September 15, by Tim McMahon Leave a Comment.

But the economic effect is much greater than that. That is just the loss of property. Another consideration is the loss of revenue while things are being rebuilt. Those numbers are so large that it is almost impossible for us to get our minds around it. If you stacked billion one dollar bills on top of each other. Or roughly the distance from Washington, D. That is a lot of money! Will it cause inflation? Stimulate the economy because it all has to be replaced?

Or depress the economy because of all the loss of jobs? The answer is difficult because it will actually do all of the above.

The question then becomes what is the net effect? The first and most obvious effect is the destruction of assets. Any time you create anything a building for instance you increase the overall wealth of the world. A good example of this would be when you build a house. You created it out of thin air by combining labor and materials.

So what happens if you blow it up? This is the effect of wars and natural disasters. What about all the wealth that is created when the new houses are built? So the net effect of rebuilding is still a loss but not quite as big as before things are rebuilt. Assume that you and nine other people are stranded on an island. Each of you has one dollar and each of you produces one product during your stay on the island. You then sell your products to each other. The average price of each product will be one dollar.

The money supply has increased but number of products stays the same so this is inflation prices go up. If on the other hand ten more items are built instead of finding the money.

This is deflation ; things get cheaper producing things is deflationary. The opposite is also true destroying things is inflationary. Thus inflation can come from increasing the money supply or decreasing the number of goods available. So even though it seems counter-intuitive the destruction of thousands of houses is actually inflationary. On the other hand the destruction of paper assets like in a stock market crash is deflationary.

Thus it is deflationary. It has not affected the state of the actual company, it is still producing the same number of widgets as before the crash. But back to hurricane Katrina, there is a very good chance that the FED will loosen the money supply to stimulate the economy to compensate for the loss of jobs. So we possibly have two inflationary factors.

The destruction of assets and an increase in the money supply. I think it is quite possible that it will balance out with all the new work that will be necessary to rebuild.

Katrina's Impact on the US Economy | Economy Watch

So the employment rate will be about the same, but the building trades will benefit while the factory workers suffer. The factory workers who are flexible and can work the building trades will do OK but those who are inflexible will suffer.

What about the destruction of factories? That is a problem. A factory is different from a house because it produces things. It is like a machine that creates wealth or products. Imagine a factory cranking out the houses in the first example.

Each product is worth more than the sum of its parts, so it is creating wealth. While they are spending time rebuilding the factory, these factories are not producing products. So, the downtime is lost production and less total wealth for the world. But, what if the new factory is more modern and efficient and can produce more products than the old factory?

In that case, in the long run the world is better off although it suffers in the short run. So it is possible, if modernization occurs, that New Orleans could be cleaner, safer, more productive and efficient and thus wealthier in the long run.

Although, it will suffer in the short run. In the same way, if the City of New Orleans was smart it would mandate that all new high rise buildings be built with mandatory garages on the first two levels and able to withstand flooding, so future flooding would be limited to washing the cars away. This could result in a revitalized downtown with more usable land area the old parking lots and the whole city has an opportunity to return as a completely modern rebuilt city.

Finally, what about the disruption in oil distribution and production? Extended outages could cause gas prices to skyrocket thus increasing costs both production and to consumers throughout the country.

This would be another inflationary factor as costs are pushed up throughout the economy. The FED almost has to increase liquidity to ease the transition period but then will have to clamp down on the money supply to prevent inflation. So we could see an initial lowering of interest rates followed by an increase several months later.

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The Economics of Disaster: Are Hurricanes Inflationary or Deflationary? Destruction of Assets The first and most obvious effect is the destruction of assets. Destruction of Paper Assets On the other hand the destruction of paper assets like in a stock market crash is deflationary. Destruction of Factories What about the destruction of factories?

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