What they did was they postponed the bill. Not impressive.Originally Posted by Firn
What's more interesting is is their mild trade balance deficit of at most 1% GDP p.a..
This trade balance deficit indicates that Spain was almost sound if seen as a black box. They just proved unable to organise their economic activity in a way that's sustainable and meeting the demands (such as proper distribution of jobs = income to the youth). They had almost as much output as input, but they failed at the allocation. Badly.
Assume they had had no bubble - would they have been then able to sustain the government without substantial budget deficit? NO.
Why not? After all, the outside view on the black box reveals no such problem.
The answer is that they have absolutely huge dysfunctionalities in their society, and instead of addressing them properly they elected a liar who played in a small war and meanwhile the people partied in a party which the black box was able to sustain, but not their very own society, the inside of the black box.
Spain is a puzzle that cannot be joined. Little fits togethe, they have major work to do.
Now maybe this made more clear why I am so disgusted by references to how exemplary Spain was until the crisis (which is all too often presented as if it was merely a 100% exogenous shock).
I expected and expect huge USD inflation, but I do so for a game theory reason. The liquidity trap is actually a reason FOR huge inflation.For example I did expect relative high inflation around 2010-11 after all that easing in 2008, but basic macro (liquidity trap etc) and decent logic helped some to get it right. Krugman was one of them. With demand that low and the economic heart, the banks, pumping the lifeblood of the economy so slowly and out of sync the inflation has indeed been very low by historical standards.
As usual, Krugman is on the (very) short term side on this.
My reasoning is strategical; the U.S. has exploited the reserve currency status of the USD a lot and can be expected to go on with it, but it's not going to be able to go on forever. The U.S. economy is unsustainable (see balance of trade, savings rate coupled with population growth rate).
At some point the idea of a surprise inflation is going to be irresistible and it will happen.
The huge financial meltdown and crisis was a huge opportunity for such a huge surprise inflation, not the least because the huge deflationary forces in the economy had to be countered with easy money. Now all they would have needed to do was tell the Fed to buy U.S. treasuries in order to improve overall cash liquidity - buy almost all treasuries. Then burn them. What would happen when deflationary forces and all the other special effect disappear? HUGE inflation for one or two years, price rigidities broken (wages!) - and the damage would be on part of the USD cash owners - such as the Bank of China or how they're called. The average American has no savings (thus savings rate close to zero), almost no American has substantial savings in liquid assets (M3).
Apparently, Obama and Bernanke do not think alike - or he thinks it's better to do this even later. After all, trade partners proved to be hugely gullible and resumed to tolerate trade balance deficits at almost the old volume
Maybe the U.S. is with its political institutions too incapable to pull something like this off anyway. In that case they will eventually do it by accident, with more pain and less benefit.
I say the U.S. gets a huge inflation within 15 years that clears a lot of the accumulated old imbalances. This is imo independent of their fiscal situation and dependent on trade and savings instead.
Regarding
Wrong country for this story. East Europe and Greece had this symptom, not Spain....pre-crisis inflow of cheap money...
http://www.tradingeconomics.com/spain/balance-of-trade
Not that much apparently. This is the weird thing. They financed their construction bubble themselves in the end. It was a huge resource mis-allocation, a stupidity on huge proportions.
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