The Market Reactor, from Gene Gard

September 22, 2009 |

ReactorWhile nuclear power gets bad press, it's really a pretty nifty way to make electricity.  Modern Pressurized Water Reactors are safer than outsiders could ever imagine. In addition to numerous automatic safety shutdown mechanisms, they possess a very reassuring design property known as a "negative temperature coefficient of reactivity." Basically, it means that as the neutron-absorbing control rods are pulled out of the core of an operating reactor (in other words "reactivity is added"),  more fission takes place, and the water that removes heat from the core heats up and expands. This causes fewer neutrons to be slowed down by the water to a speed at which they can cause fission, and therefore, the higher temperature ultimately lowers reactivity. It's a true negative feedback loop that mitigates problems from a heavy-handed reactor operator and partially keeps the rate of change of reactor power manageable by a human.  It is difficult to cause a nuclear accident these days, due to the safety of the design and the many interlocks and safety features available to the operator. It takes a comedy of major maintenance errors and poor judgment (Three Mile Island) or a bad design and overriding of safety features on purpose (Chernobyl) to damage a reactor at power.

However, that is not true at all during a reactor startup. When a reactor is starting up, the level of reactor power is so low that only a negligible amount of heat is produced. Reactor power when fully shut down is very low– say 1×10^-10% of the reactor's full power design limit. What this means is that when pulling rods out to start up the reactor, an operator must be extremely careful! There is no negative temperature coefficient of reactivity to mitigate the power rise, and if you pull rods out too quickly, you can be raising reactor power at such a rate– maybe even as high as a factor of 100,000 every minute (aka a "start up rate" of 5 "decades per minute")– that you can go from not even creating any heat at all to a meltdown in a matter of seconds. There are safety features designed to prevent this scenario, but you're never supposed to test safety features. Besides, if you get the power rising too quickly during a startup, you can possibly cause problems more quickly than the automatic protection system can solve them, if you know what I mean.

See any connections to the markets?

I read and watch a great deal of the financial press, and every time I hear pundits talking about interest rates and inflation I think of a reactor's control rods and reactivity. People act as though the Fed's reactor operator is carefully watching the dials, and will be able to deftly move the rods back into the core (remove liquidity) just at the right moment to pull us from the precipice but maintain an absolutely stable price level. What they're missing is that the reactor of the economy was truly shut down for a while at the end of last year. We were no longer operating at power, and they were probably right to recognize that things like the Taylor rule don't apply when it hit the fan. Right or wrong, the Fed pulled all the control rods out of the core as fast as they could. Now, rods are at the top, and the economy's "reactor power" is probably screaming up at an incredible "startup rate" right now, but it's not moving the needles that anyone can see– yet. I'm afraid that once the economy starts moving the needle, by means of rising lagging economic indicators (all indicators are lagging, by definition, by the way) it will be too late for the human operators at the Fed to take away the punch bowl by putting rods back to the "normal" levels. Plus, the Fed's reactor operators won't even be able to take action when the needles start to twitch, because there will be congressional supervisors straight out of the plot of an Ayn Rand novel standing over the Fed's shoulders whispering that more is better for the little people– until it's too late, at which time Congress will blame those that they pressured only a short time ago. Heck, I think it's already too late. It's hard to find signs of strong American deflationary pressure that can't be explained mainly by falling gas prices in the last year (which were elevated to begin with by those darn speculators, right?). Plus, most of the official indicators are bogus anyway, and will be exposed as a scandal du jour sometime down the road when it's obvious in retrospect what all the problems were with them.

I have questions, but no answers. It's a tough situation, because on one hand, instead of a negative temperature coefficient of reactivity, the economy has a positive liquidity coefficient of reactivity– the more you add, the more the economy heats up, and it may be getting ready to heat up quicker than anyone thinks. On the other hand, if you stop pulling rods too early, before the reactor is "self-sustaining," reactor power will fall back down to near zero– a depression. I have no idea where we are in all this, but I would be surprised if inflation doesn't come back to the forefront of the American psyche in the next few months or years. All I know is that as an unstable, discontinuous market system with demand cliffs and greed and fear it's absolutely certain that the Fed will take away the liquidity either too soon or too late. I think it's unlikely they'll do it too soon.


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