Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

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.


© 2005-2016 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

Catching a Falling Financial Knife