tag:blogger.com,1999:blog-7336648542166394110.post3111089713078125237..comments2008-09-03T00:23:23.081-07:00Edward Hughnoreply@blogger.comBlogger4125tag:blogger.com,1999:blog-7336648542166394110.post-88847386245284498602008-09-03T00:23:00.000-07:002008-09-03T00:23:00.000-07:00Hi,<BR/><BR/>"The analysis is great and I agree with most of it, but the solutions are really pathetic." <BR/><BR/>Well this is a very old argument, and goes straight back to the early 1930s, since we certainly haven't seen such complicated situations (for a whole variety of reasons) since that time. Debt deflation would be just one of the issues, but we also have the rise of the big emerging market economies, and the pressure that this is going to put on resource prices even as OECD populations (and workforces age).<BR/><BR/>There have always been those who believed it was better to do nothing, and those, like Keynes, who felt sitting back with folded arms watching people get themselves into bigger and bigger messes made it a little pointless being an "economist". I am a Keynesian in this sense, although I think his normal remedy - fiscal demand side support - is more or less impossible in the age of rapidly ageing populations.<BR/><BR/>The question is, do you want to see 3 consecutive years of 10% contraction in the Spanish economy (well this was the figure in the US in 1930, lets say 5% in the present Spanish case to be more realistic, remember the immigrants simply going home will knock 2% more or less of growth, and then we have all the rest).<BR/><BR/>Really what you call "pathetic" is nothing more than what Paulson and Bernanke have already done in the US, but then maybe you don't like that. Bernanke has "eaten" some $500 dollars at the Fed, and Paulson has armed up his "bazooka" with a very large sum of money indeed just waiting to be injected into FannyMae and FreddyMac.<BR/><BR/>All I am saying is that the ECB and the EU commission need to act in the same way. Spain is just like "Florida" isn't it. Well at least that is what Trichet never tires of telling us. So now it is put your money where your mouth is time. At presnt they are crying like young children over a mere $49 billion which has gone out to the Spanish banks.<BR/><BR/>If they don't stop the rot in Spain, then the isue will spread to Italian sovereign, and then five years from now there will be no eurozone, at least not as it is now.<BR/><BR/>But then maybe you are happy with that outcome? If you are, you need to think about the implications of an Italian sovereign default for Japan, which at a currently OECD estimated 182% debt to GDP ratio is queueing up to be the next in line.<BR/><BR/>And if the euro blows, and the Japanese have a financial crisis, they the implications for the US will be serious, since the dollar will have to take all the strain, and it will be bye bye exporst time again.<BR/><BR/>So I think it is better to act now and try and stop the rot, before the Spanish banking system folds around our heads.<BR/><BR/>"They just need to deflate salaries and land prices and start exporting cheap products. That is the way out."<BR/><BR/>Of course. It is that little word "just" there that I have so many problems with. I mean if wages deflate, as they have to, and interest rates rise on mortgages, again as they have to for the Spanish banks to ultimately rollover all their debt (remember with property prices way down, all the asset backed securites are seriously under collateralised) then how are all those people going to pay their mortgages.<BR/><BR/>A large "haircut" will be needed, and it is just how this can happen and Spain stay in the euro that I don't see. Perhaps you can enlighten me?<BR/><BR/>You need to look at Japan post 1992, and Germany post 1995. We are into a decade of problems here. And Germany and Japan still aren't out of the woods, look how quickly they are falling into recession right now, even before the US. That is what export dependence means, vulnerability to fluctuations in external markets.<BR/><BR/>Again, I add, I don't think you have thought about the underlying demographic issues here with falling and ageing populations. If the immigrants go in any quantity, this alone will be a significant demographic shock to add to all the rest.<BR/><BR/>To give one final example. In 1995, when Germany's bubble burst, construction (the industry, not financial services etc) was around 6.5% of GDP, it is now around 3%, and Germany needs a current account SURPLUS of about 7% to make up for the difference, and maintain economic momentum.<BR/><BR/>In Spain construction is currently 12% of GDP, and the current account SURPLUS is around 10%. That is a measure of the long hard road Spain now has to travel. I think it is important for everyone in the OECD world at this point that Spain get the support she needs to make this transition.<BR/><BR/>on the other hand...<BR/><BR/>"but the solutions are really pathetic."<BR/><BR/>Where are you? Maybe you are in Brazil or India. Obviously these two countries (along with a lot of other emerging tigers) will be net beneficiaries of any financial chaos in the OECD (pension money has to goi somewhere), but could you really wish these kind of problems, even on your worst enemy?Edward Hughhttp://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-7336648542166394110.post-85883939427460943042008-09-02T07:42:00.000-07:002008-09-02T07:42:00.000-07:00The analysis is great and I agree with most of it, but the solutions are really pathetic. It is trying to save a system of growth that looks as it has been designed by their worst enemy. They just need to deflate salaries and land prices and start exporting cheap products. That is the way out.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7336648542166394110.post-71311280976706196042008-08-29T00:19:00.000-07:002008-08-29T00:19:00.000-07:00Hello Francois,<BR/><BR/>Thanks for the kind comment.<BR/><BR/>"I am surprised of the VERY limited level of open discussion of these issues at political level. As far as I can grasp it in when reading Spanish press."<BR/><BR/>I agree with you. What is very much needed at this point is not panic, but a calm and serious national reflection. Panic, unfortunately, is what we are likely to see if this doesn't take place as the full extent of the damage sustained becomes evident to even the most reluctant observers.<BR/><BR/>"Spain has obviously enjoyed too good time for ten years too long and that shows. It is a generational issue. Not easy to solve alas!"<BR/><BR/>I agree. Not easy to solve, and needs time and patience. And the current 15 to 25 age group can be crucial in the longer term.Edward Hughhttp://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-7336648542166394110.post-79095303050862205342008-08-25T02:21:00.000-07:002008-08-25T02:21:00.000-07:00Thank you for your great and thorough output concerning Spain economy.<BR/><BR/>I have been a reader of your production over a year or so. Useful and comforting my view on the subject.<BR/><BR/>I am surprised of the VERY limited level of open discussion of these issues at political level. As far as I can grasp it in when reading Spanish press.<BR/><BR/>This is, IMHO, the most serious threat for the coming years. You are clearly years ahead of the game. <BR/><BR/>Spain has obviously enjoyed too good time for ten years too long and that shows. It is a generational issue. Not easy to solve alas!<BR/><BR/>I just hope some political leader to stand out and tell the truth. The sooner the better.Françoisnoreply@blogger.com