The hoopla about the Spanish bail out has fallen like Facebook stocks. No one wants to be caught holding this hot tamale. So gloom enfolds global bond markets while the currency traders ply their trade, betting the euro will weaken. This, in turn, freaks out the Japanese and frankly, the Chinese who wish to sell to Europe at a good exchange rate. Time to examine Spain’s problems and compare these with other nations, for nearly all nations are being stressed by this massive global lending bubble’s demise.
The European/American entity created after WWII, the IMF, the alter ego of the Bilderberg gang, its credit muscle machine set up to control smaller nations, has a report of great interest because it has a lot of charts and graphs which I love to look at. Here is the url: http://www.imf.org/external/pubs/ft/scr/2012/cr12140.pdf: The Spanish Bubble Pops/Destroys Entire Banking System
The Spanish nonfinancial corporate sector is highly indebted, largely as a result of the housing and construction boom. It remains vulnerable and the credit risk in the Spanish corporate sector is expected to increase further. The sensitivity analysis shows that the number of vulnerable firms increase significantly with macroeconomic shocks. More defaults are expected among most vulnerable sectors, including construction and real estate.
The housing boom has left Spain with relatively high household debt compared to the euro area. The United Kingdom, the Netherlands, Denmark, Sweden and Portugal have all higher household debt to income ratios than in Spain (Figure 1). However, Spain’s household debt to income ratio has significantly diverged from the average of the euro area since 2001. Housing and leverage have also been moving in tandem during the boom. This is reflected both in the increased lending to construction and real estate activities and in the strong co-movement of housing prices and credit (Figure 2).
Gimeno and Martinez-Carrascal (2006) show that house prices and mortgages in Spain are interdependent in the long run: loans for house purchases depend positively on house prices, while house prices adjust when this credit aggregate departs from the level implied by its long run determinants. In the short run, the two variables have a positive contemporaneous impact on each other, indicating the existence of mutually reinforcing cycles in both variables.2
Yes, Spain was flooded with cheap credit by international bankers operating out of various pirate coves owned by Queen Elizabeth II and various Asian and oil pumping entities in the Middle East who are also ‘royals’ of dubious qualities. That is, credit creation is very easy if one ignores true capitalization to cover potential losses.
The Derivatives Beast was going to ‘spread the risks’ of losses and of course, did the exact opposite making things much, much worse. And this continues unabated since capital has fled the banking system because any capital put into it right now will be eaten immediately by losses. So the bankers use government debt bonds as ‘capital’ and as I predicted previously before the bubbles burst, governments will go bankrupt instead of banks and this would lead to global political chaos, riots, revolutions and other events exactly like in 1934-1948.
First, we attend to the BIS, the international settlement entity also set up after the 1934-1948 catastrophe. Their warnings about the quality of capital backing bad loans went nearly totally unheeded because the Bilderberg gang loves the Derivatives Beast and offshore banking and this is due to it being launched by European royals in the first place. http://www.bis.org/publ/qtrpdf/r_qt1206a.pdf
Hopes for the global economic recovery and concerns about the euro area were the two main competing themes in the marketplace in the period from March to May. These two themes interacted throughout and were broadly reflected across financial markets.
Early in the period, following the ECB’s longer-term refinancing operations, investor sentiment improved substantially. With bank funding strains reduced, the focus shifted to the strength of the global economy. Positive US economic news and the continued resilience of emerging market growth helped raise hopes of a steady economic recovery. The renewed optimism was particularly visible in equity and commodity markets. Fixed income markets saw a compression in credit spreads, especially for banks and selected euro area sovereigns. It also resulted in a spurt of capital inflows to emerging markets.
But by the middle of May, doubts had returned: doubts about euro area growth; doubts about the financial health of euro area sovereigns; doubts about banks; doubts about the impact of fiscal consolidation on growth; and finally, doubts about political stability inside the euro area. All of this, combined with early signs of more fragile US and Chinese growth, made investors more cautious and drove up global financial market volatility.
The Bank of China is dropping interest rates. ZIRP Japan and US central banks can’t do this anymore, they reached rock bottom. Japan has given up on the idea of mutual consumption to raise growth (all environmentalists should cheer Japanese suicidal economics!) but China is very interested in raising consumption rates and has the ability to raise them but only if the price of world oil declines.
In regards to this, China refused to join the Iran oil boycott and Japan, desperate due to loss of nuclear power, begged to ignore it, too and thus, the boycott has been broken so the price of oil has declined significantly.
The IMF report has many graphs and here they are. First the household debt ratios:
Is Spain the worst off? The answer is startling: NO. Denmark and the Netherlands are both twice as bad off! Whereas, after 2006, the debt to GDP ratio of Spain was a little over 80%, it is nearly 160% for Denmark! That is amazing, no? It is even greater with disposable income to debt: 110% for Spain and a whopping near-300% for Denmark! In both, Italy is the best off. And we worry about Italy.
But like many parts of the US, Spain’s housing has lost great amounts of value. Note how credit to builders rose rapidly while the price was FLAT! The mania for building rushed forwards even as this killed the value of existing housing. A sure sign of a housing bubble ready to pop. In 2005, no less.
Wall Street Shrugs as JPMorgan Trades Lop Off $27 Billion after trading losses in speculative markets pound the stock value of this terrible banking entity which both Mitt Romney and former President Clinton love so much.
Like Spain, the US family wealth has been hammered by the bursting of our own bubble: Fed: Americans’ wealth dropped 40 percent so that aggregate wealth of everyone here has dropped back to 1992 levels and is still falling. This sort of 20 year loss of accumulated value is hammering the US economy since we treated our homes as ATM buying spree machines. Back to the IMF graphs:
Credit mountains on value molehills. The acquisition of real estate is dwarfed by the credit explosion piled on top of it. The second graph is a classic ‘to infinity!’ hockey stick graph. It could never go much higher, this was physically impossible. It is always impossible.
This is why teaching everyone at a young age about infinity and how it reverts to zero when it shoots upwards is life and death for any society. Nothing in the universe gets to go to infinity forever. Nothing. It is impossible. Far from entropy causing all things to disperse, it actually works the opposite: all things revert to their natural state of balance. Call this the ‘Libra Ethos’. Unbalanced systems collapse until they are balanced again.
Over 50% of the Spanish people indulged in the debt bubble. The house price to income ratio was off the chart but do note how the British are aping the Spanish and indeed, are directly responsible for this housing bubble. Retiring Brits flooded in to hot, hot tamale Spain because, as I keep saying, humans adore being hot, not cold.
It is flooding nearly daily in England ever since the numskulls in the weather service, staying true to their ‘we are going to die of the heat’ beliefs, ordered a drought emergency. Record floods ensued to the fury of many Brits who long for Spain’s climate quite openly.
The movement of Brits into Spain was doomed. First, they built housing no Spaniard would be caught dead in since it looks like a classic British home like the one Harry Potter’s uncle and auntie lived in: dreary, narrow and unfriendly. Secondly, the retirees had no intention of becoming Spaniards. They wanted to be interlopers. No nation likes interlopers who speak a foreign language and live in odd houses that look ugly (hahaha).
This next graph is a classic hockey stick graph only it can’t zero out. It is a CONTINUATION of a new steady state: bankruptcy. They shot upwards in 2006 and continue high until everyone that can go bankrupt, does. This is a time-consuming effort since so many people went foolishly into the real estate speculative markets hoping to sell dreary vacation homes to homesick Brits running away from home but not wanting to really, really leave.
And here is a graph Americans can still envy:
Their total wealth is lower today than this graph, it is no longer so high. But it hasn’t dropped by nearly 50%, either. Net financial wealth never went much up or down, it is the ‘rock bottom’ indicator. Soon, the Spanish will have US-level losses or worse as incomes there decline and the Brits lose their ability to retire in warm places as the government cuts funds to retirees.
These graphs should scare Americans. Spain had a higher ownership rate than the US and indeed, the last two years of the US housing bubble was fueled by Hispanics, many illegally in the US, buying homes with ‘liar loans’. Under 35 years of age Spaniards bought nearly DOUBLE the homes US buyers of the same age bought.
The second graph shows the Spanish bought many speculative properties. Far more than the US, double US rates. THIS is the real killer. No capital to sustain a losing property investment requiring taxes and maintenance leads quickly to bankruptcy.
The third graph shows debt to income being worse for young people in Spain and Britain but the US debt of the 35-65 group is much higher for the US. This is were our great middle class resides: deeper and deeper in debt compared even to the Spanish. The fourth graph shows why this is happening: debts held by our less than 35 year olds is HUGE. Many times greater than Spanish or British youth.
This is education debts. It is the thing that is going to kill our future economy, it is going to turn the US into a much nastier version of Japan where youth is crushed to nothingness with massive debts piled on top of them killing their future ability to start families, etc.
Spain is a bump in the road, the US is a cliff in the road which leads to a crevice a mile deep.
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