Fukushima and the Evolution of Ignorance

How much non-information about Fukushima can one absorb? Less, clearly, than is available. So here's perhaps the wisest observation I've heard about it - made by Bill Durodie of the Centre for Non-Traditional Security Studies at Singapore's Nanyang Technological University:

The closer the situation comes to being resolved at Fukushima, the clearer it will become what actually happened there. Hence it will sound like matters are getting worse just as they are getting better.

There's an echo there of the chap i/c the Three Mile Island meltdown, who observed that they only really found out what had happened five years after it was over, since that was how long it took to really have a look at what was left of the core.

But it's also another example of what's been called 'the evolution of ignorance' - the effect by which maps of 'unknown Africa' started going blank in the 18th century, as we came to realize that although we didn't know what was there, we were becoming more and more persuaded that Africa wasn't really peopled by dragons and anthropophagi.

How will the evolution of ignorance about Fukushima affect pricing of Japanese financial assets?

Off-Topic: Japan, Libya and the Psalm Ordered for This Sunday

I oscillate between the beauty of the Church of England (1662 version) and the contemplative revelation of the Quakers. This Sunday I went to Mattins, and the psalm ordered for the day was Psalm 46. Here it is: 

1 God is our hope and strength : a very present  help in trouble.

2 Therefore will we not fear, though the earth be moved : and though the hills be carried into the midst of the sea;

3 Though the waters thereof rage and swell : and though the mountains shake at the tempest of the same.

4 The rivers of the flood thereof shall make glad the city of God : the holy place of the tabernacle of the most Highest.

5 God is in the midst of her, therefore shall she not be removed : God shall help her, and that right early.

6 The heathen make much ado, and the kingdoms are moved : but God hath shewed his voice, and the earth shall melt away.

7 The Lord of hosts is with us : the God of Jacob is our refuge.

8 O come hither, and behold the works of the Lord : what destruction he hath brought upon the earth.

9 He maketh wars to cease in all the world : he breaketh the bow, and knappeth the spear in sunder, and burneth the chariots in the fire.

10 Be still then, and know that I am God : I will be exalted among the heathen, and I will be exalted in the earth.

11 The Lord of hosts is with us : the God of Jacob is our refuge.

You'd think the Psalmist had some experience not just of earthquakes and the tsunamis they trigger, but also what it takes to establish a no-fly zone in Libya.  Uncanny.  

How Do the FT's Editors Sleep at Night?

I wonder if it's just an extreme case of softening up public opinion in advance of the inevitable catastrophe.  Over the years, the FT has gambled a stupid amount of its intellectual credibility on supporting the doomed Euro.  In that, I think it's fair to say that the cheerleader in chief has been Wolfgang Munchau.  But what's this? In today's paper, he sounds almost clear-eyed about how it's all turning out:

"The [European] Council's priority is to triangulate domestic political interests, while managing news headlines. They are getting good at this.  But they still have no crisis resolution strategy. This is why I am sceptical about the pledge that they will do 'whatever it takes' to save the euro. That may turn out to be the ultimate phantom giant."

I'm not a particularly nice or tolerant person, but I recognize that pouring scorn on commentators/institutions with whom I disagree isn't attractive.  But there are two serious questions here:

First, it's clear that Greece, Ireland (who's banks need a further Eu27.5b from the government, apparently, and who's central bank has banned asset sales because of impossible losses they'd generate), and now Portugal are insolvent.  The odds on them defaulting are shortening every day, even though the CDS markets still have European banks' rates at around 350, actually lower than in December, remarkably. One must assume that they've all managed to offload their Greek/Irish/Portuguese (and while you're about it, Spanish & Italian) over the last few months?

Of course they haven't. Which means when the defaults start hitting the banking system, we'll find the current CDS rates on European banks look cheap in retrospect.  The point is this: the second round of the financial crisis is shaping up to happen in Europe, soon. This year, and possibly this quarter. Are you protected? If you're an investor with a natural long bias, how can you be?

Second, almost every aspect of the Eurozone crisis was predictable, and indeed widely predicted (if you were living in Asia at the time, where every economist is Austrian).  The only bit that didn't go exactly to script is that when Ireland's banks went bust, the German banks were in no position to buy them, having already unexpectedly blown themselves up in the CDS market.

Needless to say, the FT either couldn't hear the arguments, or couldn't understand them. Providing such comprehensive editorial aircover for what may yet turn out to be one of the biggest financial and economic disaster of our age deserves some acknowledgement, some contrition and, indeed, some redemptive punishment.

Put it this way: I hope Wolfgang Munchau isn't the only fool at the FT to get paid in Euros.  

In Which Old Japanese Habits Die Hard

Fresh off Bloomberg:

Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation's record earthquake.

"If this isn't a special situation, what is?" Kozo Yamamoto, a Diet member of the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a Y20 trillion reconstruction program funded by BOJ debt purchases. A group of ruling party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18. . . . "

No doubt Mr Shirakawa has been going through the disastrous history of the BOJ's open-ended and unfunded commitment to 'Earthquake Bonds' after the 1923 Big One. What happened that time was that BOJ was only partially indemnified against losses on those bonds, and as they financed - among many many other things - an astonishing loss of inventory, the losses on the bonds were far higher than anyone had dared anticipate or envisage. As a result, the Earthquake Bonds and associated losses cluttered up the financial system for years, and eventually brought down the banking system in the 1927 crash.  See Parts 1, 2, 3 below.

The difference is that this time, even right from the off, there seems to be no suggestion that BOJ will be indemnified in any way against losses.

So we'd better start asking: what happens if a central bank gets into difficulties? The answer, as the Philippines central bank will tell you, is that you recapitalize the central bank by widening banking spreads. Another reason to believe that the financial upshot of the earthquake will be a reform of Japan which re-introduces and re-invigorates the financial repression with which Japan is so familiar.

Japan - How to Count (and track) the Costs

There are no shortages of estimates of the economic cost of Japan's multiple catastrophes - every economist in the region has been asked to produce them, and they have little choice but to meet demand.  Now at this stage, you'd expect me to decry the spurious precision of these estimates, and lament the stupidity of those who ask for them. After all, one of the real eye-openers of the last 10 days was the admission by the guy in charge of Three Mile Island when it melted down that he didn't have an accurate knowledge of what had happened inside that reactor until five years after the accident. It took that long for the reactor to cool down sufficiently for anyone to have a good look at the damage.

But despite this, the guesses economists are making today are valuable, because they at least erect a framework around which our understanding of the consequences can grow, and from which it can evolve. They're not accurate, they're in no way reliable, but they are helpful in tracking how our understanding changes.

And in the meantime, here's my advice on how to count the cost.

First, there are estimates of the damage - both the cost of reconstruction, and the cost of lost production.  No-one really knows yet, but let's call it 'x'.   Mainly, this is presented as a percentage of GDP, and, if you're lucky, there's a time-frame with it (over the next year at least).

These are more or less educated and informed guesses. But even if they were right, they'd not tell you what you need to know.

Because, second, there are the cashflow implications of the cost - ie, the extent of  corporate reaction to the disasters.  We can track this directly using the Ministry of Finance's quarterly survey of private sector balance sheets and p&ls. More than ever, over the next couple of years, these surveys will be far more important than the quarterly GDP numbers.  Judging by the what happened after the Kobe earthquake of 1995, this number will be a significant multiple of 'x' - probably 8x to 10x.  This cashflow impact really matters, because it will show up in the liquidity of the financial system, the appetite for government bonds, and the extent of repatriation of capital.  In other words, on interest rates, bond yields, and the direction of the yen.

So the third thing you need to know, or forecast, is policy reaction to the cashflow crimp. Does the cashflow crimp potentially limit JGB issuance? And if it does, will we find Bank of Japan simply printing money to fit? Or, as I suspect the form will be, 'accepting for discount the bonds of the newly-formed Reconstruction Agency within 12 hours of issuance'

Japan's Last Big One, Part 3

The previous two posts detailed the way in which the government tried, and failed, to finance the aftermath of the Great Kanto Earthquake of 1923 – a failure generated by an initial underestimate of the sheer size of the problem, and the unwillingness fully to acknowledge it long after the problem had become obvious. In the absence of effective government policies, the burden fell on the banking system which was unable to carry such a weight. As the banking system buckled under the pressure, the result was the financial and political implosion of the Japanese banking crisis of 1927, which ultimately discredited Japan’s democracy and opened the way for the aggressive nationalistic militarism of the 1930s and 1940s.

During the 1920s, Japan’s banking industry was in no fit state to trade through the bad debts haunting the money markets and the ‘earthquake bills’ which were cluttering up both their balance sheets, and, just as importantly, Bank of Japan’s balance sheet. In the aftermath of both the implosion of the post-war Bubble in 1920, many banks were already on shaky ground. Japan had lots of banks, mainly extremely small, local, and corrupt. In 1922 Japan had 1,794 ordinary banks in Japan, averaging less than three branches each, and averaging Y4.4 million in deposits (about Y21 billion in today’s money). This multiplicity of tiny banks came at a price – local banks tended to use local deposits for the benefit of the local power-broker’s business scheme. If and when those schemes went belly-up, the bank and its depositors would suffer.

As the Japanese economic historian Nakamura Takafusa wrote: “Companies . . . commonly went to great length to cook the books so that their assets and liabilities tables showed a profit even when the company was awash in red ink.” Banks aided and abetted these practices – hardly surprising considering that the companies were also likely to own the banks.

This underlying weakness was magnified by combination of the unacknowledged losses from the 1920 bust, the earthquake bills mess, and extended deflation. Increasingly, the banking system was quietly freezing in distress. Four years after the Great Earthquake, the cracks in the system could be hidden no longer.

By the beginning of 1927, the government was moving on two fronts to deal with the banking industry’s problems, addressing both the banks’ immediate financial problems, and also the regulatory and capital weaknesses obvious in the system. In April 1927 it introduced a new Banking Law, in an attempt to consolidate the industry and ensure its capital adequacy and operational probity.

But first, in January 1927 two bills were introduced into the Diet to deal with the recurrent problem of the roughly Y200 million in uncollectible outstanding Earthquake Bills. The first indemnified BOJ for Y100 million losses from uncollectible bills, and proposed issuing a Y100 million five year bond to do it. The second bill would allow the government to lend Y100 million in public bonds to banks still holding Earthquake Bills, whilst the debtors would be given 10 years to pay off, in instalments, the remaining bad debts.

This willingness to open the public purse to the banking system was political dynamite. The government faced accusations that it was bailing out mismanaged but politically well-connected banks and enterprises at the expense of the taxpayer. The opposition wanted to know which banks held the earthquake bills; the government refused to say. In the absence of disclosure, rumours abounded.

Quite a few centred on a trading company called Suzuki Shoten and the Tokyo office of the Bank of Taiwan – which, as its name suggests, was a note-issuing bank for Taiwan (at that time a Japanese colony). Together, these two became the ground zero of the 1927 banking crisis.

Founded in Kobe before World War One, Suzuki Shoten was a small trading company dealing mainly in Taiwanese products, and financed largely by Bank of Taiwan. Bankrolled by Bank of Taiwan, the company massively over-traded: indeed, at one point it was bigger even than Mitsui. Naturally, when the 1920s bust came, Suzuki found itself holding huge inventories at a time when prices were falling. Its vast profits disappeared into equally imposing losses, and Bank of Taiwan threw good money after bad. Naturally, Suzuki Shoten was responsible for a huge amount of “earthquake bills” after 1923. By April 1927, loans to Suzuki Shoten stood at Y396 million (at the time, Japan’s national budget came to Y1.5-1.6 billion). Its borrowings from Bank of Taiwan came to Y250 million, out of a total BOT loan book of Y720 million. By the time one adds Suzuki-affiliated manufacturing companies, the total owed by Suzuki to Bank of Taiwan was about Y350 million. In other words, about half Bank of Taiwan’s loan-book. This was not so much a disaster waiting to happen, but a disaster that had already happened.

The collapse of Bank of Taiwan triggered a fully-blown banking crisis which rapidly closed all banks in Tokyo and Osaka temporarily – a closure which literally bought time for Bank of Japan to run its printing presses sufficiently fast to meet the demand for banknotes as customers withdrew their deposits. The note issue doubled and Bank of Japan lending tripled in a matter of days. In an echo of its initial response to the earthquake, the government imposed a three-week moratorium on all financial obligations. But in the end, this was insufficient: 44 banks were bankrupted, representing the loss of deposits equivalent to around Y36 trillion today.

The political blow to Japan’s Taisho democracy was immense. Had Japan reflated massively after this financial catastrophe, the worst of the depression and indeed starvation of the 1930s might have been avoided. But the political damage was too deep – opening the way for something much worse. In June 1928, the Japanese Army in Guangdong blew up a train carrying Chinese warlord for Manchuria and Inner Mongolia, Chang Tsolin. When Prime Minister Tanaka appealed in vain to the Emperor to for the perpetrators to be court martialed it was clear his political support was over. A new regime took over, and the days of a crushing and inappropriate financial orthodoxy began. That financial orthodoxy, based on a return to the gold standard, was ruinous both to Japan’s economy, and to what was left of the credibility of the political system. What happened next - the end of Japan’s experiment with democracy and its succumbing to nationalistic militarism - ripped China and Asia apart for the next 15 years. Still today we live with the consequences.

Japan's Last Big One, Part 2

The previous post looked at the immediate government response to the Great Kanto Earthquake of 1923 - the declaration of a 30-day moratorium on short-term debt, subsequently backed up by a general discounting of 'earthquake bills' by Bank of Japan, itself receiving only a partial indemnity from the government.

In the short term, the rescue measures saved many companies, but the cost to the financial system was only revealed over time. First, this de facto BOJ guarantee for bad debts allowed banks – who were still reeling from the implosion of the post-War 1920 bubble (the result of a collapse in Japan's terms of trade) - to avoid making credit judgments they didn’t want to make, and generally encouraged fraud. Second, it would also lead to a rise in bank loan/deposit ratios and, conversely, a rise in corporate leverage ratios. At the end of WW1 banks’ LDR stood at 94.2%: by 1923 it stood at 115.7% - a level it would not reach again until after WW2. The aftermath of the earthquake provided banks with a final chance to re-leverage, courtesy of the government’s guarantees. They would soon (in 1927) discover that those government guarantees did not solve the underlying problems of their portfolios. For the next 17 years, banks basically built this ratio down – in a way which was bound to be deflationary.

As for corporate leverage, 1923 marked the start of a build-up in leverage ratios which continued throughout the 1930s (mainly reflecting the rise in debt securities markets). Taking the Dupont financial leverage ratio (total assets/equity) we find the ratio for Japan's principal enterprises rising from around 1.35 in 1922 to just under 1.80 by the end of the 1920s. Releveraging in a deflationary environment might be though to be asking for trouble. As we shall see.

Third, and crucially, the technique of rolling debts, adding liquidity, and giving a guarantee that would deal with only part of the problem, didn’t work. The government had indemnified BOJ for losses on these bills to the tune of Y100 million, but this clearly was insufficient to deal with all the bad debts left behind by the earthquake. The amount of “earthquake bills” has been estimated at Y2,100 million, equivalent to 18.7% of all bank loans. Frankly, I don’t know how this estimate was arrived at – most probably it follows the “lost merchandise” figure, about which we have already been skeptical.

In practice it came to less than that. The face value of the bills payable at the end of March 1924 and rediscounted by BOJ came to Y431 million. That’s only about 4% of bank lending, but it was also 33.5% of all industrial bonds outstanding. By November 1924, the unpaid amount of “earthquake bills” had fallen to Y276 million (21% of bonds outstanding), but their liquidation was slow and even at the end of 1926, there were still at least Y207 million outstanding of these identifiably bad loans circulating in the system, equivalent to 11.2% of all outstanding corporate bonds.

These earthquake bills stressed the financial system in at least three ways. First, they cluttered up BOJ’s balance sheet, leaving it less able to lend to other parts of the financial system. Secondly, this amount of bad debt undermined the overall health of the money market, thus muting any impact BOJ could have made still further. Third, the earthquake bills also undermined banks’ balance sheets: because they had to depend on foot-dragging political decisions of the government with regard to loans, banks holding these bills were gravely weakened.

And this, of course, was the problem - Japan's financial and fiscal system in the early 1920s were in no fit state to handle these sorts of stresses. When misfortunes come, they come not single spies, but in battalions. The story of how these stresses concatenated to produce the Japanese financial crisis of 1927 - and all that followed from it - will continue tomorrow.

Japan's Last Big One, Part 1

This is the first of a three parter on the impact and financial aftermath of the Great Kanto Earthquake of 1923. How did Japan's bureaucrats respond, what was short and longer-term financial and economic impact, and what were the longer-term costs. As you read these, bear in mind that a) Japan's goverment debt/GDP ratio is already 200%+, and MOF expects that by 2014 32% of all tax revenues will go on debt service, and b) only three weeks ago, the FSA was still thrashing out how to account for the roughly Y1.39tr in losses stemming from the collapse of the 'jusen' housing finance system in the 1990s.

The catastrophic Great Kanto Earthquake struck on 1 September 1923, leveling most of Tokyo and Yokohama. The casualty statistics are shocking: 91,000 killed, mostly in Tokyo and Yokohama; 13,000 missing; 52,000 injured; 69,000 houses lost or damaged. At the time it was estimated that 3.4 million people were directly effected – approximately 6% of the population.

The damage to national wealth was put at Y5,274 million, approximately 4% of total estimated national wealth of 1924, and 44% of 1923 GDP. Of that total, Y2,136 million worth of merchandise was lost and Y1,874 million worth of buildings, equivalent to 8.2% of the total building-stock. Perhaps we should be skeptical of these numbers: the Y2,136 million claimed as loss of merchandise and inventory seems an astonishingly high number (particularly when compared with the Y869 million lost in household goods), and suggests there was no shortage of people willing to inflate their losses in response to government relief actions.

(To compare: between December 1989 and September 1990, Japan’s stockmarkets lost Y270 trillion in value – an amount equivalent to roughly 60% of GDP.)

This estimate of losses does not, however, include the impact on the stockmarket. In the event, however, these seem to have been surprisingly light. The bond market reopened for business on October 16 (in IBJ’s banking hall), spot transactions started again in the ruins of the exchange on October 27, and futures trading restarted on November 15. But, buoyed by a Y13 million rehabilitation loan from IBJ, when TSE proper reopened on November 15, its shares, which had been quoted at Y121.9 on August 30, opened at Y107 – a loss of only 12%.

The government’s bureaucratic responses, and its immediate provision of liquidity were as one might expect. The government provided relief financing and, cut duties on the import of reconstruction materials. Not surprisingly, this resulted in a flood of speculative imports, which in turn blew out the trade deficit in 1924 to record proportions (6.7% of GDP), which in turn cut the gold reserves, drove the yen down from around 49 at beginning of 1923 to 38.5 by October. Such negative developments (from the point of view of a political leadership unwilling to abandon its gold-standard aspirations) constrained the government’s role in reconstruction.

More significant, in the longer term, was the government’s arrangements to contain the immediate economic and financial damage. On Sept 7, the government declared a 30 days moratorium on all obligations contracted before Sept 1 and payable during September, for all debtors having their residence or place of business in the stricken area. In addition, when that moratorium ran out, BOJ was empowered to rediscount all bills discounted by banks and maturing before Sept 1925, which were covered by the moratorium, with the government offering to indemnify BOJ for losses on these transactions up to Y100 million.

In other words, when the deadline for payment of a note issued or to be paid in the earthquake region came around, the note could be taken into a bank to be discounted. The bank would subsequently take the note to BOJ, which would rediscount the note stamping it with the words “Earthquake Bill.” In the event that the debt turned out to be bad, or simply not paid on time, the government would guarantee BOJ up to Y100 million.

Many companies were saved by this procedure, but at a cost to the financial system which was only revealed over time. And we'll turn to that in Part 11. . . .

The Opportunity Hiding in the Multiplicity of Crises

There will be plenty of people like me sitting at their computers this Saturday, wondering which crisis is going to get them on Monday morning. Let's list them:

• Japan - not just earthquake and tsunami, but now also Chernobyl II.
• Arabia - what happens if the sovereigns fall? Can neo-tribal societies sustain the oil production we need?
• Eurozone - the sovereign debt crises are only getting worse, even though the immediacy of the first two crises knocked yesterday's (predictably inconclusive) EU meeting out of the press pages.
• China - if it's slowing faster than we previously thought, what tools are available to keep it growing?

Over the weekend, I'll be trying to sketch out some short and medium term futures in numbers, in the probably mistaken hope they'll provide a sort of blind-man's stick to tap our way around the obstacles and mantraps during the next few weeks.

But today I want to suggest something more radical: that taken together the first three crises share common roots, and that they will conspire to hasten the birth of a radically different shape of state and society in the West, which is nothing short of revolutionary, and which will overturn all the current expectations about patterns of growth and activity during the next 50 years.

The roots of all three crises are the same: the interplay between provision of power, and the power of the state, and what happens when costs rise sufficiently to disrupt that interplay. I recommend Daniel Yergin's book 'The Prize' as an essential primer for anyone who doubts the role that the secure provision of energy has played in the construction of the modern (ie, Western) state. Securing the flow of oil is a major fixation of all major states, be it the US, China or Britain. This task justifies now, just as it did with the first British claims on Mesopotamian oil, the recruitment and deployment of national armies and defence industries. The love between governments and oil is mutual - oil provides one of the most lucrative opportunities to raise taxes both directly and indirectly, and doubtless the industry can be persuaded also to fund political parties and politicians directly too, where possible.

If anything, the nuclear industry is even more intimately linked to government - let's face it, almost everywhere it's a not-so-covert part of the local defence industry. When Chernobyl went up in 1986, it was a disaster of incompetence which tolled an early bell for the Soviet Union. More recently, since 9/11 we've all been aware that a nuclear power plant is potentially a strategic weapon for Osama bin Laden sitting in our own backyard, thus once again justifying the most lavish deployment of central state power both here and abroad.

Since the stable provision of electric power is a precondition of a modern society, it is also the main de facto justification for the big modern states for which we pay our taxes and raise our 'national' debts.

Ah yes, the debts. For this is where oil and ChernobylII intersect with the Eurozone's sovereign debt problem. Actually the Eurozone's sovereign debt problem is interestingly mainly because the crass economic mistakes of Europe's political elites, energetically pursued, has brought several European countries face to face with the unsustainable cost of running their state structures.

The combination of Arabia and ChernobylII will, at the very least, raise the cost to nation states of that central task of securing energy supplies. Yesterday, Britain pensioned off its aircraft carrier Ark Royal: the very same day, David Cameron was arguing that someone (who?) should institute a 'no-fly zone' in Libya. You and who's navy, David? My guess is that by Monday, the nuclear industry which is being asked to build new reactors in the UK without government funding of guarantees will have done the new sums and be presenting their new and more lavish estimates to Number 10. The costs rise. . . .

At which point, I need to direct you to two more books. The first is 'The Collapse of Complex Societies' by Joseph Tainter. This is a study, by an archeologist, which argues from massive evidence, that complex societies expand (and become more complex) up to the point at which the marginal cost of extra complexity outweighs the advantages won by that complexity. To an economist, that sounds extremely reasonable and likely. My point is this: if we were nearing that point a few years ago, the rising cost of securing and defending the current sources of energy bring us a lot nearer today, when Arabia is burning and Japan is melting down.

The second is 'Cognitive Surplus' by Clay Shirky. In contrast to Tainter, Shirky is a sublime optimist, who believes that much human and social behaviour we take for granted is merely adaptation to restrictions which need not be immutable. Remove the restrictions and behaviour changes. He uses this model to suggest how society may be changed (much for the better) by the liberation of the 'cognitive surplus' we currently squander on TV by the tools of social networking.

He thinks - and he's surely right - that this will change what we need and demand from the State. Take one obvious and current example: given the tools we now have, no-one in their right minds would propose that the best way to ensure maximum access to a maximum range of books would be for the local authority to build a building in the centre of a town, buy a limited range of books, employ someone to keep the shelves tidy and track of who's got which book at any particular time, and patrol the system by issuing minor fines. No - you'd just set up a book lending/borrowing app and let it organize itself. Obvious, innit?

In other words, Clay Shirky suggests that many of our goals would be better achieved outside the structures of the state, which are too often:

• based on ideas first thrashed out in the late 19th or early 20th century,
• implemented in the 1950s, and
• are bankrupting us and our children in the 21st century.

The opportunity hiding in the multiplicity of crises, then, is this: as the cost of oil and nuclear rise not just for consumers, but also in terms of the externalities they impose on states, the attractions of renewable energies emerge ever stronger. The economics improve not merely directly on price to price comparisons (of which more later), but also of the markedly lower externalities they impose on the states. If your energy comes from fields of solar PVs or (even) windfarms, then we can stop worrying about the Arabs, we can stop worrying about the safety of nukes, and Dave can stop wishing he hadn't decommissioned the Ark Royal.

And how are the direct price-to-price comparisons looking for solar? I follow the monthly data on module and electricity pricing from Solarbuzz, and from the US Energy Information Administration. To cut a long story short, commercial electricity prices were roughly stable last year for conventional energy, and were down 8% for solar. Solar fell 8% in 2010, 4.3% in 2009, 0.3% in 2008, o.7% in 2007. They'll be down more this year, because in the first quarter of this year, retail prices of PV modules were down 15% YoY.

A few years ago, I sketched the long-term trends, which demonstrated a smooth glide path to grid-price parity pricing by 2020. Right now, that's looking pessimistic: the model suggested commercial solar electricity would cost around 2.25x conventional electricity around now, actually it's running around 2.06x. In scheduling terms, we're about 18 months ahead of that 2020 deadline for parity-pricing.

The point is this: we've seven years and counting away from a time when not merely the cost of energy, but also the cost of the state, can fall. Today we have a multiplicity of crises: what they're signalling is nothing less than the re-invention of the West.

Why a Blog?

Those of you who have found your way here will have a fair idea about what's happening. About a year ago, I was asked by some friends if I'd consider helping start a hedge fund. My reaction was perhaps as you'd expect: my entire background was economic research, so I wasn't qualified to start a hedge fund - nevertheless, I'd try to put together a team that might be useful, and then probably drop out and leave them to it.

If you want to give God a laugh, tell him your plans. The 'useful team' turned out to be people for whom I have great respect, who I love working with. So gradually, the work on the hedge fund has grown from a mild interest, to a serious proposition, to a passion which is subsuming my analytical work, to a full-time occupation on many fronts.

In the circumstances, I cannot honestly say I can give my full attention both to Coldwater's clients and to the fund. But at the same time, my love of economic ideas and the exchange of them, is undimmed, the excitement of following the world's economic story remains utterly unquenched. It just is part of me now that an interesting piece of analysis is made to be shared. Take this morning, for example. China's inflation data for February arrives and shows . . . . that we're at a downward inflection point! How exciting is that? And then we get China's retail sales data which also shows. . . . a downward inflection point! How does that alter our understanding of China's cycle and policy, and, on reflection, our understanding of the potential near-term momentum in the US? Once these sorts of issues grab you, it's difficult not to share it.

So here's the blog. For those of you who used to support me financially - I'm sorry you're not paying, but I hope you find the content interesting. For those of you who never did . . . . well, the marginal cost of a new blog reader is zero anyway.

And so on with the music.

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