ECB president Mario Draghi has his work cut out for him. Not only is Draghi foolishly fighting price deflation, credit in Spain is on the deepest plunge compared to historical averages since 1970.
Via translation from the El Confidencial article Credit Does Not Flow.
The current weakness of lending in Spain is even more worrying if put in relation to its historical trend. If you compare the level of credit as a percentage of the economy with this trend, we are at the lowest level since data exists.
The Bank of Spain notes this reality as one of the arguments for not requiring a greater capital cushion banks; that is, to argue that now there is no risk that the credit excess causes a crisis like the one experienced after the housing bubble. To measure the flow, the Bank of Spain uses a complex indicator called “credit gap” which basically measures the evolution of financing to GDP with the historical average of this relationship.
The “gap” was -57.7 percentage points in September 2015 (meaning that credit to GDP is that far below its average). This is the lowest level since 1970, with a further deterioration from -54.3 points in the previous quarter.
The average of this indicator is +2.1 percentage points. Between 1999-2008 the measure stood at 30.7. Its record high, reached during the peak of the bubble, is 45.4 points.
How much farther to the end of deleveraging?
The question is whether there is much ahead to that end deleveraging and credit can regrow in net terms. As reported by El Confidential, credit to large companies is still falling hard.
The Bank of Spain says the gap proves there is no need for the ECB to require banks to have capital. I strongly disagree. Moreover, Mario Draghi’s attempts to force banks to extend more credit to customers who really have little demand for it, will simply create more bank loses.
Mike “Mish” Shedlock
Its kind of sad that people actually living within their means rather than continuing to run up debt is a harbinger for an economy. It seems like they want us to commit suicide by telling us that our only salvation is double dosing on the poison that made us ill in the first place.
I seem to be really confused. I believe that debt is bad and savings are good and that zero trade is better than an eternal trade deficit. I guess this must explain why I’m a furniture maker and not a raving Wall Street success.
If all purchasing power stems from debt, everyone must pay rent to the banksters. All the gobbledygook is just attempts to obfuscate this goal.
Pay rent, yes, and kinds that are not obvious either. When someone has leverage on your existence and their word means forfeiture or tolerance, getting paid or being fired, they sometimes realize that with debt they are in deeper than they ever imagined, and with a very compromised moral base from which to reconcile that reality.
This credit contraction is more evidence of an ongoing worldwide deflationary depression, and a logical response by banks and borrowers to the grandiose monetary central planning (e.g. QE, negative interest rates, upside wage mandates).
The command and control economy of the Bolsheviks and totalitarian socialists failed in the USSR and eastern Europe. Big surprise, Politburo central planning economics also do not work in western Europe. These central planning bureaucrats are barbarians in banker suits, and their remedies are like the worst of medieval medicine as practiced by barber-surgeons (e.g. bloodletting, amputations).
Perhaps Illinois, California and the rest of the USA are different, and the Marxist and socialist medicines will work better in the New World than they have in the Old World. Or perhaps the deflationary depression outcome is the desired global outcome for more dominant political reasons. That the same nostrums and outcomes are being prescribed globally is indeed interesting. Is it simply a sort of global central banking mass stupidity akin to mass hysteria?
The Marxist ideology is never wrong, it is simply implemented poorly. If you don’t succeed the first time just keep destroying till you get it right!
There is NO cost too high in the pursuit of perfection…or Utopia.
You nailed it precisely, madashellowell. Indeed, I’ve stumbled across books by apologist historians who write that 50 million lives, 250 million lives, be it the French Revolution or Bolshevik Revolution, is worth it. Merely the price of progress; a worthy sacrifice. Would be ironic if while directing our attention towards militant Islam, that the totalitarian Marxist/socialist vision visits upon the West the greater harm.
To become competitive the wages must be cut in Spain.
With lower wages the debt burden increases.
Without rising wages, consumers can not take on more debt.
Without debt/credit growth there is no GDP growth.
No growth leads to recession and bankruptcies.
Bankruptcies and a financial crisis leads to a new Euro crisis.
What should Spain do ?
Spain and the word must allow the economy to reset. It will happen anyway and the sooner the better.
Sorry for the typo, it should read; Spain and the world must allow the economy to reset.
Reset would displace too much power. There are people who have invested decades at least in this mess.
If they allow the market to reset… then the economy could collapse to half of today’s GDP and lead to riots… and civil war. If they don’t… then it will happen anyway.
I believe that they will try to postpone the event as long as they can.
Spain could start by taking back its currency, it did have a fairly strict policy before the euro. Not sure if it could return to it easily though as the previous framework is now washed out by outside financial influence, the country is a patchwork of misdirected spending and investment. It would have to then live within its means, but the structure of understanding in society has changed radically also and so any attempts at change are going to have some conflict attached. The country is not exactly happy as is either, and apart from the distractions of trying to now make it all fit, there is no great sentiment of direction except of being slowly ground into EU.
Sorry to bother you.
You and others live in another World. Check by yourself.
GDP growth in Spain? 3,5%.
Now, tell me, whats wrong with you and others? Is it bad growing with less debt and saving more? Whats wrong with you? Lack of brains?
I beg your pardon but you are all a bunch of morons. Nobody cares about what the crap that you think and spread. In Europe we spit in yours thoughts and comments.
Sorry to be cold and rude. Have a nice day.
From Europe but not the Euroland with love.
The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.
In the past I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory.
http://brucewilds.blogspot.com/2016/03/inflation-or-deflation-debate-continues.html
Look on the bright side all. You can buy Spain real estate on the cheap now and get a Spanish passport, and become a citizen! I kid you not!
Tough to be able to spend Euro’s when your broke and unemployed. Spain’s young population is having a hard time finding work at all.
Do you have 500,000 Euros to spend? That’s how much it costs.
They don’t bother deporting illegals and every now and then legalize and nationalize most for free. Cheaper, the property investment idea is for investors who normally won’t get residence ( aka Chinese and some Russians etc.) . Even easier is to trace an ancestor who fled the civil war, or if you have really good memory, a relation expelled during the inquisition half a millenia ago… as long as he were Jewish ( Sephardic) you are now entitled to Spanish nationality. I guess if they get really desperate it will be the descendants of the moorish arch enemies that are invited back in a gest of Marxist cultural enlightenment ( tinted by demographic realities) . I say desperate not out of any contempt towards Arabs but because they are still widely regarded as inferior in the country, in spite of recent more egalitarian doctrine.
And not to forget that as a Spanish citizen or resident you are obliged, under heavy penalty, to declare all worldwide assets and income… just so you don’t inadvertently forget to pay your taxes.
Crys I was being a bit sarcastic. I was looking at real estate and an ad for Spanish real estate popped up and I clicked on it. Actually most of the real estate was in the 260k range and they were offering I kid you not a Spanish passport to get out from your oppressors. I just had to laugh.
Taxes in the EU make the USA taxes cheap. I would never do this.
We are in a Bizarro economic world. The measure of GDP growth is “credit growth”, which is debt growth. Casino economics is the rule of the day. Financial manipulation has replaced traditional wealth creation, and the CBs and Wall Street banksters have strip mined our economies and our citizens. National, local and personal debt levels are beyond saturation and have long since exceeded the ability to pay off, let alone service interest payments at any rate above ZIRP. We have even entered the cloud-cuckoo land of NIRP. Extend and pretend is now the political strategy.
The democracies went bankrupt in the 1970s. Our apparent prosperity since then has been fueled by the extension of credit and the increase in debt.
Usually, I try to offer educated explanations to support my opinions, which, I believe, are spot on correct. (There’s no shame in having confidence in yourself, providing you can admit mistakes if and when they occur … and they haven’t in respect to my opinions on the EU and Eurozone.)
Here’s Europe’s problem in the simplest terms:
Idiots who present themselves well, power hungry sociopaths, Machiavellian bureaucrats, occasional Utopians, and free lunchers run the place. Completely. Arguments among them are only about degrees of stupidity, not bad ideas in general.
The population are substantially all free lunchers who want lots everything for free and want to retire shortly after birth. I’m not exaggerating.
Since this model is unsustainable, it is only a matter of time before it falls apart. Not too many more years. The kick the can efforts are extreme and almost comical. Expect more free money from the ECB, not less, in the not too distant future. The ECB is considered to be the source of all things free,
At least China is performing shenanigans to prevent a civil war, which would certainly erupt if their economic system failed. Japan is an example of nationalistic narcissism.
“Japan is an example of nationalistic narcissism.” Could you elaborate? If you mean, inward looking, what does that look like in terms of economic behavior?
Off-topic – but I wanted to report that the housing bubble is alive and well in Redmond Washington.
While I am sitting doing work at a table in a Redmond Starbucks on a Sunday morning there is a mini seminar going on next to me about how to get rich from the fast appreciating house prices. The “expert” is talking about how he’s been buying dozens of homes in the area and flipping them for huge profits within months. 6 people (all women, some with little kids, are listening with great focus).
‘Mom, when I grow up I want to be just like him’
‘Yes dear, but you remember why Pops left and how we ended up on the street. That man sold him a flat he could never pay off and was not worth half he paid for it. That is why we are all here dear, for when he brings out the papers to sign at the end dear so we can leave him with our signature.’
Contrary to what is shown on TV most flippers fail. My son is in Bremerton and wow Real Estate is so high.
Credit contraction equals money supply contraction and deflation. Without inflationary default the outright government defaults come sooner than later.