Slowed but Not Derailed: Global Events' Impact on Oil, Supply-Chains, Fund Flows

Article excerpt

Japan's earthquake/tsunami/ nuclear tragedy and heightened tensions in the Middle East and North Africa have led to some concerns about the global economy, and in turn, the strength of the U.S. recovery.

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Assessments of the damage from Japan's earthquake and tsunami will become clearer over time, although the situation at damaged nuclear reactors is more uncertain. The disaster is a major setback for Japan's economy, but natural disasters are typically followed by a period of rebuilding. More immediately, trade and supply-chain disruption will ripple around the world, although the impact on aggregate global growth is likely to be small. Before the quake, Japan was viewed to have a relatively high degree of excess capacity. In the weeks ahead, we can expect to see other parts of Japan making up a large part of the output lost in the damaged region.

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Problems with the nuclear reactors may compound Japan's recovery. Rolling blackouts could lead to supply-chain problems more broadly. It may also shift sentiment about nuclear power in other countries, adding somewhat to the price of oil over the long term.

Is there a danger that Japan will dump its holdings of U.S. Treasuries to fund reconstruction? Not likely. Japan has a huge ratio of public debt to GDP, but also a very high private savings rate. …