Brahmason's Blog

The world economy has a real problem which is the bubbles .

A bubble is the total rupture between prices and incomes as a result of intense especulation in a certain sector of economy.

The current bubble affecting world economy is that of housing . The prices have burst in several countries to levels which are not only impossible for average income potential buyers but also for most qualified proffessional investors who see no prospects of making money out of reselling housing at their current prices , with prices being pressed for deflation till buying power will be restored by strong price reduction or strong income increase .

The economic cycle being interrupted by the bubbles have left banks as main actors of the process in a situation of blockade with huge amount of unpaid bills and debt levels up to their necks.

But is not only banks . Companies and consumers have been left with tremendous levels of debt .

If we do not restore buying power through a period of austerity , with costs reduction process and strong increase of added value in our GDP ‘ s and instead we try to recover activity by further credit and debt increase , the world economy will collapse.

The stress tests in Europe is just an attempt to relax fears of bankruptcy but do not mean that the economy is now on the road to recovery .

Take Spain for example . Even if banks are fully healthy and ready to help activity , the economy canot recover because it has first to replace housing as growth engine by a more advanced production net that will provide bigger added value GDP. The old model inherited from the sixties with salaries half those of nord european countries and housing clearly more expensive , is saturated .

That should take no less than twelve years as it did in previous examples as that of Finland not so long ago.

Not to mention the inertia caused by the spanish housing bubble which has a much more significant impact in the economy that the japanese bubble had in its economy which is still suffering from it after fifteen years .

With banks into fitness the only countries able to grow are those not handicapped by housing bubbles and enjoying GDP ‘s with a strong added value .

Of course stock exchanges are showing gains because speculators know that the stress tests may confuse most of non proffessional investors who may think this is the beginning of another buoyant economic cycle and put their money back in the stocks .

They are bound to loose even their inner garments.

The economy is far from recovery specially in countries with bubbles , low salaries and heavy debts and deficits.

Brahnason