Sanchez1

The UK has printed more money from thin air wrt GDP than anyone else, 200 thousand million pounds and they are threatening to run off another 100bn if the austerity program threatens a double dip. As a result they now have shocking inflation and thats as measured by a complex set of stats that helpfully removes anything that is going up too much. A sort of cost of living index minus the real cost of living. Even with their crooked measurement its at around 4%, meaning real interest rates are NEGATIVE 3 percent.

Anyone who actually lives in teh real world and has to buy food and energy and insurance etc knows the real cost of living is going up many times this amount. So you can get economic growth by printing money, but if inflation outstrips GDP, its no help and the people that suffer most are those on low incomes that spend much of their cash on food and energy.

Spain itself does not have the ability to print money, so its in an EU straight jacket. If Portugal is any indication of the future it won't have access to the bond market much longer either. So it looks like outright deflation for Spain, except in dollar denominated commodities, which are going through the roof thanks to the US new QE program.

The obvious answer for Spain is to default and lose the Euro stranglehold. This would almost immediately make Spain competative again, and tourists would flood back to Spain and it would attract international finance and jobs. Sadly I suspect it won;t be allowed to do this, as the international banks would lose too much on their bonds and the EU project seems sacrosanct even if it does bankcrupt all its members. 

Other obvious remedies include losing the socialist employment laws and red tape that pretty much guarantee that you have to be certifiable to employ anyone and putting in place a decent set of fair laws for property ownership, that give people confidence that they can actually own something without losing their shirts in teh process.

TJ222,

Good post, as usual.  But I'm not sure you have grouped the UK in with the basket case Club Med economies.  The UK grew by 1.2% in Q2 2010 and 0.8% in Q3 2010.  That's pretty impressive growth if you ask me, particularly given all the doom and gloom and the impending public sector cuts.

Spain, on the other hand, is struggling to get 0% growth...

ts22 2has  hit  nail on the head, what is the solusion? get rid of credit?live within your means?                                                            How long will it take to bring industry back to the uk?                                                                                                                                     Who got rid of manufacture in the uk?was it bad management that could not control the unions?no it was greed that has done the damage just human nature, Must have more than I need to show how good I am.

There thats me said what I wanted to Let the greedy mega rich respond.

http://www.eyeonspain.com/spain-magazine/dire-spanish-economy.aspx

"Of course, no-one should be surprised at the poor prospects for economic recovery in Spain.  This is because the country faces a huge structural problem – namely how to replace the economic value of the ‘deceased’ Spanish construction industry.

In fact, I suspect, that Spain’s economic prospects could be crudely distilled to the question of: what has Spain got (or can develop quickly) to replace the wealth generation of its defunct construction industry?

This may seem an odd way of putting things but the Spanish construction industry accounted for something like 18% of GDP at the height of the boom, according to Spanish government figures.  In reality, I suspect that it was more like 30% of GDP, if its full impact was taken into account.  So, it was a major part of the Spanish economy and drove the economic miracle of Spain"

Sadly it was not an economic miracle, it was an economic mirage.

The article is at least a fair assessment of the future for Spain, but I feel compelled to point out that it has a major flaw, and perhaps this is what is wrong with most people's thinking, including most economists, so this is no offence to the writer.

There was very little wealth creation produced by the construction industry, what it did create was a fantastic amount of debt. The jobs and wealth actually were an illusion which evaporated as quickly as the cheap money, sadly the debt however is very real and still remains to haunt the country and its economy.

What is now becoming increasingly apparent is that the economies of the world are now split between countries whose wealth was real and those which was not. Countries like Spain and the UK and the US whose future was based on a housing boom and its associated retail consumption are now still mired in unemployment and stagnation, with the future threat of crushing inflation. Countries like Germany and Canada and Australia are starting to boom again and are having to raise rates.

And here is the nub. Germany's wealth is based on real production of engineering and technology, German engineering is prized all over the world. Canada and Australia's wealth is largely based on mineral commodities which are increasingly required by the rapidly growing East. India and China everyone knows is booming because they produce practically everything we buy.

Housing does not create wealth, wealth creates housing. You can;t take a country like Spain and put it into a rich club of Europe and then expect it to become wealthy by a process of osmosis. In Spain's case the problem is not the credit crunch or the recession, these are the solution. The problem was the boom, which was created by forcing incredibly diverse economies together under one interest rate policy and a cheap money policy started by the US.

The boom in property in which Spain so eagerly took part was in fact just masking ongoing structural problems and a decline in productivity. The debt taken on at a consumer and governmental level, just hid the fact that the country was getting poorer with every passing year. As soon as that debt was withdrawn which was always only a matter of time, it became increasingly clear what the true situation was.

The bottom for most of Club Med and the UK and US is I fear a long way off. Instead of starting to tackle the real problems in their respective countries, these economies are now resorting to printing money out of thin air. You don;t need history to tell you what happens when you do this.

TJ- So what do you suggest as alternatives then without compounding the problem?

I don't wish this to sound negative as I'm genuinely interested to hear of alternative strategies....

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I am pleased for you and your OH, good luck to you both and happy times in Spain. Just make sure you convert those pounds saved into something else before they become worthless.

Only consolation is that Gordon looks as bad as we all feel.

On a happier note my OH, who took early retirement last March aged 60, has been contacted by his ex boss as they're snowed under with work at GKN & they didn't replace my husband. He starts Monday, can work the days HE wants & the hours HE wants & he will be earning almost double his wage on leaving. He always said contractors earned a lot. It won't interfere with us spending a lot of time in Spain. We're both well pleased.

China:  China holds the key to the next phase of the financial crisis. Falling oil and food prices will come as a relief to western policymakers, but the reality is that the West has already more or less run out of policy options – at least easy ones. They are now largely in "cross fingers and hope for the best" territory –where the best largely depends on emerging market central banks which do still control their own destiny. In particular, that puts the focus on China, which has important choices ahead.

China needs to decide whether to persist with its policy of monetary tightening now that it is beginning to yield results. Growth has now slowed for four consecutive quarters to 10.1% from a peak of 11.9% and is forecast to fall to around 9% next year – a decline that would feel akin to a recession in a country that needs to create millions of jobs for an expanding urban population. Meanwhile, inflation fell back to 7.1% in May, having peaked at 8.7% in February.

The optimistic scenario is that China sticks with its current monetary policy, using bank required reserve ratios rather than interest rate hikes to take some of the heat out of the domestic economy. A slowing Chinese economy would reduce demand for oil and other commodities, leading to lower global inflation. That would pave the way for lower Western interest rates, easing the pressure on Western financial institutions.

But there are two major risks to this scenario. The first is that China tries to ease some of the domestic pain by allowing the renminbi to appreciate. China’s long-standing policy of holding down its currency - thereby sacrificing consumption to job creation – has led to the build up of China’s vast trade surplus, stoking its inflation problem. Over time, further appreciation of the Yuan seems inevitable. But too fast an adjustment could trigger a global loss of confidence in the dollar and dumping of dollar assets.

The second risk is that China succumbs to domestic political pressure and abandons monetary tightening. Earlier this week, the finance and economic committee of the National People’s Congress called for policymakers to be flexible and guard against a sharp slowdown, fuelling speculation over a change in policy. Such a shift would be a major shock, raising fears that an over-heating China would start pushing oil prices back up again, dashing hopes of a quick recovery from the financial crisis.

For the moment, China looks committed to continuing to fight inflation, while allowing only gradual appreciation in the renminbi. But China has a choice – and will exercise that choice in the interests of domestic politics rather than global investors. The rest of the world will have to live with whatever it decides.