Tsunami 39 feet
    http://earthquake.usgs.gov/earthquakes/world/events/1923_09_01.php

    Sanriku, Japan
    1933 March 02 17:31 UTC
    Magnitude 8.4
    Tsunami 94 feet
    http://earthquake.usgs.gov/earthquakes/world/events/1933_03_02.php

    Tonankai. Japan
    1944 December 07 04:35 UTC
    Magnitude 8.1
    Tsunami 26 feet
    http://earthquake.usgs.gov/earthquakes/world/events/1944_12_07.php

    Nankaido, Japan
    1946 December 20 19:19 UTC
    Magnitude 8.1
    Tsunami 20 feet
    http://earthquake.usgs.gov/earthquakes/world/events/1946_12_20.php

    Sendai, Japan
    2011 March 11
    Magnitude 8.9
    Tsunami 50+++ feet
    http://earthquake.usgs.gov/earthquakes/eqinthenews/2011/usc0001xgp/

  2. Gravatar of Andy Harless Andy Harless
    16. March 2011 at 19:46

    A rising yen makes sense to me (as long as the SRAS curve is upward-sloping rather than entirely flat). Japan has a large trade surplus, and its output capacity has been damaged, while there has been relatively little change in other countries’ capacity. Japanese goods need to become more expensive relative to foreign goods because they are now in short supply — which is to say, the yen needs to appreciate in real terms.

    I agree that the Bank of Japan would do well to resist the yen’s rise much more aggressively than it has been. But that has nothing to do with the earthquake: we can all agree that the BoJ has been too tight for about 20 years now. If all central banks were following my preferred policies, it still wouldn’t surprise me to see the yen rising under current circumstances.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2011 at 20:25

    Scott,
    The BOJ pledged over $180 billion in QE since the earthquake/tsuunami (last I heard). The popular perception is that Japan *has* loosened monetary policy in response to the crisis. But the problem is they have no nominal target so the increase in the demand for money in the wake of the crisis has absolutely swamped their response simply because the BOJ has done a poor job of setting nominal expectations for over 20 years now.

    And you left out Poland (as usual) from your list of countries who still “do monetary policy”. The zloty has fallen 2.5% relative to the euro since the Japanese earthquake/tsunami. I’d have to check its performance relative to the yen but I suspect that that’s probably a bigger drop than any of the countries you mentioned with the possible exception of New Zealand.

    So beats the the one note drummer.

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2011 at 20:25

    Scott,
    The BOJ pledged over $180 billion in QE since the earthquake/tsuunami (last I heard). The popular perception is that Japan *has* loosened monetary policy in response to the crisis. But the problem is they have no nominal target so the increase in the demand for money in the wake of the crisis has absolutely swamped their response simply because the BOJ has done a poor job of setting nominal expectations for over 20 years now.

    And you left out Poland (as usual) from your list of countries who still “do monetary policy”. The zloty has fallen 2.5% relative to the euro since the Japanese earthquake/tsunami. I’d have to check its performance relative to the yen but I suspect that that’s probably a bigger drop than any of the countries you mentioned with the possible exception of New Zealand.

    So beats the one note drummer.

  5. Gravatar of mbk mbk
    16. March 2011 at 20:30

    I have a naive question. If money is neutral in the long run, how can a policy have been too tight for 20 years?

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2011 at 20:51

    Sorry about the double post. I think the Scott awakening has thrown his server a little bit.

    By the way in honor of massive amounts of cesium-137 being thrown into the atmosphere in Japan how about a little “Run Like Hell?”

    http://www.youtube.com/watch?v=VWLmnZ7VdBI&feature=player_embedded#at=12

    P.S. Is everybody aware of the fact that Fukushima has six times the fissionable material in its reactors and spent fuel pools as Chernobyl did? Sweet dreams.

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2011 at 21:56

    By the way, cesium-137 has a half life of 30 years.

    The ad hoc manner of measuring the radition release so far has not inspired confidence from my point of view.

  8. Gravatar of J. Jiggs J. Jiggs
    16. March 2011 at 22:04

    I’d like to comment if I may?

    First let me begin by saying I know nothing about all this economics ‘stuff’ and second I have a dumb blonde question for all you economists that blog regularly…it seems to me that you (collectively) all have your ideas and your notions and potions (models, theories, arguments in favour of this or that)…but why don’t you focus on where the decisions are being made and by whom, based on what and why? Ever google BIS, seemingly THE bank and had a looksee around? All around? They report to the G20 Finance Ministers, who report to the leaders of those countries, who tell everyone what to do, when and how, pretty much, right? (or am I missing something in up and down the pipe logic and following the penny?)
    The pipe or rather the rods are melting no?

    Doncha think BIS is going to pretty much tell Japan what to do, to prevent all sorts of icky money things from happening?

    Not only did I google and poogle around BIS and read about some Basel III thingy, but tonight I found this which made me smile: (all about that crazy yen and the yang of it all)

    “It’s mayhem out there,” said one trader at an Australian bank in Sydney. “The yen’s been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in.”

    (and some more gobblygook about the Group of 7 having a mtg today…)

    It just seems to me that you bloggers and learned econonomist types do a lot of speculating and blogging and maybe it would make sense to google more and look at the top of the pipe (where they are throwing water to cool things down at the bottom)?

    But hey what do I know, I always thought the group of 7 were a bunch of painters and I’m just a poor dumb student?

    Maybe the BOJ is waiting to be advised what to do and they are likely somewhat dependent on that information given their present situation?

    Source: http://www.reuters.com/article/2011/03/17/us-japan-economy-idUSTRE72F3FJ20110317?feedType=RSS&feedName=japan&virtualBrandChannel=10464&WT.tsrc=Social%20Media&WT.z_smid=twtr-japan_reuters&WT.z_smid_dest=Twitter

  9. Gravatar of dirk dirk
    17. March 2011 at 00:16

    First, when the financial types talk about “support” levels, they may as well be talking about their horoscopes. There is no reason to believe the concept of “support” levels has any useful value.

    Second, this incident has caused volatility to shoot up in worldwide markets, meaning % moves are much less meaningful than they were a week ago. I view the move up in the Yen as nothing more than random noise.

    Third, I’m one speculator who is short the Yen. I think you sometimes take the EMH too literally. We have just experienced a huge increase in volatility in nearly all markets. What this means is that what may appear to be a big directional move may not be. The big move of the past week has been increased volatility and increased random noise. In my view no market: currencies, bonds, equities has chosen a clear direction yet. Picture Bugs Bunny or the Road Runner rabidly moving legs with dirt flying in all directions before actually taking off. The market may eventually move strongly in one direction or the other — but it hasn’t yet. The cartoon legs are still churning.

  10. Gravatar of erickqchan erickqchan
    17. March 2011 at 00:40

    Thank you for caring about Japan. I am a sumnerian in the country.

    As Mark says, the BOJ is doing something but monetary policy obviously ramains contractionary.
    What it should do is promising not to sterilize the goverment’s national recovery plan, but the plan is poorly defined for now. Not only that, the government is looking into tax-raising in order to finance it. Crazy.

    Professor, please keep wrighting about Japan. We need your help.

    By the way, the power plants were built 40 years ago.

  11. Gravatar of bertusmaximus bertusmaximus
    17. March 2011 at 04:20

    having lived in tokyo, i can assure you that the government and folks have done the utmost to prepare for these sort of disasters … though how you prepare for something of this scale is a mystery in the context of the last 100 years. i guess one of the real issues at hand is the corporatism (poor safety records and firms trying to squeeze every last penny out of capital) but if you have to large swathes of fiscal policy then lobbying power augments.

    as for financial market consequences, numerous energy supply shocks and threats, more like, will continue to dampen global growth expectations and ergo higher NGDP countries currencies are susceptible. my guess is that given japan has probably had the greatest aggregate capital outflows for the last 20 years as percentage of GDP or size of population, its the redemption of those flows back into japan that will drive the currency over the next few weeks/months. good luck to the BOJ to stem that. the US dollar is a non issue here.

    as an investor, i have long been long yen (given its real rate of return and capital held abroad) but that should come to and end in the next few weeks/months. i suspect once the rebuild starts in earnest, the overall state of the fiscal mess will be made clearer and i wouldn’t be surprised to see taxes go up.

  12. Gravatar of Philo Philo
    17. March 2011 at 07:18

    “I favor stable NGDP growth. The problem isn’t that money is not becoming more expansionary, the problem is that monetary policy (in the US and Japan) is becoming more contractionary. I’d be happy if they simply stayed put.”
    This remark employs what is probably your most effective rhetorical strategy. Many people operate within a conceptual scheme where the monetary authority is either *passive* or is *doing something*; without a special reason to *act*, it is supposed to remain passive. And, given their vague intuitive ideas about what would constitute a *special reason to act*, they are disturbed by the image of an erratically activist monetary authority, jerking now this way, now that, in response to changing economic conditions You do well to present your recommendations as amounting to having the authority put in place the mechanism for satisfying a general rule (5% expected NGDP growth, similar to Friedman’s 3% money supply growth) and ever thereafter *doing nothing*: no “discretion,” just following a pre-established rule; no disturbingly erratic *activism*.

    But I do think it would be more accurate if you said not “I favor stable NGDP growth,” but “I favor stable growth of *expected* NGDP.”

  13. Gravatar of StatsGuy StatsGuy
    17. March 2011 at 08:01

    The yen move has been quite the puzzle, as everyone tries to rationalize. Conventional wisdom: Japanese people liquidating assets abroad to fund domestic needs. So why would huge BoJ injections not compensate and provide liquidity? Seriously, how much money do locals need?

    Don’t know, really, but those were big moves compared to daily or weekly cash needs for people buying stuff. Some speculation it was carry trade liquidation. You have FX traders with 50x leverage and derivatives contracts on expectation of long term Yen decline due to Japanese fiscal problems. (That’s the rational thing, right?) Then this hits, demand for Yen jumps, everyone runs for the exit. Because of leverage, all the stop losses and margin calls hit. Even if traders don’t want to liquidate a position (because they think the Yen is in long term decline) then are forced to, which forces prices up and triggers another round of margin calls.

    Traders cry for BoJ intervention (rescue us! it’s not fair!). Funny. Finance is too full of non-linearities, especially when the underlying economy follows the finance tail so directly. Hard to tell what’s really real anymore.

    All the anti-Fed folks, btw, would cite the above events as proof that the Fed is dangerous by creating a “wall of liquidity”. The problem isn’t “money”, however, it’s the regulation and management of leverage. And yet, so many economists refuse to admit there is a difference between “endogenous” money (credit) and exogenous money (fiat, or even metal currencies).

    The moral hazard, btw, is that BECAUSE the money supply is credit based, the providers (banks, etc.) can take big risks because they know that everyone else is taking big risks AND they know that if something happens, the correlation in downside will force a CB intervention to cover that risk. This forces up the risk profiles for _everyone_ throughout the economy. If one country tries to regulate, banks from other less restrictive countries – including poorly regulated money havens – can step in an force up the risk profile (subjecting their taxpayers to huge risk burdens – think Ireland and Iceland).

    It’s ludicrous to think that banking/finance regulation is separable from monetary policy. It’s also ludicrous to think that the monetary policy agent can truly make independent decisions when private capital has influence (which is DOES, because capitalism-without-corporatism is a pipe dream).

    Anyway, other things to worry about now.

  14. Gravatar of Mark Mark
    17. March 2011 at 08:14

    The yen appreciating while other risky assets lose value and volatility increases is likely one manifestation of the global carry trade (whereby investors are borrowing yen to invest in other higher yielding assets) being taken off. On a daily basis, we seem to have been in the mode of either “risk-on” or “risk-off” trading for probably a couple of years now, with unusually high correlations between many assets (probably because so much trading is now being done at a portfolio level through ETFs and other basket-like investments). It’s hard to look at this as simply increased noise. And today (Mar 17) we seem to have a reversal of this, as risk-on trades are back with yen losing value and most all other risky assets appreciating, along with volatility falling.

  15. Gravatar of Scott Sumner Scott Sumner
    17. March 2011 at 10:09

    Steve, I agree. It’s absurd the Japanese were not ready for this. And I’m not at all sure that we are any better prepared. What sort of earthquake can our reactors withstand.

    And I’m planning to retire in LA–land of high taxes, lousy public services, and apocalypses.

    Andy, My point is that the BOJ reacted to the quake by making monetary policy even tighter. Yes, one should never reason from a price change, but stock and bond markets also signal tighter money.

    Mark, Good point.

    mbk, Good question. Monetary policy may not have been too tight over that entire period, it depends on whether the labor market becomes less efficient near the zero wage rate increase point (which economists don’t agree on.) The main problem is that the average rate of NGDP growth is so low that Japan stays near the zero bound, and since they are not very good at unconventional stimulus, they suffer more than necessary during recessions. But Japan also has lots of supply-side problems.

    J. Jiggs. You said;

    “First let me begin by saying I know nothing about all this economics ’stuff’”

    You do know that this is an economics blog, don’t you?

    dirk, Isn’t the knee jerk reaction to a country in crisis to see its currency fall? If a nuclear bomb fell on Bangkok Thailand, would the Thai baht appreciate in the forex markets?

    erickqchan. Thanks for that info–and good luck.

    bertusmaximus, You said;

    “having lived in tokyo, i can assure you that the government and folks have done the utmost to prepare for these sort of disasters … though how you prepare for something of this scale is a mystery in the context of the last 100 years.”

    I agree that Japanese buildings are very well built. But their nuclear industry has been full of safety scandals. If these plants can’t survive a 9.0 then Japan never should have built them. (Or perhaps put them on the Sea of Japan, if the earthquake risk there is lower.) It’s an outrage for people to say “of course they can’t survive a 9.0,” after telling us the plants were perfectly safe.

    You said;

    “good luck to the BOJ to stem that.”

    The BOJ can put the yen where ever it wants to (in nominal terms), regardless of capital flows. It is the real rate that is determined by capital flows.

    Philo, Thanks, I often forget to mention “expected,” and that distinction is important.

    Statsguy, You said;

    “It’s ludicrous to think that banking/finance regulation is separable from monetary policy.”

    The relationship is that good monetary policy often leads to better banking policies. But not always.

    Mark, Those factors drive the real value of the yen. What puzzles me is why the BOJ is letting the nominal yen appreciate so much.

  16. Gravatar of C C
    17. March 2011 at 10:16

    Not a black swan? The Richter scale is logarithmic, so the difference between 8.4 and 8.9 is very large.

  17. Gravatar of DanC DanC
    17. March 2011 at 13:44

    A quick aside is that the plants seemed to have dealt with the earthquakes but not the Tsunami.

    I think this disaster will reveal the structural faults in the Japanese economy.

    25% of the population is over 65. They discourage immigration. Who is going to rebuild and who are they rebuilding for?

    The American Southeast recovers quickly from natural disasters because the area remains attractive to many people and resources are quickly and easily relocated to the area.

    Japan has been growing slowly but to a degree this appears to reflect changing social norms. An aging population has less incentive to build wealth and more incentive for stable returns.

    Unless the risk adjusted returns of new projects is high enough to adjust that view, why won’t the area around these nuclear plants just become like many American inner cities – a wasteland?

    All else equal, Scott’s policies may be the optimal path to follow.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. March 2011 at 14:04

    DanC,
    I don’t mean to pick on you but I want to take the opportunity to riff on some of your fine points:

    You wrote:
    “A quick aside is that the plants seemed to have dealt with the earthquakes but not the Tsunami.”

    Wouldn’t it be nice if reactors located near coastlines in a highly earthquake prone area had backup power that was protected from surging water? Too bad no one had the foresight to predict the totally obvious. (Too much regulatory capture due to the fact that TEPCO provides about one third of all the electricity in Japan?)

    And you wrote:
    “Unless the risk adjusted returns of new projects is high enough to adjust that view, why won’t the area around these nuclear plants just become like many American inner cities – a wasteland?”

    That’s a feasible policy when you’re a land rich conglomeration like the Chernobyl inflicted Soviet Union (8.6 million square miles) or a Three Mile Island inflicted US (3.6 million square miles) but what do you do if you have a major radiological disaster on a relatively small island like Japan (0.14 million square miles)? Where do you run to?

  19. Gravatar of DanC DanC
    17. March 2011 at 14:46

    Two points in response to Mark

    Why the plants were built were they were seems to have been based, on my readings, by political factors. The regulators were not captured by the utilities, rather the utilities saw advantages in giving into regulators.

    Next, the rural areas, I am told, tend to be older and poorer. Young people have been leaving this areas for some time. Absent an incentive to invest in the area, why will it happen.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. March 2011 at 14:52

    DanC,
    I defer to you seemingly greater knowledge. But wouldn’t it have been possible to make the backup power “waterproof” as it were?

  21. Gravatar of Benjamin Cole Benjamin Cole
    17. March 2011 at 15:00

    Cricky-if the BoJ doesn’t pump up money now, when will they?
    Maybe they will–after all, John Taylor wrote a piece in 2006 absolutely gushing at the then-success of a five-year BoJ QE effort.

    Scott-I love L.A., I live here, I was born here. But why would a New Yorker-Wisconsite come here? It is an easy place to dislike for past-their-youth transplants.

  22. Gravatar of dirk dirk
    17. March 2011 at 16:35

    Appears the BOJ has finally made its move with the G7 announcement. I’m a bit shocked this seemed like such an easy trade to make, considering everyone new the meeting was coming. Usually the market acts first and reads the fine print later.

    Hopefully they will be able to keep this up.

  23. Gravatar of StatsGuy StatsGuy
    17. March 2011 at 17:21

    Mark:

    “DanC,
    I defer to you seemingly greater knowledge. But wouldn’t it have been possible to make the backup power “waterproof” as it were?”

    Yes, it was, but they didn’t. The question is whether that’s because of regulatory capture, or stupidity. Let’s think through the incentives, and see if they are consistent with the capture argument.

    If Tepco is a rent-seeking corp, it wants the regulator to make rules that benefit it. For example, allow it to expose the public to risk or costs while keeping the benefits private. So the question is, was the cost/benefit/risk profile sufficient to cause Tepco to desire to avoid to pay the cost to waterproof its backup power, ASSUMING IT KNEW the full PRIVATE risk/reward situation?

    The answer is no – even the private portion of the risk-adjusted cost of pump failure more than compensated for the cost of generator upgrades. They had every incentive to avoid this, even without regulation.

    But they, and the regulators, were stupid. The engineers failed. Period. Public and private. And now people are dying. That’s what happens when engineers fail. It’s what happens when economists fail, too. And politicians. Except that usually, the linkage is less blatant.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. March 2011 at 19:13

    statsguy wrote:
    “But they, and the regulators, were stupid. The engineers failed. Period. Public and private. And now people are dying. That’s what happens when engineers fail. It’s what happens when economists fail, too. And politicians. Except that usually, the linkage is less blatant.”

    Arrgh!

    Drive a stake through my heart.

    I wish it were otherwise. But it’s true, we failed.

  25. Gravatar of Miguel Sanchez Miguel Sanchez
    17. March 2011 at 20:18

    “For those who don’t follow the yen closely, 77 is an insanely high level.”

    Aptly worded, though probably not in the way you intended. For those who do follow the yen closely, the real effective exchange rate is historically quite low, though it’s been off its all-time lows since the financial crisis.

    I know there’s a huge and ongoing debate about how to gauge ‘fair’ value, but I would’ve thought the very basic test of whether a currency is overvalued is whether the country is running a trade deficit. Japan has and continues to run a massive trade surplus.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. March 2011 at 20:40

    But maybe you did too.

  27. Gravatar of DanC DanC
    17. March 2011 at 21:52

    I don’t defend were or how they built theses plants. However the location of the power plants was in no small part a political process. Evidence of regulatory capture is weak. Evidence of poor planning is clear.

    After the fact, it looks like they designed a system that came through a severe earthquake. Why they didn’t plan for a tsunami is a question I cannot answer. It would seem they should have.

  28. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. March 2011 at 21:53

    How is Tepco’s failure different from BHP’s in the Gulf? We should not expect perfection from any structure: it is more a matter of playing the odds.

    The difference between the typical performance of government-owned enterprises and private enterprises in highly regulated industries is not very significant. Tepco is in the latter case, it is not clear to me that BHP is so it is not clear that there is some specific structural factor rather than failure of foresight or poor calculation of probabilities which can happen. (So, the issue may be more internal management practices and principal-agent problems.)

    If you are going to make a case, it seems to me to be something like this: your reactor was required to be built to deal with an earthquake of X power, it should therefore incorporate the predictable possible consequences of an X power earthquake, which a tsunami of Y size is. So, did they build to the regulations (and did said regulations incorporate that reasoning) or did they build to avoid expected costs? (Remember that Japan is not a litigious society: they were not building to avoid being sued: not that that seemed to have struck BHP.)

  29. Gravatar of DanC DanC
    17. March 2011 at 23:03

    I need to amend my comments. It maybe that the retaining pond was damaged in the earthquake leading to a leak in the pond.

  30. Gravatar of MikeDC MikeDC
    18. March 2011 at 05:51

    So I see this morning the US and rest of the G7 is stepping in to help weaken the Yen at the BOJ’s request
    http://hosted.ap.org/dynamic/stories/U/US_FED_INTERVENTION?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2011-03-18-09-01-18

  31. Gravatar of TheMoneyIllusion » A note on the Japanese yen TheMoneyIllusion » A note on the Japanese yen
    18. March 2011 at 06:10

    [...] the following reply: Aptly worded, though probably not in the way you intended. For those who do follow the yen [...]

  32. Gravatar of Rien Huizer Rien Huizer
    18. March 2011 at 06:54

    Scott,

    1. Why the JPY is at this level cannot be explained, but short shap moves tend to have identifiable “causes”. Often they are linked, by “analysts”, “experts” etc to events everyone is familiar with and that were unforeseen. Markets tend to develop a short term direction (or become heavily one-sided). After a while things settle down and usually a correction occurs. The Japanese “events” are linked to (a) the conjecture that the Kobe earthquake prompted large scale repatriation of funds by japanese companies (repairs, fresh domestic opportunities, etc) and retail investors (who tend to buy basic hybrid securities linked to currency movements like bonds with embedded options) fleeing to safety. The result is that, for instance, the large positions against those hybrid securities have to be unwound, which leads traditionally to pressure on high-yield currencies like the Aussie and Kiwi dollar (and in the past the Loony too). Because everyone knows that this is what will happen under this type of circumstances, it happens and on top of that there is a much larger presence of JPY carry trades than 15 years ago. The carry traders are vulnerable to margin calls, etc. So what is happening here is easy to explain and hard to prove. The most likely event that will happen next is coordinated intervention but by then Mrs Watanabe will have been cleaned out by her broker.

    2. Do you believe that t is possible to design monetary policies that would eliminate the business cycle (assuming a credible central bank with ample resources of any kind to execute such a policy). If so what would that policy be in the case of Japan (assuming that exchange controls are not part of what you understand as monetary policy). It does raise a few questions not the least the tension between credibility and robustness (the ability of a system, including your NDGP targeting system to function to specification despite extreme emergencies). Regardless of the reply, it is unlikely that even the most independent central bank would be able to conduct policies that would be rejected by the public (a public conditioned to believe the politician’s story that the gvt has the responsibility to conduct economic policy using the state budget, especially during emergencies).

  33. Gravatar of Considering the Fluctuation of the Yen | The Prospective Investor Considering the Fluctuation of the Yen | The Prospective Investor
    18. March 2011 at 08:22

    [...] My recent post on the yen triggered a number of interesting comments. For instance, Miguel Sanchez responded to my claim “For those who don’t follow the yen closely, 77 is an insanely high level” with the following: [...]

  34. Gravatar of ssumner ssumner
    18. March 2011 at 10:36

    C, Yes, a black swan–the problem is that black swans are increasingly common.

    DanC, With Japan’s population plummeting, and the young preferring big cities, why not just abandon the area–or move 6 miles inland?

    Benjamin, The weather. And obscure films available at theaters.

    dirk, Yes, I did a post this morning.

    Statsguy, Yes, lots of villians. BTW, in a free market there would be no nukes in the US, as they couldn’t afford insurance. They have some sort of exemption, granted by Congress. Don’t know about Japan.

    Miguel, I did a post answering your question.

    Lorenzo, I don’t know, but I’m pretty sure it (intentionally) wasn’t built to withstand a 9.0 quake and tsunami.

    MikeDC, Thanks. I did a post.

    Rien, None of the factors you describe explain why the BOJ let it happen. Or perhaps I should say, was expected to let it happen, as spot and forward rates tend to move in lockstep, so it wasn’t just a question of the BOJ not yet having time to step in.

    If there is a bend in the road and the bus goes off the cliff, I don’t blame the bend in the road for the accident, I blame the driver for not turning. It’s the BOJ’s job to prevent deflationary shocks, and they are doing a horrible job.

    I don’t think you can prevent cycles caused by real shocks (like this one), but there is no need to pile a deflationary shock on top of the real shock.

  35. Gravatar of Benjamin Cole Benjamin Cole
    18. March 2011 at 15:38

    Scott

    Hurry to L.A. Many of the old special-run, indie theaters are closing (death by Netflix), but I think UCLA and USC still run some films. There is also the AFI, which runs movies at the Egyptian Theater on Hollywood Blvd. Also the LA County Art Museum runs films. Actually, now that I think about it, you could probably see a great or at least interesting film a few times a week, but you would have to make an effort to get skeds from schools and AFI, and LACMA. Maybe others i have forgotten about.

    We used to have a Silent Movie Theater but I think it is closed now.

    I hope you enjoy L.A. as much as I do.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. March 2011 at 21:17

    Lorenzo of Oz,
    You wrote:
    “So, did they build to the regulations (and did said regulations incorporate that reasoning) or did they build to avoid expected costs?”

    Let’s be realistic. TEPCO wrote the regulations. They are a third of all electrical power in Japan and they supply all of the power for the world’s largest and most productive metropolitan area.

    Chances are they will bear a significant part of the costs of the Fukushima nuclear disaster. Chances are also that they will avoid paying the entire cost (realistically calculated).

  37. Gravatar of ssumner ssumner
    19. March 2011 at 14:43

    Benjamin, It would be a tragedy if movies could only be seen on TV. It’d be like if operas were only available on TV.

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