Saturday, December 20, 2008

Depression and nuclear power

Eric Sprott, a Canadian investment funds manager has read the tea leaves. Sprott has stated:
“There are so many job cuts and output cutbacks it’s shocking. That’s not a recession, that’s a depression. I look at the data points and they just scream at me that we are off the cliff.”
During the last few months the Fed and the US Treasury has been running the printing presses at a historically high rate. The money creation machine has been working overtime. Conventional economic theory tells us that this should lead to rampant inflation yet as Craig Harrington notes
Despite the Fed’s creation of hundreds of billions of dollars out of thin air and the Treasury’s massive foreign borrowing campaign, the prices of everything from gas and groceries to electronics and clothing has gone down. Most of us are struggling through economic hardship of our own, and the recent drop in prices has been a welcome relief; but these price corrections could have a more sinister undertone. When prices fall across the board the phenomenon is called “deflation.” If this occurs over the course of a few months we typically herald it as a relief. If it occurs over an elongated time period, it spells doom to an economy.

When prices drop across the board companies are forced to lay off workers, lay offs lead to decreases in disposable income which in turn lead to decreased consumption. In order to bring in customers companies must drop prices further, thus setting off another cycle. If this spirals out of control we could see massive joblessness, falling personal income, and prices so low companies cannot afford to produce or sell goods.
The word depression seems appropriate. What is happening is not a local mater in the United States. We are dealing with a world wide phenomena. The entire golbal economy economy is in a tail spin. The insane economic policies of the Bush Administration have something to do with the problem, but the Bush administration policies were expediencies designed to cope with a deeply flawed international economic structure. In my own oppenion, the problem has at least as much to do with distortions in the international economy by the fact Asian consumption of consumer goods was not growing as fast as their production in China and to a lesser extent India.

From time to time I have to adjust my thinking to catch up with the economiic reality we confront. Chinese overproduction forced prices some dow, while Chines spending to to expand their economy drive the prices of energy and raw materials every higher. Eventually something had to start giving, and eventually the United States absorbed more debt than it could handle, and as debtors were unable to reopay their loans, financial institutions began to collapse, and with the resulting collapse of confidence, consumers world wide have stopped buying.

It is probably too soon to assume that we will have a deep and prolongured international depression, but we certainly cannot rule it out. certainly we will see a reversal of the inflation in the price of energy production facilities. This will be true of nuclear power plants.

Normally a reasonable assumption in predicting the future is that the future will be like the present. This assumption is not always correct, hovever. We seem to be undergone a sea change in the international economy, and its consequences still have to be measured. Many of our deepest held beliefs about economics may have to be unlearned, and the international economic structure may have to be rebuilt.

Recovery will probably be the eventual outcome, but when is the big question. The present national and international debt structure appears to be collapsing. Irving Fisher argued that this is precisely what caused the Great Depression of the 1930's. Fisher postulated 9 factors that lead to the prolongued depression:
1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates
All nine conditions have arguably have been meet, and the collapse continues at a pace. By this time next year, economic conditions are likely to be much worse than they are now.

Recovery may take far more time than we would expect, and thus projecting the future becomes impossibly problematic. The impact on the cost of building new nuclear power facilities could be very considerable. How much no one knows. But the price of muclear facilities before the power plant inflation between 2002 and 2007 was running around $2 billion per GW. It could drop considerably lower than that, however. The price of basic material like steel and cement has dropped dramatically, as has energy costs. If the price of labor falls over the long term, the cost of reactor construction could fall very dramatically.

At the very least, high end estimates of the future cost of nuclear power seem improbable. If last week, I thopught that the high end cost of building a nuclear plant in 2015 woud run to $8 billion, $4 billion nows seems more like the extreme limit, and $2 billion or less is at least plausible. A depression is extremel grim news the world's economy, but it ought not to stem the fight against global warming, and will significantly lower the cost of achieving success in that fight.

1 comment:

Marcel F. Williams said...

You make some excellent points about the cost of material and labor. This would be great time to invest in capital intensive nuclear and renewable energy projects-- if the banks were actually handing out any loans.

Hopefully, the Obama administration will follow through on its support for a Clean Energy Bank Corporation in order provide both nuclear and renewable energy systems the investment money that this country needs in future energy technology.

Marcel F. Williams


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