Posted by Curt on 23 March, 2013 at 3:54 pm. 22 comments already!


Apparently it takes a former Federal Reserve senior economist to ground everyone in reality. The European Union is no more and disintegrating rapidly:

“The European project is crashing to earth,” Athanasios Orphanides told the Financial Times in an interview. “This is a fundamental change in the dynamics of Europe towards disintegration and I don’t see how this can be reversed.”

This week’s events had made “a mockery” of EU treaties, he added. “It suggests that in Europe not all people are equal under the law.”

“We have seen other eurozone countries, the Netherlands, for instance, put national interests ahead of the European interest by trying to bring down the economic model of countries such as Cyprus or Luxembourg.”

He also called into question the credibility of the ECB’s threat to pull the plug on the Cypriot banking system. On Thursday, the ECB warned that if an EU-IMF rescue programme was not agreed by Monday, it would ban the use of “emergency liquidity assistance” to prop up the Cypriot banking system.

According to Mr Orphanides, about €10bn of ELA is being provided via Europe’s Target2 payments system used by its central banks. “If you say it is no longer authorised, it would force the Central Bank of Cyprus to default on its Target2 obligations. Cyprus would then have to leave the euro area.”

“The ECB will have forced Cyprus out. This is the one thing Mario Draghi doesn’t want to happen – he does not want to be the ECB president who triggers the break-up of the euro. It is painful to watch.”

Meanwhile, in Cyprus, they figured out that confiscating money from every depositor wasn’t such a good idea so now they plan on instituting the Obama plan. Just take the money from the rich. Plus they have put in place capitol controls, meaning once the banks FINALLY do open up they will limit how much you can take out and transfer. Capital controls are also being talked about in Spain and Greece. The EU was premised with open borders for all, including money….no longer.

The EU is dead.

And that will have repercussions at home.

The coming economic crisis in Japan will also have repercussions at home:

Forget Cyprus. A much bigger story in the coming weeks and months will be in Japan, where one of the greatest economic experiments in the modern era is about to begin. A country where government debt even dwarfs those of Europe’s crisis-ridden nations, Japan will attempt to inflate its way out of a 23-year deflationary spiral.

The overwhelming consensus among the world’s economists is that quantitative easing (QE) has saved the day in the U.S. and that Japan needs to follow suit, on a larger scale. I beg to differ and suggest this policy will almost certainly lead to a hyperinflationary disaster in Japan. If that’s right, it will have serious ramifications for other countries, dragged down by an acceleration of the so-called currency wars. More broadly though, it is likely to destroy the myth pushed by today’s economists that QE is a cure-all for downtrodden economies. It isn’t and Japan will become the template to prove it.

…Government debt to GDP in Japan is now 245%, far higher than any other country. Total debt to GDP is 500%. Government expenditure to government revenue is a staggering 2000%. Meanwhile interest costs on government debt equal 25% of government revenue.

There’s no way that Japan will ever repay this debt. It has two main options: either go through extraordinary pain by cutting back on government expenditure or print substantial money to inflate some of the debt away.

Japan is choosing the second option, as are most governments around the world. It would rather print money than cut spending and doom the economy to a substantial contraction. The choice to print money though will result in an even more painful and drawn-out outcome.

It’s inevitable that the yen will fall further from here, potentially much further. I’ve previously said that the yen at 200 or 300 on the dollar would not surprise. This could prove optimistic.

It also seems inevitable that Japanese interest rates will rise and bonds will sell off. Yields have to rise to just 2% for interest costs on government debt to take up 80% of government revenue. The jig will be up well before that though.

Those that argue this won’t happen as 91% of Japanese government bonds are held by domestic investors are missing some key points. Foreign ownership of bonds is rising as domestic investors need more money to fund their retirements (Japan’s rapidly ageing population). Foreigners will demand higher yields for the risks that they’re taking on. And even domestic investors aren’t going to sit by earning 0.6% on a 10-year bond as hyperinflation takes hold and the currency tanks.