Spain Tips Into Depression
By Staff News & Analysis - September 28, 2009

Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days. The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11% of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero (pictured left), who still says Spain's recession will be milder than elsewhere in Europe. RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25%, comparable to the worst chapter of the Great Depression. – Telegraph

Dominant Social Theme: More carnage?

Free-Market Analysis: We think that the problems with Spain do presage problems going on elsewhere in the world. We think, eventually, they will visit the United States as well. When we write "eventually" what we mean is that things will get considerably worse. We believe this because the Western world is doing exactly the opposite of what it should do to resolve what is basically a paper money and leveraged-capital crisis.

The Western world has resolved to issue more money and prop up failing organizations and companies rather than let the economy purge mal-investment. This means that capital is diverted to failing enterprises and that jobless rates will stay stubbornly high or even climb. In Spain, obviously, the property and housing crisis has still not been resolved, nor will it be until the Spanish economy is allowed to purge and recover. Here's some more from the article:

The Spanish government can do little to cushion the downturn. "The room for manouvre in fiscal policy has been exhausted," said Mr. Ruiz. The rocketing cost of jobless benefits has added 3% of GDP to the budget deficit. Mr. Zapatero has ordered all ministries to cut 8% of discretionary spending to help plug the gap left by collapsing tax revenues. The axe is likely to fall on research and big projects such as high-speed railways.

The root cause of Spain's trouble is that it joined the monetary union before its economy was ready. EMU halved Spanish interest rates almost overnight. Real rates were minus 2pc for much of this decade. Combined private and corporate debt reached 230% of GDP, funded by French and German savings.

The credit boom masked a steady decline in productivity over the last decade. Spain's unit labour costs have risen by about 30% compared to Germany.

The Bank of Spain made heroic efforts to counter the effects of the bubble by forcing banks to put aside extra reserves, known as dynamic provisioning, but the sheer scale of the problem has washed over the defences. Spain no longer has the escape valve of devaluation to claw back market share. It cannot resort to emergency monetary stimulus – as Switzerland, Britain, the US, and Japan are doing to prevent the onset of debt deflation. Prices are already falling at a rate of 1.2%.

Jamie Dannhauser from Lombard Street Research said Spain is bearing the full brunt of the European Central Bank's restrictive monetary policy, which has caused private sector credit in the eurozone to shrink over the last six months.

The latest ECB data shows that 60% of Spanish firms have seen access to credit fall so far this year. Most say they have been denied their full request for loans or credit lines.

What the article explains to us here is that while central banks cannot make anything much better, they can do a lot to make things worse. In this case, having helped to create a fiat money contraction, Spanish central bankers are finding it difficult, given EU restraints, to provide additional credit and money to businesses that need it.

This is the double whammy of central banking. By propping up economies in time of trouble, central banks significantly retard recovery time. But if banks do not issue additional fiat currency into the economy, then economies shut down anyway. Central bank monetary policy is good for pumping up economies, and creating bubble economies, but not so good at dealing with the aftermath, especially when the fiat bubble and crash is significant. And they do get larger, serially, over time.

After Thoughts

The Spanish are feeling either a deep recession or a depression because their central bank is limited as to how much money it can pump into the economy. This is one way an economic mess is prolonged. While it is true that economies after going through a bubble need to deflate, the amount of money that is needed within an economy and the nature of its direction must be determined by the market. In this case, the absence of money is as artificial as its overabundance once was. Governments need to get out of the market and out of the money business. A gold and silver market-based standard is a corollary to this necessity.

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