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Great Depression Online Archive Issue:

For Sale: European Autonomy

Great Depression Online
Long Beach, CA
January 18, 2011

Inside This Issue You Will Discover…

*** The Scourge of Europe
*** Another Property Mania
*** For Sale: European Autonomy
*** And More

The Scourge of Europe

In the late 15th century things were looking up in Spain.  With the capture of the Emirate of Granada in 1492, Spain completed the Reconquista of the Iberian Peninsula…ending the last remnant of a 781-year presence of Islamic rule.  And if that wasn’t enough, that same year, in a voyage funded by Isabella, Christopher Columbus discovered the new world. 

Soon after, Spain emerged as the first world power. 

Early on, their good fortune appeared limitless.  For the next 200-years, Spanish treasure fleets transported vast riches of gold, silver, spices, tobacco, and agricultural goods, from the Spanish Empire in the Americas to Spain.  But alas, the bounty was not without consequences.

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You’ve no doubt heard the old mantras: “stocks for the long haul,” “diversify,” “buy and hold.”

Investment gurus worldwide repeat them daily.  But are these strategies really wise for ALL markets?  Can advice that sounds so simple (but so vague) be useful to you as an investor?

Market Myths Exposed eBook 

~~~~~~~~~~~~~~~~~~~~~~~~~

Overtime the flow of wealth to Spain became an expected entitlement and the influx of riches proved not to be a blessing, but a curse.  Like the spoiled heirs of a family fortune, or an unprepared lottery winner, Spain squandered its wealth through a succession of misadventures.  Wars of succession, Hapsburg inbreeding, Napoleonic rule, Spanish-American War, Civil War, and much more, drained Spain’s resources and undermined their empire. 

By the late-18th century Spain had fallen into irreversible decline and for the next 250-years was the scourge of Europe.

Another Property Mania

At the dawn of the new millennium the sun was finally shining on Spain again.  On January 1, 2002, Spaniards traded in their pesetas for euros.  Seemingly overnight, credit in Spain was priced at about par with Germany…kicking off an economic boom.

Soon euphoric images of limitless wealth returned to the Iberian Peninsula.  Not since Spanish Galleons loaded to the hilt with gold filled the Cadiz harbor had the population of Spain been so ecstatic.  And not since Hernan Cortes toppled the Aztec Empire had Spaniards been granted so many opportunities to ruin themselves.

So it was, with their newly found cheap credit, that Spain went about creating a mess of things like most nations did during the first decade of the 21st century…with an epic and enthusiastic property mania.  What’s more, as property prices reached extraordinary heights foreign trade deficits exploded too. 

Somehow, after all the years of economic flailing, Spain wasn’t suspicious of this cheap money or the speculative intoxication that followed.  Predictably, a severe property led recession landed on Spain’s shores in 2008; things turned ugly quick. Unemployment spiked from 7.6 percent in October 2006 to 18.7 percent at the end of May 2009.  But that’s not the half of it…

Now, with Spain’s economy on the fritz and its debt load swelling, Spain’s creditors are getting a little panicky.

For Sale: European Autonomy

Similar to Greece and Ireland, Spain is broke.  They have two options.  Either default on their debt or receive a European bailout with printed money.  The problem, however, is that unlike Greece and Ireland, Spain’s economy is too large for Europe to bail out.

Spain’s GDP, based on 2009 GDP, is $1.4 trillion.  This amounts to nearly double the GDP of Greece, Ireland, and Portugal combined.  Additionally, Spain’s GDP amounts to nearly 12-percent of the entire Eurozone’s GDP.  A bailout of that magnitude could certainly undermine the euro…maybe it could even lead to its end.

“If Spain collapses the way Greece has collapsed I don’t think the European Union has the resources to rescue it,” said Nobel Prize-winning economist Christopher Pissarides last Wednesday.  Such an event, he continued, “might even see the end of the euro as a common currency.”

The next day, Spain – and the Eurozone – averted disaster with the successful auction of about EUR3 billion ($3.94 billion) of five-year bonds.  More notably, China pledged to buy billions of dollars’ worth of bonds in European governments – including Spain.  Why would China do that?

The same reason they buy U.S. Treasuries.  China’s economy can’t afford the collapse of the euro any more than they can the collapse of the dollar.  They need Europe to buy their stuff.

So now, what we have is an implicit Chinese bailout of Spain.  In other words, European autonomy’s for sale.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  During the mania -- when the trend was almost always up -- virtually anything had a good chance to go higher. Investors ignored advice that cautioned against risk, because there was always someone lucking into a moon shot during the insanity.  The S&P index itself – followed by the NASDAQ and other markets – sat at the center of the mania.  Back then, simply being in an index often outperformed other popular strategies.  That’s not the case anymore.  Uncover important myths about the safety of your bank deposits, earnings reports, investing in bubbles, small stocks, inflation and deflation, speculation and more.

Market Myths Exposed

Learn More on Causes of the Great Depression

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