Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Gold And Silver – Elite Supernova Death Dance In PMs? - 1st Nov 14
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Free Forex Forecasts

Spain is Beyond Repair, So is the United States

Interest-Rates / Global Debt Crisis 2012 Oct 06, 2012 - 07:11 AM GMT

By: Fred_Sheehan

Interest-Rates

Best Financial Markets Analysis ArticleSpain is beyond repair. This is also true of the United States. Following is a bottom-up view of the insatiable parasites clinging to the rump of the Spanish economy and how such gruesome imagery applies elsewhere.

A Bloomberg story on September 27, 2012, resembled many others since the mid-'oughts: "Spain's Boom-Era Building Gear Sold as Developers Cut Off." This does not need much explanation but a connection is offered: though QE3 is designed, and will (in cases) lift asset prices, gravity rather than levitation is the natural direction of assets.


Construction equipment manufactured during the Spanish housing boom now lounges and pouts, or jets to countries where housing bubbles still offer a thrill. For the connoisseur of booms-and-busts, Berlin, Oslo, and Hong Kong may be peaking. None are likely to match the sheer weight the defunct construction industry loads on the Spanish economy. Bloomberg described its proportions: "The property bonanza that ended in 2008 has left around 2 million unsold homes in Spain, representing supply that will take a decade to absorb.... Spain's construction and real estate industry, which represented 18 percent of gross domestic product before the financial crisis, now accounts for 11 percent and building permits plummeted 87 percent last year from the 2004 peak." [That it has only shrunk from 18% to 11% means the state is spending madly to keep it, and the banks, operating. - FJS] "Work started on fewer than 4,500 houses in February this year, a 94 percent decline from the October 2006 peak."

Towards the bottom of the article, a modern financing mechanism was advanced: "Almost half of Spain's 67,000 developers are insolvent but not bankrupt after getting additional financing from banks, according to R.R. de Acuna & Asociados, a property consulting firm. Extending the lives of companies is becoming harder for banks after Prime Minister Mariano Rajoy's government demanded they set more money aside to cover losses on real estate loans." [My italics. - FJS] That the fantastically over-occupied development sector "is insolvent but not bankrupt" should not be a surprise, at least to Americans, where the same has been true of money-center banks, General Electric and General Motors.

The question arises how the encumbered Spanish banks are extending the lives of the developers. Rifling the archives, Bloomberg also met with Fernando Rodriguez de Acuna, president of R.R. de Acuna & Asociados on July 22, 2009. At that earlier meeting, Sharon Smythe (the author of both articles) learned: "The nation's banks lent about 318 billion euros to domestic real estate companies and also were forced to accept billions of euros of real estate assets in exchange for canceling debt with insolvent developers." The banks accepted the property back from the developers in lieu of payment for the loans.

Fernando Rodriguez de Acuna went on to say (in 2009): "Those assets are sterile, or constantly falling in value, so the banks have to get them off of their books or else they will damage their balance sheets in coming years." One could sigh at Mr. Rodriquez' innocence, but he was not alone in thinking the banks could not indefinitely pretend they held real assets.

The banks are slowly admitting losses, but Bloomberg's summary is of a slow recognition. Even so, write-downs have left the banks stranded: unable to make loans. Up until now, it appears, the banks and the government were able to carry the building gear manufacturers.

We know bank write-downs in Europe have been limited to window dressing. We may presume the assets that were "sterile, or constantly falling in value," are worth a nominal amount today. Referring to the September 27, 2012, Bloomberg brief in which "Prime Minister Mariano Rajoy's government demanded [banks] set more money aside to cover losses on real estate loans": Money from where? Who would invest in an insolvent bank that is pretending its capital is not impaired? An unaccountable international organization is the best bet.

Let's suppose, first, the ECB is allowed to capitalize banks. We will skip over (second) the Spanish government's "bad bank" plan, and assume it takes wing. Even so, in this most optimistic of scenarios, the revived lending capacity will fund, not strong and growing businesses, but: the Spanish government.

The government's deficit gap is growing fast. On September 25, 2012, Spain reported the January through August deficit rose from 3.81% of GDP in 2011 to 4.77% GDP in 2012. The Spanish government - in the second or third year of "austerity" - has spent 8.9% more euros in 2012 than in 2011. Tax revenues have fallen by 4.6% in 2012.

The ECB needs to distribute euros at an extraordinary pace to retain the façade of a continent that is not bankrupt.

Of the many reasons the deficit is getting worse, coddling the insolvent but not bankrupt building industry is one. A total of 4,500 houses were built in February. Not all the developers build houses but, when it takes five or ten companies to build one house each month, tax revenues will fall. Living as if this is 2006 will push Spain back to 1492. It is interesting that economists, who sold the world on "GDP" and "productivity," have trapped workers of the world in the most unproductive jail cell imaginable.

Across the ocean, Washington runs business in the United States. This is why employment gains have been in government jobs. This is why the favored financial industry is still far too large for a functioning economy. This is why the capital-equipment industries that invest after projecting demand over the next 10 years are not investing at all. These companies have historically produced most of the high-paying jobs; their absence is the reason new jobs are in the worst paying fields (except for government, which pays a solid, middle-class wage: None of that hedonically-adjusted, ex-food, ex-gas, pay-plan at the BLS.)

Federal Reserve policy props up dead and malignant businesses. Its no-interest-rate gambit is manna for bad companies that contaminate good companies. Good businesses do not hire. They do not invest. In past times, they only had a vague notion of the Federal Reserve chairman since they had business to conduct. Now, they are no less dependent on the ministrations of Bernanke than the Soviet steel industry was to KGB requests. They sit around wondering what Bernanke will do to them next and what this all means. Introspective CEOs are un-American (if not un-Spanish.) The economies run by Rajoy and Bernanke are headed down the same path as the failed enterprises that hopped to the orders of Beria and Malenkov.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014