Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Overlooked Stock Investments To Keep An Eye On in 2017 - 27th Jun 17
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

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.


© 2005-2017 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