Edward Hugh once again makes some excellent comments regarding the mess in General and Spain in particular.
“‘The global imbalances have to add up to zero and so, if the US is
going to be less the consumer importer of last resort, then other
countries are going to need to be in different positions as well."
Director of the US president’s National Economic Council Larry Summers, speaking over lunch with the FT’s Chrystia Freeland.
Think about this for a second. Who is going to buy all this excess stuff? I find it difficult to believe that the developed world is going to go on a consumption binge anytime soon.
Anyway, below are some bits from the post. Good stuff Edward
Take Spain for example - Spain's external debt is continuing to rising even as I write, while at the same time GDP is falling, and will continue to fall untill we get back to export competitiveness. Worse, nominal GDP (that is current price GDP) is now falling faster than real (inflation-adjusted) GDP, so the value of the debt remains - in money terms - where it is, while GDP shrinks in relation to this absolute reference point - both in real terms, and even more so in nominal terms. I have been following this problem in Japan for the best part of a decade now, and the solution is evidently not an easy one, since - if you take the core core price index - Japan never really came out of deflation after 1998, and land prices are now back at the levels of somewhere in the early 1980s. Needless to say, if this repeats itself in Spain, the mess will not be a pretty one, and the problem for the ENTIRE global financial system will be substantial, due to the counterparty risk element.
Now Anatole only has it half right here, the objective is not to
finance dubious government debt in semi-bankrupt countries (Italy, for
example), but to enbale those countries who had been running
extraordinarily large current account deficits (Spain, Greece and
Portugal) to close the deficits gradually (ie without precipitating a
dramatic implosion in their economies) by facilitating government
borrowing to fill the gap left by domestic and corporate deleveraging.
The situation I am trying to describe is perhaps best illustrated by
the following chart on Financial Balances prepared by PNB Paribas Chief
European Economist Dominic Bryant for a recent research report on Spain.
As households and companies desperately try to save, to put some sort of order back into their balance sheets, government steps in (Krugman's push button "G") to help ease the transition. Such a policy is, of course, all well and good and totally justified (since there is effectively no alternative), so long as the structural transition which such support is meant to facilitate is actually carried through. And this is a big if, especially since most of the evidence we have seen to date suggests it isn't.