The Spanish Monetary Nightmare.

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It is common among mainstream Media to see the Spanish Economic Depression as a result of a Bust of its Real State Bubble but, if it was true at the beginning the reality is that right now, and in the foreseeable future, what really matters to Spain and to the Global Investors is that this beautiful country is in a Monetary Trap, a trap very different to the one the economists usually talk about.

            Believe it or not, all the signs indicate that since Spain joined the Euro the Bank of Spain (Her Central Bank) does not measure the Money Supply in its territory of responsibility, perhaps because they think the ECB job is enough. For that reason, if you look for the aggregates Mo, M1, M2, etc you won’t find them. Consequently, our economic authorities, in their design of their economic policies, do not care at all to the basic principles of the Quantitative Theory of Money. As a result of that, my fellow citizens are suffering three immense and adverse economic enemies: the Bust of the Spanish Real State Bubble, The International Crisis and Their Own Economic Authorities.

            So, let put some figures in terms of the Quantity Theory of Money (QTM) to this mess created by the dysfunctions of the Doctors Frankenstein teams of the Bank of Spain, the Spanish Government and the European Central Bank.

According to the QTM, M*V = P*Yr, where M is the quantity of Money, V de velocity of Circulation, Yr is the real GDP and P the level of prices. But, when inflation is not the problem what policy makers must care (in addition to financial stability) is to the Nominal GDP as with it Debt and Capital service, employment and Taxes are paid.

All central banks in the work pay careful attention to this equivalence as it usually determines the level of inflation depending on the Money Supply (M*V) as the economy grows. In fact you can easily find for the USA M1, M2, MZM y V or for the Euro area as a whole see this link Europe M3, but not for Spain.

We, the economists, use different definitions of money in QTM and you can see the ECB ones in the following link: ECB M definitions. I will use data from the Spanish Central Bank, the Bank of Spain, to illustrate you these variables and the Trap referred above.

Let see first the Cash in the Spanish Economy: if you check the following chart you can see the evolution of the amount of cash, which has been practically stable since 2006 when the Global Financial Meltdown hasn’t started yet. The stability of Cash by itself is not determinant but is indicating certain standstill in the Economic Activity. 

            And, in attention to its effect in Nominal GDP we should also consider the Velocity of Money (Nominal GDP/M) of this variable:


            It is interesting that with the exception of the introduction of the Euro this factor is very stable and equivalent to around five weeks of nominal GDP. In terms of Cash Spain does not seems to have a serious Money Supply problems, so where is the “trap”?!

            To see the Spanish Monetary Trap we have to check a wider definition of Money and the best available in the data of the Bank of Spain is the Amount of Cash and Deposits. Here we will see some amazing facts:


For the first time in 15 years there has been a reduction in the amount of Cash and Deposits in the Spanish economy, being in September 2009 a 2% lower than the last data of 2008. In addition, this contraction coincides with a downtrend in the Velocity of Circulation of this variable as you can see in the chart below:


            Further to this structural restriction to the Nominal GDP we have also another factors that will destroy money (and employment) To check them we will do it under the frame of the Macroeconomic Framework of the Aggregate Demand [Y = C + I + G + (X-M)] and what finances it (Y = C + Si + Sx-m + T), where Y is the Nominal GDP, C is Consume, I is Investment, G is Public Spending and (X-M) is the Current Account, Si is the local Saving, Sx-m is the foreign net capital flows and T the taxes. Then, the Fisher Equivalence of the QTM will be as follows:

 C + Si + Sx-m + T  = M*V  = C + I + G + (X-M)

Spanish QTM Draining Factors:

–       (X-M): in terms of the Current Account Balance Spain suffers a structural deficit of around 5% of GDP that is correcting but will take some time.

–       Sx-m: because of its high external debt to GDP Spanish banks have scheduled strong down payments in their debts with foreign debtors. Something that is an excellent new from the point of view of their good solvency but that will maintain serious restrictions to the internal credit and Money Supply.

Of course there are other implications in the equivalence above but they are more related with large chain of very serious mistakes of economic policy associated with (T-G) and their implications in terms of employment, public debt and welfare; think that under a Money Supply restricted any increase of T or G would reduce C creating more unemployment and more Public Deficit in addition to the produced by the necessary balances adjustment with their need to increase Si and Sx-m. Perhaps, in the case of a plan to re-structure some house of savings, if this plan is financed with foreign debt and these institutions start to create bank money, it could relatively alleviate the asphyxiating situation of the private sector in Spain.

What is clear is that unless our obese prima donnas of the European Union and the Frankenstein team ruling the Euro System correct their dysfunctional management, the possibility that Spain become a Global Systemic Risk is a certainty. We must consider that if the Spanish trap were properly attended this country wouldn’t have such a Public Deficit with its financial needs and capital markets pressures and, consequently, much smaller countries, like Greece, would be able to default their un-payable debt and enter into a correct and manageable debt situation without a risk of domino effect. I know French and German banks are concerned about their mistakes in financing Greece but their lobby gains in Brussels are peanuts and the real problem of the Euro bureau-crazy is not the Greek clear insolvency. 

Is Greece in a similar Trap, and the rest? I do not know, but if She is, all the EU actions just make things worse and to solve this crucial problems we do not need a European Monetary Found or a Jurassic EU Financial Mega-Ministry, we just need that our overpaid bureaucracy just do its job starting by the all the Central Banks, the same entities that permitted the Credit Bubble that brought the World Economy to its knees. Is it too late? Will they continue destroying our Economies? Are we all doomed?

© Luis Riestra Delgado. 03/2010 (Click this link to read the version published in Spanish)

5 Comments to “The Spanish Monetary Nightmare.”

  1. José A dice:

    QUerido luis el problema verdadero es la falta de inversión más que la velocidad de circulación del dinero porque si hay dinero, pero no hay suficiente actividad económica para emplear el dinero de que sirve más dinero, la velocidad se para o se reduce de forma drástica, en todo caso si sería bueno dar dinero al Estado para matener el sector público,pero eso no sería beneficioso para la parte privada, pues la inversión no se produciría si las prestaciones de paro son tan bajas 400 eur habria que aumentar los salarios pero a la larga crearía inflación y bajaría la productividad y la competitividad y los déficits de balanza comercial,si los salarios aumentaran los parados podrían pagar su hipotecas si, pero los problemas anteriores no se solucionan. lo que si que hay que hacer es bajar el tipo de interés y dar subvenciones a las empresas para renovación de equipos y la inversión por el BCE oBdE imprimiendo dinero. Luchar contra lo que llaman economía sumergida o más bien sería que aquellos que se han forrado se lleven el dinero. Y vigilar los crecimientos sostenibles en los sectores.

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