Daily News Roundup 2013: Monday 15 April

Good morning

Note: I have been doing a bit of market research*, and it seems that the news pieces require more background information before I launch into an opinion. So I’m going to start doing a brief summary of the story before I get into why I think it’s interesting/good-to-know/weird.

*which is code for “speaking to people that I’m having a beer with”.

The headlines:

Cyprus and her citizenship rules.
Link: an update.

A Recap:

– Cyprus needed a bailout from the EU.

– The Troika (being the EU, the ECB and the IMF) told Cyprus that should could have the bailout money, but she’d need to impose a levy on bank deposits in order to get it*.

– The Cypriot government said “no”, and then shut the banks and stopped money being moved out of Cyprus.

– The Troika said “okay fine – we’re open to options”.

– The Cypriot Government then responded with “What if we liquidate our second largest bank, and then collect the money you asked for from the grandé-deposit-holders of that bank, and the Bank of Cyprus?”

– The Troika said “Cool”.

– The Cypriot Government then said to the deposit-holders in those two banks “If you had more than 100,000 euros in either of these banks, then ~~we’re going to take some of your money~~ you’re going to lose some of your money, it’s true. But in exchange, we’ll give you some shares in the Bank of Cyprus. And, um, that’s probably not going to amount to more than 40% of your extra money**”.

– Days passed.

– The Cypriot Government then said “Oh that’s awkward. So, about that 40% – well, what we meant was 60%. But we’re just going to be keeping that extra aside in case we need it. Then we’ll let you have it back. Maybe.”

The most recent news:

If you were a foreign investor, and you lost more than 3 million euros under the new rules (which, I assume, meant that you held a minimum of 7.6 million euros in cash in one of those banks), then the Cypriot Government plans to make amends by allowing you to apply for Cypriot citizenship. Also, prior to this, if you wanted to become a Cypriot citizen by investing in Cyprus, you had to invest 10 million euros. Now, you’ll be able to become a Cypriot citizen by investing 3 million euros. And you’ll be able to have immediate access to your money***.

I’m not sure that I quite understand the link between “losing money” and “becoming a citizen in the country where you lost your money, because you lost your money”. But there it is.

*I’m not sure if this was to make sure that Cyprus could pay back the bailout loan; or if it was on the “you-should-match-the-money-we-give-you” principle. Or just a general punishment for being a tax have. Something like that.

**An example: let’s say that you had 150,000 euros in Bank of Cyprus. Your first 100,000 euros is protected under bank deposit insurance, so that won’t suffer a loss. But 40% of the extra 50,000 euros would be turned into bank shares. So, basically, a loss of 20,000 euro.

***The previous requirement was that you needed to keep the money invested in Cyprus for 5 years.
Japan’s Quantitative Easing gets some criticism.
Link: justified?

A Recap:

– Japan has the largest amount of debt relative to the size of her economy in the world.

– At the same time, Japan is stuck in an economic hard place where the Japanese don’t seem to want to spend money.

– This means that the economy can’t grow to offset the debt (the larger the economy, the less of a burden the current debt level will be).

– And the Bank of Japan has been reluctant to try and stimulate economic growth by printing money.

– But, there was a change in government recently, and the new guy (Shinzo Abe) is dead keen on making the BOJ do a little more quantitative easing (money-creation).

– The theory: the Bank of Japan should “print money” by buying up more government bonds. This money would then be in the bank account of the government, who could then use the money to invest in more projects that would result in more civil servant jobs. Or they could use the money to pay higher salaries to existing civil servants. Then, hopefully, instead of saving the money, these civil servants would spend it voraciously, thereby stimulating demand. Manufacturers would raise their heads and go “Oh my – demand! Let’s meet it.” The economy would then grow and offset the original debt, plus the extra debt that was bought by the BOJ.

– The trouble: this is a massive bet. And that’s a big ask from the levels of money creation that are being talked about.

The Criticism:

Takeshi Fujimaki used to be an advisor for George Soros. He has declared that Japan is “sinking into the ocean”. And that “there’s no escape from a market crash in the future when you have such enormous debt”.

This may be true. But what is the alternative? Japan has tried sticking it out with the gentle approach. Sometimes, an economy needs a shake-up.

And if causing a market crash is the result – then so be it. Afterwards, you can start again. After all, let’s say that the money creation results in massive inflation. Well that should break the unreasonable saving mentality of the Japanese*. And the inflation basically cleans the slate for a fresh start. Surely that’s better than being indefinitely in limbo?

*Too much saving is the same problem as too much spending. People spend too much when short-term gratification is all that matters. People save too much when long-term dynastic success is all that matters. There needs to be balance: embrace the now, plan sensibly for the future. It’s a truism, yes. But neither of those two extremes sound healthy…