How Italy will fail and drag down the European Project
Greece, Portugal and Ireland were mere test subjects for what will come. Spain would have been a challenge, but were narrowly avoided. Italy will drag the whole structure down if it continues on its current trajectory, and there is nothing to suggest it will change course.
The main problem for Italy is its stagnating level of nominal GDP, which we refer to as “Japanificaton” of the economy. While people usually think of deflation when they hear “Japan”, that is not an entirely correct observation. It is true that nominal GDP flat lined after the crisis in the 1990s which dragged down revenue. However, if it was truly a deflationary period, expenditures should fall also as prices paid for services rendered would drop concomitantly. This has not been the case and it is more correct to say Japan has been trapped in a revenue / NGDP deflation, hence the perceived need for Abenomics, or in plain English, the creation of a helluva lot of currency units to boost NGDP and revenue and thus reduce the need for bond issuance. As our first chart show, so far it has been modestly successful. Please note that Abenomics have nothing to do with creating real prosperity (no one can be that ignorant), but all about getting the spiraling debt problem under control by jacking up the inflation tax.
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