EU Collapsing? Will Cyprus and Japan spell doom for the world economy?

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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.

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Doom? Well, yes, but it’s ongoing as opposed to “coming”. Japan and Cyprus are just this week’s drama. Spain will be back, and Italy and France are not far behind.

The entire deleveraging process and concurrent demographic problem will shake out by around 20023-2025.

So we have that going for us.

There could also be a more negative outcome.

2023? WOW your an amazing optimist.

many countries around the globe are privately waking up and worrying about a collapse and they want their hedge back.(all the gold they have stored in new york. germany has oficially asked for thiers back and other high profile euronations, now texas is making noise.

Texas Moves to Repatriate Its Gold From the Federal Reserve

Call it the Rick Perry gold rush: The governor wants to bring the state’s gold reserves back from a New York vault to Texas.

And he may have legislative support to do it. Freshman Rep. Giovanni Capriglione, R-Southlake, is carrying a bill that would establish the Texas Bullion Depository, a secure state-based bank to house $1 billion worth of gold bars owned by the University of Texas Investment Management Co., or UTIMCO, and stored by the Federal Reserve.

The idea isn’t entirely new. Some Republicans worked on a gold bill last session that was never filed. And gold-standard-backing Ron Paul, the former Lake Jackson congressman, has raised repeated concerns about the safety of states’ gold supplies.

“If you think gold is a hedge, or a protection, you always want it as close to the individual and the entity as possible,” Paul told The Texas Tribune on Thursday. “Texas is better served if it knows exactly where the gold is rather than depending on the security of the Federal Reserve.”

Originally, I was all for the European Union. I figured it would be a good way to compete against China and other developing countries. I’m guessing that the problem is just like a group of people forming an alliance where each will help the other if they need it. That is fine if all of the people in the group work as hard as they normally would have for themselves, and only rely on the others when needed. All it takes is one person who isn’t pulling their weight and gets help from the others, then one by one the others figure why should they work hard when the others aren’t, and they start wanting the same benefits as the others are getting without the work.

The EU is dead.

Has the date for the EU funeral been announced yet? Will we be sending Biden to represent us at the funeral?

Winston Churchill said, “Those who fail to learn from history, are doomed to repeat it.” Since I am lousy at history, I guess I will be repeating it. Just like Ziggy once said, “Those who say history doesn’t repeat itself, haven’t read my diary.”

If people in charge of a country want to help that country get out of a bad situation, wouldn’t they ask their cabinet members to find out when the country, or another country, was in a similar situation, and how they got out of it, and what else was tried and didn’t work? Do these leaders really care what happens to ther EA and to their countries?

I respect a person who tries something, fails, then admits they were wrong, more than the ones who can’t admit to being wrong, and keep trying other things. A supervisor told me one time, “I don’t mind you making a mistake. It shows you are doing something. Just don’t make the same mistake twice.” How many times do these people have to be wrong before they admit that they made a mistake and need to do something different?

How many times do these people have to be wrong before they admit that they made a mistake and need to do something different?

well if they are dyed in the wool socialists like barky that would be never.

As someone living in Europe, I can tell you that the European Union is proving not only ever more of a failure, but this small cabal of hardened socialists is trying desperately to expand its power by decreasing national sovereignty of “member” states in order that their cushy jobs survive. That is the sum and substance of the issue as socialists of various stripes — from overt Communists to the seemingly softer social welfare types — seeking first and foremost power and money for themselves. This is merely the old rent-seeking aristocracy of old, reinvented. Europe has tried to “socialize” and “unite” behind revolution (Napoleon), various 19th century rebellions which all failed, the Kaiser’s wars, Hitler’s National Socialism and Mussolini’s Italian Fascism, and now this crop of “EU” internationalists. We need remember that the Soviet Socialists were internationalists, as have been successive waves of strife around the world. Socialism in all its forms is a belief system held without regard to simple mathematics and the most basic observations of human nature. It pretends to being anti-war as does the war-making Obama administration and most US Democrats and many Republicans, while heaping taxations and other demands on the “proletariat.” As with the Soviet system, this EU experiment is rapidly collapsing, because simple freedom cannot be crushed, the basic laws of economics are being violated, and most importantly the biggest socialists are all grubbing for large amounts of capital, as ever. Socialism is not an economic system, but a system of collecting power and then money for the newest generation of aristocrats — these socialists. As with many of us “small” savers in Europe, we are waking up to the truth that the “troika” — a Soviet term — of the EU, ECB and IMF are socialist, dictatorial and thieving. Of course such politicians will be angry when their latest scheme collapses, as the Euro must, but that is little difference from the shrill call in the US from politicians like Gore and California’s Democrats for more taxation through the other socialist game, “carbon tax.” This has collapsed once in the Chicago Climate Exchange, and now in the European system where “credits” are worth only ten percent of their original price, and yet these schemes are held together by the nomenklatura — another Soviet term — of the “liberal” press and “liberal” politicians, all living a fantasy high life on other people’s money. The German press is waking up to this, while the US press seems to be denying it by refusing to report. Thank you therefore for spreading the reality of this situation. This new aristocracy is coming for our savings, as they have in Argentina and elsewhere, to confiscate it for their own first-class living standards at the expense of the middle class. Let us understand that Greece and Cyprus were run by the same socialists, at a different level of power than the big bosses, and this is a sorting out in which populations are learning the now old truth — socialist government in all forms becomes insolvent, freedom-hating and eventually very angry that its quasi-religious belief cannot be made “true.”

I think I can explain hyperinflation. Check out my Hyperinflation FAQ:

http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html

@S W: #5
It sounds like the EU needs to start a Tea Party. Ours started in Boston Harbor when King George III put a high tax on tea to raise more money for England. With all of the other taxes and regulations, the colonists had enough, and revolted. Maybe the EU countries need to start declaring their independence again. Of course, the ones that are dependent on the EU money won’t want to.

This new aristocracy is coming for our savings, as they have in Argentina and elsewhere….

Our democrats were thinking of taking our 401(k) money, and putting it in the federal treasury, but THE PEOPLE found out about it, and revolted about the idea. This is one of the reasons that even the liberals are starting to question what our president is up to.

Great analysis. Take the money from the rich or in other words “Confiscation of acquired wealth” as espoused by our friends in the EU is every bit in line with what our Commie oriented so called President is aiming for and one should make no mistake of that. They did it when Russia fell and under this President if he has his way they will do it again. Cyprus and the actions by the EU are just the first litmus test and once the first confiscation is accepted it will be tried elsewhere.

Hell, if anything Comrade Obama is probably licking his chops waiting for the outcome on this. He’ll then just point to what is good for the rest of the world is good for us and use the usual leftist BS to get the majority of this mind dead electorate (lemmings to be exact) to endorse his everything belongs to everybody earned or not policy. Of course the fact that as the rest of us suffer the power elite of both parties will in effect grow fatter is just the normal by product of any Leftist Socialist take over.

THE SKY IS FALLING THE SKY IS FALLING. the sky will continue to fall for quite a bit longer, and in the long run….. well we are all dead anyway. How many of the “economists” posting here predicted the Dow would DOUBLE in 4 years?

@Smorgasbord: I think they are just feeling some heat and slipping back in the shell a bit.

@john: yeh – riiiight!!! — the economy is going gang-busters!

@Budvarakbar: #10
I’ve never set in a hot tub, but I guess the hot water is supposed to feel good. Evidently, if obama doesn’t turn the temperature up too quickly on his hot tub, he can cook liberals before they know they have been cooked, just like you can frogs.

I was a visiting professor in Turkey at the time the Euro was launched. In effect I had a ringside seat. I followed the European news closely. I could see than that it wasn’t going to work. I’m surprised it took this long to collapse of its own dead weight.

@S W: #5,

“this small cabal of hardened socialists is trying desperately to expand its power by decreasing national sovereignty of “member” states in order that their cushy jobs survive”

One positive outcome from this implosion of the EU, will be that the talk of a One World Government will subside, or even disappear for at least a century.

The more the number of countries in the EU grew the greater the odds grew against its success.

There was no equality between the players, even the first ones who signed on. That Inequality was in the EU’s DNA and the reason for its long term guarantee of failure.

When a country surrenders control over its currency to a foreign power, it has given up control over its destiny.

The word on the ground in Cyprus is creating a rumbling which suggests that the Russians with deposits will remove their cash as rapidly as they allowed. All of it. Other tax havens are waiting with open vaults.

@john:

How many of the “economists” posting here predicted the Dow would DOUBLE in 4 years?

The DOW’s numbers and gains aren’t a reliable indicator of how the actual economy is doing.

For one, when priced to the same economic indicators, such as their gold values, the current DOW isn’t even half of what the previous high, back in 2007. Which, in turn, wasn’t nearly as high as the pre-“dotcom” bust DOW levels.

Two, the makeup of the DOW is different than it was back in 2007, which in turn, was different than the makeup of the DOW back in 1999.

Three, the “safety” of the bond market is deterred by the increasingly low interest yields on bonds, which has driven much of the investment money into the open stock market in search of the “safer” of the higher yielding stocks available. This, in turn, has resulted in the FED having to purchase more of the bonds, flooding the market with even more dollars, weakening the foundation the dollar sits upon even further. How long before inflation actually starts to runaway from the FED and the government? Some would claim that it already is starting to do just that.

Four, the job market is still bad, and meager .1% decreases in the unemployment rate just ain’t gonna cut it. Particularly so when 60% of the lost jobs since 2007 were mid-level wage jobs and 58% of the newly created jobs are in the lower-income wage brackets.

Five, the real median income level for Americans has decreased by almost $5,000 since 2007. Couple that with average gas prices of 40 cents more per gallon, or, 12% higher, and the average family is spending a couple hundred dollars more on gas every year. Add in the cost of foods in general increasing by large percentages, and the actual cost of living has increased, making every family that was just getting by, or worse, back in 2007, just that much worse off now than they were back then.

Six, consumer confidence, closely related to confidence in the dollar itself(due to the dollar being fiat money), is over 20% lower today than it was back in 2007. That is well outside any statistical error, showing that confidence in the economy overall is much lower than it was.

Your continued claims of the DOW and it’s high numbers mean very little in the grand scheme of the economy itself. In actuality, it shows that you have little to no understanding of what makes an economy tick.

Remember when the obama administration wanted to take your 401(k) and IRA money?

Now Obama wants your 401(k)

t would be interesting to know how much money this government
naming OBAMA sent since the first GREECE MARCH ON THEIR STREETS PUSH BY ANGRY INTERNATIONAL UNIONS MEMBERS,
HOW ABOUT BILLIONS, TAKEN OUT FROM THIS AMERICA,
AND LOOK WHAT IT DID , NOW,
add the debt of almost 17 trillions included in ,
look where we are, jobless, revenue less for the VETERANS,
AND YOU THINK IT WILL STOP THERE ONLY ON VETERANS? look again but ahead,
ON THE NEXT CHAPTER, LOOK AT THE ONLY BUDGET MADE SINCE OBAMA
WAS PUT THERE. GEEZ COULD IT BE THE BILLIONS HE SEND ABROAD WOULD BE JUST HIS DEPOSIT TO BE RETURNED INTO HIS ACCOUNT AFTER HE LEAVE, MAYBE NOT ALL OF IT BUT ENOUGH TO MAKE HIM AS RICH AS HIS DEBT ON THE DOLE OF AMERICA,
WE NEVER LEARNED WHERE THE GADAFY’S BILLIONS WENT,
GOLD SACHS NEVER TOLD ANYONE,
WAS IT PART OF A LOAN IN THE ELECTION,
THERE IS DEFINITELY A VAST POOL OF MONEY SOMEWHERE
ONLY FOR THEM TO DIG IN.
would it be at the BILDENBERG CASTLE?
DID anyone watch a lion figuring his options to attack a pack of hyenas, as oppose to the same lion not figuring his options and attack one hyena and always kill her

I’m sure TEXAS IS DOING A RIGHT MOVE BY DEMANDING HIS GOLD BACK,
OTHER WILL FOLLOW,

I can picture the CIPRUS PEOPLE NEED THEIR BANK FOR PAYING BASIC THINGS LIKE RENT HEAT FOOD ECETERA, AND 12 DAYS NO ACCESS IS A RIP OFF ALREADY, SO THEY ALSO WILL DENY THEM TO EMPTY THEIR BANK ACCOUNT, THEY ARE ONLY ALLOWED TO TAKE SO MUCH,
ONE MORE RIP OFF,
THAT BANK IS DEAD ALREADY,
FOR AGREEING WITH GOVERNMENT RESTRICTIONS,
AND IT BRING ME TO THE BANK OF AMERICA DOING THE SAME THING ,FREEZING THE ACCOUNT OF A GUN BUSINESS ON LINE WITHOUT TELLING HIM BEFORE,
THIS BANK WILL ALSO DYE

Not only can I explain hyperinflation, I can now simulate it. I can show how the feedback loops work so that things get out of control.

http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.html