The coming worldwide credit crunch

 To keep you up to date there was a critical vote late last night on confidence in the Greek government. If it had been a NO vote the result would have been very serious for the whole Euro region as it would have pretty much sealed their fate.

As the article below points out it was in fact a bit of theatrics, the outcome known safely in advance and designed purely as a piece of spin to try and instil some much needed confidence. The article is from Money week, i have not posted it here because i do not have permission, but if you like you can read it here -

http://www.moneyweek.com/news-and-charts/economics/europe/how-to-insure-your-wealth-against-a-greek-default-54222

Note to ads - notice the reference to money flowing like rapids into London property rather than concrete on the CDS.

Also the comment at the end on UK inflation. There was an article yesterday in the DT about the BOE preparing the way for more QE and the arrival of confetti money.

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"Sorry TJ, I thought you were implying by your previous observation that it was still OK to purchase even though the existing system stinks!"

I have lost you ads, what does this refer to - which observation?

I fear that as regards cleaning up all the "damage" the reason its not happening is because they can't. They simply do not have the cash. Infact its much worse than that - Spain's banking system is bust and Spain will soon be forced to bail it out as happened in the UK with HBOS and RBS. The difference is that as part of the Euro, Spain cannot simply print the money like the UK did, it will need to borrow it from the ECB or the IMF or the stability fund.

Even if it can borrow the funds to bail the banks, its not clear that Spain can afford it, since these loans come with high interest rates due to the lack of confidence. Spain is finding its bond rates increasing for the very reason that no one really knows what the Spanish banks are holding in the way of toxic assets and how bad the problem is now and will be in teh future. What everyone does know is that the banks are in a terrible mess, hideing billions upon billions of bad loans and the numbers are getting worse every day that goes by.

The chances that Spain then can find additional billions to sort out homeowners and put things right is i think negligable. What we have learnt from this crisis is that the banks will always be rescued by the taxpayer regardless of fault. The general public are not so lucky - they just get to foot the bill.

I very much fear, TJ, that the boycott Spain idea is unlikely to fly. 

Even as we write here and exchange views there are people buying property in Spain.  An acquaintance has just spent a little over one million euro for a largish apartment........

Patricia

Sorry TJ, I thought you were implying by your previous observation that it was still OK to purchase even though the existing system stinks!  If only everyone would come together to pressure the Government to clean up their act and implement justice....... the Spanish youth seem to be focusing on this however. Trouble is (back to money) how can this be funded now that there are so many caught up in this scenario? Will the Banks/Government have the funds to meet their legal obligations? Given the suspected magnitude of the problem how on earth can this be resolved?

As for a mortgage, it's another sad reality that the financial system, given the rules and regulation associated with taxes actually encouraged people to take out mortgages in Spain as a means of offsetting IHT etc. Another nail in the coffin re "financial games/strategy" that has backfired and added to the crisis.

Anyway, I look forward to your observations on " common myths of money and economics and what we can do to help ourselves and prosper in the future".

 Actually i made this very point several times in the recent point on here, maybe not this thread, it may have been the Spanish petition thread to EU/MEP. I do not have the time today to search for it.

I gave the example of buying a 100acre mansion with pools and castle in a far flung land for 5 grand. The owner soon finds that its been appropriated by the friendly local Junta because the rules have been changed. Five grand or 50p its not much of a bargain if you don;t own it.

I also said this is why London is a magnet for big money. The justice system in the UK for now is a great respector of property rights. This alone attracts capital from countries where citizens are not so blessed and are looking for a safe "home' for their wealth.

I alos said that i think no one should consider Spain as a property location to buy, until various laws and rules are sorted and enforced and buyers can be confident that their rights are fair and will be respected.

As far as the bank guarantee thing goes, it looks to me like Spain has behaved like a third world country, but with first world prices. I have no personal experience of this and am no expert on it, but that is the way it looks to me. Also planning/illegal builds etc the list goes on. If everyone was to boycot Spain as in new buys, Spain would soon get this sorted!!!

TJ

You never make mention of the vulnerability and outrage that comes from ongoing lack of justice and consumer protection in this scenario. I find it inconceivable to detach the two, as once bitten twice shy? It's the foundation to a civilised society and I can't see any long term formula to the workings of money that doesn't include this as part of the future package. But perhaps you see this differently?

 RD

I cannot really advise you on your situation because i would need to know alot more about you and even then the buck must stop with you.

What i can say is that if you bought the property for a home and you love and enjoy Spain AND you can sensibly afford it, then i think little has changed. You bought it for the right reasons and life is too precious to spend it worrying about any monetary loss.

If however you bought it as an investment, or may need the money in the future, or cannot really afford the luxury of a second home, then things are different.

If you have been following this thread for a while you will know my views on interest rates and where they are headed and inflation and property prices and where they are headed.

They may well be able to keep the Euro together for some time yet, maybe a long time. BUT it will be at the expense of more and more bailouts and subsequently more and more economic trouble.

Sounds interesting...

Yes, TJ.  This would definitely be a worthwhile topic.

"BUT i would really like to focus on a new topic of something like common myths of money and economics and what we can do to help ourselves and prosper in the future. Maybe this is for a new thread if anyone is interested that is."

Patricia

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I certainly have not forgotten about the people you describe - because i am one. I may not be near retirement age, but i like you and many others will be caught up in a mess that was no creation of ours. This is life and it does no good to dwell on it, unfair as it maybe.

What perhaps is more useful is to focus on understanding what went wrong and more importantly what we can do to protect and make the best for our families and friends and the wider community.

They say fore armed is fore warned. This crisis was visible from a long long way back and the reason why i wrote this thread was to try and help people understand what was going to happen. I suspected that as i wrote it much would fall on deaf ears, but if it has changed anyone's thinking or actions for the good then i am glad.

I am happy to keep commenting on this thread and updating it along with others to discuss what is really going on. 

BUT i would really like to focus on a new topic of something like common myths of money and economics and what we can do to help ourselves and prosper in the future. Maybe this is for a new thread if anyone is interested that is.

Thanks for the reply TJ,

Just one more question then because you seem to have been along the right lines since the the start of this thread back in 2007. In your experience IF you had bought a Spanish property and financed it with a Spanish mortgage as we do, would you

A. ride it out ?or

B. sell now (if you managed to get a buyer) at whatever price you could get before the Euro collapses??

Everyone has an anecdote I am sure about the encouragement to spend spend spend scenario.

I can remember, must be eight years ago, receiveing a letter or two from a well-known credit card company offering me their platinum card (not gold, but platinum!).   Sure I was making my living but in no way was I in platinum league. 

I threw the letter in the bin.  Some days later their call centre contacted me to offer the platinum again and had I got their letter.  I asked the girl how much she thought I was earning, heh heh.  Long story short, I asked them to cease sending me those "offers" and while they were at it to stop sending me offers to buy expensive rings  and other luxury items on the "never-never". 

That was me.  But I bet there were some or many who took up the offers and landed themselves in heavy debt.

Patricia

Yes, Ads, I have every sympathy for that sector, the people  who saved in order to buy their home and who were defrauded.  It is completely unjust. 

As for the majority who lived beyond their means whether encouraged to do so or not., will they learn the lesson?   I wonder.

Patricia

On a smaller scale and in relation to Spain, please don't lose sight of the generation who saved, put by for a rainy day, lived according to their means, bought their retirement home in the sun from their hard earned efforts (not from credit) and are being penalised both from a system that defrauded them of their monies/homes, and/or banks who refuse to recognise their responsibilities according to the law. To generalise can sometimes do a disservice to those who lived by the book, those who had no intention of living beyond their means and followed all procedures to minimise the risks. They tend to be an older generation who now appear to be paying the price for those who were encouraged (rightly or wrongly) to do otherwise.

Thanks TJ222. Very insightful and eloquently put!!! ... so many lessons learned from this. I personally hope that the younger generation will have chance to reflect on this enforced "correction" and recognise (eventually!!) the realities and consequences of not living within their means (can it be equated to the aftermath of the war when everyone back then was forced to live according to their means?) What made it more palatable psychologically  was presumably that everyone was in the same boat (ish), all pulling together for a common cause. In this instance however, it appears the opposite and all too many continue to look to their own self interests, refuse to see the overall picture and how by pulling together and each being prepared to make some sacrifice should help in the longer term. As you rightly say, it's all relative, and "Overnight the 5% public sector pay cuts suddenly look like a tremendous option and any kind of pension looks like a fantastic deal. ".

We all need a reality check right now, but the trouble is no-one believes the messenger, as there have been so much lies/deceipt/corruption this past decade (if not more) that to be told to cut your cloth according to your means, really means "you can make sacrifices but don't expect us to ", where the "us" is the politician/businessman/banker etc who appear to be making very little sacrifice. Is is any wonder that Jo public is very wary and distrustful when the mention of "pain and misery" is discussed? Until such time as a common cause is identified and sacrifice across the board is seen to be employed, then there is bound to be growing public discourse, resentment and unwillingness to make sacrifices, which only compounds the problem.

Surely eradication of corruption, evolved transparency and accountability will have to walk side by side with austerity measures if any longer term headway is to be made across the various nations? Otherwise more and more citizen unrest will ensue as the hypocrisy becomes ever more apparent. Just another part to the equation re any solution, no?

This was in 2006!

From The Independent September 2006

UK borrowers account for one third of unsecured debt in western Europe
On average, a Briton has twice the debt of a European
Total consumer debt in the UK is at a record £1.3 trillion
New debt last year came to an unprecedented £215bn

Britain's "buy now, pay later" consumer culture has led to unprecedented levels of personal debt. The average Briton now has more than twice as much unsecured borrowing - including overdrafts, personal loans and credit card debt - as the typical European, according to a report published by Datamonitor.

http://www.independent.co.uk/money/loans-credit/britain-becomes-never-never-land-as-personal-debt-runs-out-of-control-417809.html

Yes, TJ,

 "The banks encouraged reckless spending on all levels by convincing people that they could have it all now and worry about the paying later"

and yes again!

"Despite the banks, no one forced anyone to borrow money to consume or to speculate on shares or property. I have however some sympathy for those who bought a home and were obliged to pay too much, but other forms of debt and consumption were entirely voluntary."

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Its a very good question and now we are getting to the heart of the matter. There is plenty of blame to go around, but no one seems to want to own it. The banks encouraged reckless spending on all levels by convincing people that they could have it all now and worry about the paying later. Governments around the globe provided too much cheap money by manipulating rates for too long and pumped up bubbles in consumption, the stockmarket and property. As one bubble burst - the tech market, they pumped up another in the form of housing. Rather than take the hangover they tried to keep the party going. 

As i have written many times in the past, the recession is the solution, the boom was the problem. Despite the banks, no one forced anyone to borrow money to consume or to speculate on shares or property. I have however some sympathy for those who bought a home and were obliged to pay too much, but other forms of debt and consumption were entirely voluntary.

In the case of the Eurozone, i think its pretty obvious now that the project was flawed from the start. Even if you ignore the "looking the other way" that went on as regards the entry qualifications with the Med area countries and down right fraud as in the case of Greece, the pact was always destined for failure imho.

If i lived in Germany, i might chose to sit in a traffic jam in the rain on my way to a stressful well paid job, consoling myself with the luxury smell of the leather in my BMW and the sounds of my Bang & Olufsen stereo. On the other hand if i lived in the Southern Med i might prefer to watch the world go by at the waters edge, happy with a cafe con leche and a good chin wag with my friends. The well paid job probably wasn't going to be an option anyway.

And -------- Who said that the average Med man wanted to work like a Brit or a German anyway? Sure they wanted to live and spend like one, but did anyone really think it was going to last. The differences socially, culturally and in education and climate and just about everything else are so great, it was a union that was never going to work as regards finance. The Bank of England meet each quarter with 12 of the "brightest" minds and carefully steer the economy with 1/4 point rate steps between the twin perils of inflation and deflation ( or so we are told ) and yet everyone expects a bunch of economies as diverse as Greece and Portugal to Germany to manage happily on one rate fits all. Someone's leg is getting pulled!

To find the best solution to the crisis which to be fair is the question - you have to know what is/was the problem. 

The problem is largely decades of living beyound our means courtesy of debt and fractional reserve banking. The Euro project was a huge enabler of this, for a long time it allowed countries like Greece and Spain to borrow at German rates and live like kings. Of course at first it was all good and everyone was happy, now it all is mostly bad and everyone is unhappy.

But I ask you what did people expect? Did people really think that someone else ie Germany was going to foot the bill for pensions and public sector non jobs that the country itself could never afford. Did they think that the bond markets would just go on extending debt for ever with no rational hope of ever getting paid back?

So now there are two solutions, neither of which is going to be any fun. The easy option expired probably 10 years ago.

The first is to try and pay the money back, but in the case of most countries this is not going to be possible. Austerity and tax hikes is inevitably going to cause a negative spiral as in already evident in the UK and near its conclusion in Greece. Even if this was possible it would take perhaps a good decade or more of painful living, not just spending less that earned, but some how finding all the spare to redeem the debt. How many countries can balance their budgets now and they are not even repaying the debt, they are still stuck on interest only. Without the debt based consumption, their economies are going to shrink and the unemployment is going to soar and then take away all the public sector non jobs and the economy is going to fall off a cliff, taking house prices and the banks with it.

That brings us to the second option which is some kind of default. Now you have the option of a soft default or a hard one. The first is the chosen option of the UK and US, but as we have already talked about, inflating away the debt is a double edged sword. If printing money was a good option, then Zimbabwe would now be a world power. Because of this the ECB is not willing to take this route - or atleast thats what they are saying now. Why after all should Germany debauche its currency to rescue nations that have spent and now can;t pay?

The hard default is when you say you can;t or won;t pay. In this case effectively the lender pays because in all cases either the borrower or the lender pays. There is no tooth fairy in the big bad world.

When the lender pays he suffers and then you suffer. He can no longer afford to loan new money and even if he could, you ain't on the invitation list anymore. Then you as a country have to manage on what you earn and no more. in the case of Greece where tax evasion is a way of life, the budget is suddenly very small. Overnight the 5% public sector pay cuts suddenly look like a tremendous option and any kind of pension looks like a fantastic deal. Currency devaluation makes things worse and the standard of living and economy fall off a cliff.

So the end result is the same in both cases, except the soft option takes longer and extends the misery and the final bill as a result of trying to push it under the carpet. The hangover gets postponed by one more last drink.

You choose - up to you. Pain and misery now or more later?

Just out of interest, what do you want to happen TJ222 given the option of a crystal ball? Which option would be the least painful for the majority of EU citizens?

Since this crisis began which  was caused by the insatiable appetite of people all over the world for improvements in standards of living be that personal or infrastructure, regardless of the fact that it was paid for by debt financing, there has only been one end game which is a bout of rampant inflation to mitigate the debt.

Why else do you think that governments around the world, except those that are not bankrupt such as China, Australia and a few others, have not resorted to raising interest rates to quell inflation.

Add this fact to the comments yesterday by Richard Branson about the real reason behind soaring oil prices, totally down to speculation to which I agree 100%, and the refusal of governements to bring in controls and you have further evidence of the various governments acknowledgement of the need for a bout of serious inflation regardless of their weak protestations to the contrary.

It is only a matter of time.

Barry

 Guy

What i was implying was that currency devaluation for countries that produce very little is very different than with countries that are more self sufficient.

For example in Spain the price of tomatoes and a haircut will likely not change in relative terms.

I realise that the UK is not in the Euro in money terms, but i was using it as a example of a country that would be very vulnerable to a currency devaluation.

As it happens the UK has devalued its currency a fair bit already in an attempt to lessen the debt burden and to help its small export sector. However this is a double edged sword as its also now has one of the highest inflation levels of any western nation. The price of tomatoes and most such items in the UK have gone up very considerably as a result of the FX move.

Its a very underhand move by the UK and punishes the savers and prudent at the expense of the feckless. The coming UK public sector strikes are a direct result of this backdoor inflation. It solves nothing,