Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.” The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.” According to Krugman:
The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness.
Evans-Pritchard explains why a number of European countries, led by France and England, are so angry:
Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world’s top exporter and pivotal power of Europe’s monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs. No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.
Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief? Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.
The point he is making is that the imbalances were not created simply by “binge debtors in the Anglosphere” but also by those countries that subsidized directly or indirectly overproduction, which ultimately have had much to do with the very conditions that led to consumption binge. This includes not just Germany but any of the countries that created persistent and high trade surpluses. Evans Pritchard makes the comparison very explicit:
Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU’s implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder.
The downward spiral dragged everybody into depression. Germany and China are today’s violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.
What does all this have to do with China? The reasons I bring this up is because it is, I think, a foretaste of the type of nasty battles that are likely to erupt between the trade-surplus and trade-deficit countries as global demand continues to contract. The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust. Furthermore, fiscal expansion aimed at generating employment in countries with large trade deficits will not be nearly as effective as they might be if they are not matched with programs in trade surplus countries (essentially demand boosting fiscal programs) that prevent domestic demand from bleeding out the trade account.
The French and the British (and much of the rest of Europe) are concerned that if their governments borrow to boost domestic demand and employment at home, they are also borrowing to boost demand and employment in Germany, which means that they bear the fiscal cost for the foreseeable future while Germany gets a substantial chunk of the benefit. This may be a great deal for Germany, but it is one hard for the rest of Europe to embrace.
In Europe it is clear to me that the economic debate is migrating rapidly towards consideration of the impact of trade, and it would be surprising if the debate does not quickly globalize. If Europeans, nominally members of one country (sort of), can get into such an acrimonious debate among themselves, what hope is there for a polite and statesmanlike discussion that involves countries less tied together? I believe that in the US there is a much stronger commitment to free trade and, in spite of Mr. Bush, multilateral cooperation on economic issues, then elsewhere, but politics is politics, and rising unemployment in the US will inevitably lead to the same confrontational attitudes as they seem to have in Europe.
By the way among the dozens of bankers, government officials, academics and businessmen I have met in the past few weeks to discuss trade issues, it seems to me that those of us who have spent the past several months warning about an imminent collapse in trade are getting more and more attention. This is undoubtedly going to become a hot issue next year.
It is not that China isn’t doing anything to address the problem. The slate of bad economic numbers this week and last (trade is down, we are racing towards deflation, investment and consumption growth is down, manufacturing output growth was only 5.4%, electricity consumption was down 8.6%) has confirmed what we all dreaded: things are slowing quickly. The government is trying to do all it can to boost the economy and, especially, employment, but I am afraid they still don’t understand their place in the global mayhem. They continue to see China as an innocent victim of the global crisis – not as one of the fundamental creators of the payments imbalance that led to the crisis – and much of their strategy seems to assume that China can adjust domestically without worrying about the impact on the global market.
For example two days ago I was part of a panel that included a prominent Chinese economist and think tanker who I know and like very much, and as we discussed what needed to be done I got the impression that he hasn’t considered global implications at all (although as we discussed them he acknowledged many of my arguments). For example, much of his currency focus was on how China can retain export competitiveness without encouraging hot money outflows. But that is not the right way to think about it. China needs to think not only about the domestic impact of its currency but also about the global impact of its currency policy, and how that affects the adjustment that trade deficit countries are undergoing. If it makes things worse for them, there is no reason to assume that they will remain indifferent to Chinese domestic policies, and there is even less reason that they will run policies that accommodate China’s needs.
China is making Herculean efforts to get out of this mess. It is doing everything it can to maintain growth and is clearly very worried about the pace of the slowdown. Bloomberg, for example, had this article today:
China’s government plans to lower taxes and reduce the lockup period for home sales to stem a decline in the nation’s property market. Home owners will be waived from paying a sales tax on properties sold after three years of purchase, compared with the previous term of five years, according to a statement today by the State Council, China’s cabinet. The tax will also be levied based on the profit from the sale, instead of the sale price, according to the announcement.
These are all good things because they are aimed at boosting domestic consumption, and to the extent they also affect production positively, they affect non-tradable goods. That is a start. But there must also be recognition that policies that do not bring the trade surplus down sharply are inevitably going to cause trade friction, and that is a game China cannot play. A collapse in trade would force a brutal adjustment here.
Just to get some sense of numbers, with a trade surplus equal to 10% of GDP, what would happen if external trade were to disappear? Even assuming that there are no transition difficulties, Chinese producers would suddenly be forced to deal with the fact that they are producing more than Chinese are consuming by an amount equal to 10% of GDP, and if domestic demand cannot be increased by that amount immediately, Chinese producers must fire enough workers to bring production down by that amount. Of course firing so many workers would also cause demand to contract further, so the country would race downwards and adjustment much worse than even these frightening figures imply.
Of course international trade will not disappear (or, more to the point, the trade account will not quickly balance), so this is not the scenario we need to worry about, but even a small move in that direction would be terrible for growth. Remember that Chinese overproduction today is roughly equal, in global GDP terms, to US overproduction in 1929, and the US had more than six times the share of global GDP then than China has today. This is a much bigger adjustment for China than that of the US in the 1930s.
It will be grim. In the last few weeks there have been lots of new numbers and stories about unemployment. Perhaps it is because I am a university professor but I find myself particularly worried by rising college unemployment. According to a story today in the South China Morning Post:
More than a million Chinese college graduates unable to find work could make coping with unemployment harder now than it was during the Asian crisis, the head of China’s largest vocational training organisation said
…“The employment situation may be worse than the 1990s … This time, college graduates are not finding work, and there are so many of them,” Mr Chen told Reuters. In the late 1990s, China’s government weathered mass unemployment as the Asian financial crisis and bankruptcies of state-owned enterprises slowed the economy to a crawl.
Many college graduates now lacked the skills needed to compete for jobs in a fast-changing economy and were unwilling to take less respected jobs, Mr Chen said. More than six million students will try to enter China’s workforce next year, half a million more than last year. Up to a quarter could have difficulty finding jobs, the Chinese Academy of Social Sciences said on Monday.
In another article today the same newspaper says:
Swarms of migrant workers driven back home by the economic downturn in eastern provinces are putting huge social and employment pressure on the governments in their hometowns. In Yunnan province authorities are not only facing the tough task of creating jobs for 510,000 returned workers, but are also struggling to secure enough food to feed the swelling population in some areas, according to the provincial government’s website.
“The hundreds of thousands of returned rural workers have increased grain consumption by the local population by 500,000 tonnes per day, and we are feeling the strain of preparing enough rice in the bowl,” Liu Guoquan, director of Zhaotong’s Rural Human Resources Development Office, told fellow officials at a provincial meeting to discuss the crisis.
[...] Michael Pettis explains why international trade generally, and U.S.-China trade specifically, will likely be a big [...]
Michael,
most people in Germany are surprised by the heated debate, because in Germany there is a quite lively discussion HOW to react, not IF we need to do something. There is a consensus for a coordinated European response instead of a mix of national proposals.
So the official position is to plan first and spend later. Sounds very German, right?
So the key question is: What is the smartest thing to do? Actually, many experts doubt that creating more (public) debt is an adequate answer to deflation that was caused by too much private and corporate debt. Can we spend our way out of this mess or are we just creating a new one? Because if we mess up, government defaults are the next wave. And this is far worse than corporate defaults.
Furthermore, stimulating private demand is high on the agenda in Germany. What most external observers do not get is the fact that Germany is living a deflatory environment with high unemployment and high taxes for quite a while. Private consumption is rather low, private debt levels as well. The official motto of Germany’s largest electronics chains was “Thrift is sexy”. The federal budget was used for decades to counterbalance the lack of private spending. Tax and labour reforms were used to increase corporate investments, while wage increases have been moderate.
So many argue that cutting taxes might be wiser than more public spending that has done nothing to stimulate private consumption.
I think it is quite frustrating that German officials spend too much time for the internal debate. Everybody is calling for some leadership from the strongest economy in Europe. And our government doesn’t provide much.
But in the end, Steinbrück is right by pointing out that nobody has presented a plan that goes beyond emergency measures. To criticize that without having an answer themselves is what creates a lot of the anger against the German government in the first place. But it is obvious that Germany will act on a joint plan, but only after we got our act together
Gregor/ Germany
the us and uk policies of zirp + qe seem to to be having the result (intended or otherwise) of trashing their currencies against other floating currencies, particularly the euro and yen. obviously, this helps address the trade imbalance. it also helps to head off deflation (with stagflation the possible medium-term outcome). of course, it takes two to tango in any currency pairing, but statements from steinbruck and trichet make it clear the eur/usd carry trade should be good at least for the next several months.
i can imagine that some asian exporters may also accept some appreciation of their currencies against the dollar, if their currencies retain the same exchange rate on a trade weighted basis (i.e. usd devalues sharply against eur). indeed, some of the smaller asian economies that care about protecting the value of their reserves (because they may actually need to use them) like korea or taiwan may even think about rebalancing reserves into the euro, thereby exacerbating the euro’s appreciation.
now the interesting point. although as you mention the usa has a history of championing free trade (though obama’s voting record suggests he is a skeptic), the eu in contrast was very happy to shake its fist at china (and the usa) when it felt that it was getting a rotten deal thanks to its overvalued currency a a year or two back. if the euro returns to usd 1.60, i can imagine that the europeans will start making loud noises about trade competitiveness and the unfair policies of china and others in pegging to the dollar and riding down on the dollar’s devaluation. this is something that the french and germans can agree on, and may help paper over some of the cracks in the eurozone.
so perhaps if there is to be a trade war, it will take the form of european actions against china and others, which will then provide cover for obama to follow suit.
“Chinese producers would suddenly be forced to deal with the fact that they are producing more than Chinese are consuming by an amount equal to 10% of GDP”
What do you think about the idea that goods for export aren’t analogous to goods for domestic consumption? Is it accurate to say part of the problem is that China makes a lot for US consumers that wouldn’t have a market in China? By comparison, I’ve read that a lot of US exports are industrial related and it would take a long time to rebuild the consumer industries.
This is why I’m skeptical that simultaneous stimulus would be very effective and see global trade rebalancing through trade collapse as far more likely.
Do you think the Fed will succeed in coaxing foreign CB’s BACK into agencies and riskier assets? Clearly, the Fed has been able to use the greed of private capital to go into the long end of the curve and even riskier parts of the credit market.
When will foreign CB’s get greedy again, or have they been chastened for now?
Also, don’t the Chinese object to getting risk-free returns on their money when it goes to buy agencies that yield 6%+?
Great piece.
Coulple questions:
Japan has let their currency skyrocket 25% vs. $, 30% vs Euro and 60% vs pound over the past few months…i wonder if their economic performance improves… going forward that could be a template for China?
Also…what would be synonymous to the collapse in the gold standard…maybe just hot money flowing out at a rapid pace?
Prof Pettis:
Is Germany really the same kind of animal as China? Germany didn’t have the same kind of mercantilistic currency regime as China. Wage suppression was indicated above, but the relative appreciation of the euro obviates that argument for all but France and England.
Also, while it is certainly true that Germany took part in the global, did they enjoy it as much as the debtor states, who enjoyed the pleasure of a consumption binge? I’m not sure they did, and I’m not sure it’s fair to demand the Germany pay to propitiate the struggling debtors. If Germany ends up not participating in a global reflation effort, but enjoying the benefits anyway, I would be inclined to call it a service fee for financing debtors through their risky assets.
Certainly, it might be in Germany’s best interest to participate in a global rescue effort, but I don’t think Germany owes anyone anything.
Michael,
I have read with great interest your article in FT published last Monday. Although I am not an economist,I can appreciate your view that unwinding of global imbalances will hit trade surplus countries as hard if not harder than the trade deficit countries. As an extension of this view, would you agree that this is a big negative for currencies of the trade surplus countries, such as yen or swiss franc? Thanks.
1) Policy that aimed at boosting domestic consumption (y’day’s property policy, infrastructure projects, etc) are policies that are aimed at bringing trade surplus down, no?
2) What kind of policy announcement do you think is needed?
3) China is trying hard to support domestic consumption. Could you please share what is keeping you from giving China benefit of doubt? Is it because you think while China is trying to support domestic consumption it is not trying to reduce export?
But export will be reduced anyway and it does not make sense for government to try to reduce it further and faster than the natural rate because it will kill the domestic demand which is bad for the global economy.
Prof. Pettis, I understand that it always takes two to tango and that China is now in a very similar situation with US before the great depression, but I believe there is an important difference between now and then. At that time, the medium for accumulating reserves derived from trade surpluses was gold. Today that medium is dollar paper (treasuries and alike). I believe that if Britain was able to “print” gold, at the time of the Great Depression in order to cover its deficit, the recovery of US would have been more difficult and lengthier.
My questions are:
1)Do you think China’s necessary economic readjustment (and implicitly recovery from the crisis) is going to be more difficult because the main partner in trade imbalance has an “alchemical” monopoly over the monetary reserves medium?
2)If the answer to the question 1 is positive, doesn’t this mean the recovery would inevitably open China’s domestic economy to western banking/lending?
-I’m referring to bits of news like this:
http://news.xinhuanet.com/english/2008-12/16/content_10513985.htm
Mikkel, I have been focusing on the macro environment because I think the adjustment there is bad enough. I haven’t really focused on the micro shifts you point out but they too are likely to be difficult.
MXQ, I don’t think there really is an analog to the collapse in the gold standard. Hot money outflows also occurred in the late 19th Century under the gold standard, as for example during the Barings crisis in 1890, in which Argentina was forced into default.
Matt, after writing the piece I realized I may seem to be equating Germany and China and that was not my point. My main point is that historically in a global contraction trade friction becomes a serious problem, and given what is happening already in Europe I see no reason to assume that this time will be different. As for as whether Germany “enjoyed” the deficit-country consumption binges as much as they did, the purpose of mercantilist policies is to generate employment, not consumption, so to the extent that Germany has had low unemployment it has enjoyed the trade relationship as much as the consuming countries.
AC, to address your first question, these policies are aimed at boosting demand for domestic production. If they are effective they will also bring down the trade surplus as long as production-enhancing policies do not predominate. I can’t answer your second question because it is not about announcements but rather about the supply demand imbalance. As for giving policymakers the benefit of the doubt, it is hard to know what to say. They have been in agreement for years that China needs to do more to boost domestic consumption, but during this whole time overcapacity has been growing, not shrinking. Instead of parsing their policy statements, it is easier just to look at the composition of international trade. I realize that exports are declining and the government does not want to see it decline further, and I further realize that China is in a very tough situation, but my only point is that everyone is in a tough situation and every one wants to boost domestic employment, and I am not sure it is enough to argue that Chinese needs it more, so the rest of the world should accept higher domestic unemployment. Frankly I agree that China has a bigger problem than other countries, and I am hoping – and doing what little I can do to argue in favor – that the world should come to an agreement with China about what they can do to slow the adjustment over a four or five year period rather than allow trade frictions to force China to adjust in one year. It is not clear to me that Chinese policymakers recognize their role in this mess, however, and until they do I don’t think there will be international agreement.
CLN, you may be right because “printing” gold would have increased the money base, and most economists argued that the Fed was too contractionary during that time and so made the US adjustment worse, but even with accommodative monetary policy the contraction in world trade would have forced an adjustment onto the US. I don’t think the US control over the dollar will make things harder for China because US and Chinese policy interest coincide: both want to see an increase in underlying money. For me the role of the US in determining the difficulty of the Chinese adjustment is more about trade frictions.
So the world capitalistic system is broken once again. How to fix it? Find away to let Schmpeter’s “creative distruction,” work, while no one goes hungry and is able to have a roof over their heads. This begets another question: is providing food and a roof just another form of moral hazard? Simply put, if only people could find something constructive to do, when laying idle. But no, most of us become restless, and lawless at such times.
I think one does not have to operate now on the assumption that we are going to be stuck in a Japanese style deflationary period for a decade. I don’t think the pre-requisites for this to happen are in place.
ZIRP was a stable policy for Japan, Singapore and other export driven countries but certainly won’t last long for the US/UK.
When they hit ZIRP, Asians gave up to the interest rate lever and adjusted money creation in relation exclusively to the exchange rate, suppressing the value of their own currency. This was possible because of the abundant trade surplus which allowed them to generate liquidity needed domestically by simply exchanging dollar and euro revenues.
Also notice that the BoJ delegated much of the currency warehousing to private entities by encouraging the yen carry trade. Because of that, the official estimates of Japanese reserves based only on BoJ holding tend to be grossly understated. By delegating reserve warehousing they managed not to bloat further their oversized balance sheet. However, that policy decision now bites back and limits BoJ’s power to counteract the unwind, forcing them to uresorting to swap lines with the Fed.
A similar ZIRP route is not going to be an option for the US and the UK. What will happen [and is happening] is a tremendous pressure on foreign exchange rates as the yen carry trade unwinds. The consequence will be inflation, lots of it.
Inflation is needed and is welcome at this point as it leads to asset depreciation and essentially reduces the real level of debt.
All one can do is to counteract the negative effects of inflation and use it to spur growth.
Just a few are talking about it, but one possibility that strikes me as very interesting is to send rates into deep negative territory [-5% to -10%] as a form of capital taxation [or demurrage]. This could be introduced alongside a major reduction of direct and indirect taxation. The net effect would be to sequester excess cash from circulation while spurring money velocity and growth.
It would also have a major effect on macro capital allocation by shifting the equity-credit balance toward the equity side, making equity fundraising cheaper than debt fundraising for companies. This may seem counter-intuitive perhaps, but high interest rates along with tax laws that make interest payments tax exempt and divvidends double taxed actually suppress equity values. Negative interest rates would have the oppostie effect and make it possible to hold a currency value steady. It would also allow the economy to exist with the substantial credit spreads which have been generated by the credit crisis and now need to remain large to be realistic. The way out is simply to spur equity investments as opposed to credit lines. It would be nice if central banks realised that and started using equity investment as their primary tool toward money creation.
The Detroit Lions felt the same way about the Tennessee Titans after getting blown out on Thanksgiving Day. It was all so unfair!
Here’s a suggestion to the rest of Europe and the Detroit Lions, too: take a look in the mirror if you want to see the reasons why you’re getting your rear ends kicked. Don’t expect either the Titans or the Germans to deliberately handicap themselves.
Thanks for the inspiration! I threw you a link in my post responding to this.
Thanks for the usual thoughtful and insightful commentary.
Two additional thoughts.
One, such analysis is, however accurate, limited in that it’s East/West perspective misses the just as important North/South context. While the East (overproduction: cheap labor) and West (over consumption: debt as substitute for labor income) no doubt explains much, failure to encompass the North/South (where overproduction and over consumption combine in the North, and where neither apply to the South) leaves out a big part of the puzzle.
Two, increasing consumption in the East while increasing production in the West assumes ever greater extraction of natural resources. I suggest that this amounts to looting nature at the expense of future generations. The bounties of earth has its limits, no matter what technological advances may be forthcoming in the future.
So . . . what I present here includes both spatial and temporal factors that need to be taken into consideration.
Dear Michael,
although I understand the possible implications for Germany and China of a collapse in worldwide demand, I question any attempt to prescribe alcohol to alcoholics. Why should a country like Germany that has put priority on financial austerity and already suffers from the bankruptcy of their trading partners risk its long-run solvency by throwing more money at countries that are structurally bankrupt?
The US, UK, Ireland, Iceland, Spain and alike were all happy enjoying the credit financed spending binge driven by rising property values and turbo capitalism. Now – facing the end of that bubble – suddenly even well-known economists such as Krugman start blaming Germany for its competitiveness. The truth is that those countries have deliberately chosen to build their economies ever more upon unproductive business such as banking and housing. Instead of criticizing Germany, Krugman should rather go onto the streets and protest against his corrupt government bailing out bankers and letting mainstreet industry go bust.
Only if the US, UK and other countries alike find a public consensus (and not by a banking elite) on how they address their structural economical and political problems and really commit themselves towards such a long-run restructuring plan, then they would deserve support by large fiscal stimuli from Germany and China.
But my impression is that especially the US is still assuming it could come back to a business-as-usual scenario. Sadly, it looks like the next 10 to 15 years will be characterized by languishing economies and world trade disintegration. Hopefully, the US would not use it’s weaponry over capacities to start war with a quicker recovering Asia.
Gemrany don’t have to thorw money to the overconsuming countryes:it have to throw money into gemrany.
They have to increase the consumption dramaticaly,and that will help everyone.
And from this process the one that will slowly recover will be china.
The deficit country is the one that can quickly recover.
Mika, Bomlat is exactly right. The argument the Europeans are making is not that Germany should throw money to bankrupt countries, but rather that Germany should stop throwing money at them. Running a trade surplus requires exporting capital to the trade deficit countries. The Europeans are saying that Germany should create demand domestically for their own production rather than insist that the bankrupt countries continue to borrow and buy German goods. This is the inconsistency of the German position – you cannot tell people to stop buying while, at the same time, insisting that they continue to purchase most of your overcapacity. At any rate in a world of contracting demand, it takes real chutzpah to insist on more austerity when it is the profligacy of your trade partners that supported your own austerity.
Michael, you wrote: “The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust.”
As I have mentioned before, this is what I call the lump of consumption fallacy. There is no need for the current account surplus countries to adjust at least their current account balance, if not their product mix as well, for the current account deficit countries to save more. The current account deficit countries can do it for themselves by shifting their own production from consumption goods into investment goods (eg from cars to wind turbines), although they could also shift the nature of their imports similarly (eg machine tools from Germany instead of BMWs). And they should – since the world is ageing, it should save more, and the only way that this can be done is for investment to increase somewhere.
I admit that there might have to be a dip in economic output while the adjustment is made, but if so, the policy priority should be to encourage that adjustment. One way of doing this is to substitute either substitute public sector for private sector borrowing or tax for consumer spending, and spend on public infrastructure. That is why I prefer the Barack Obama’s stimulus plans to Gordon Brown’s.
Peer Steinbrueck is right, and I only wish we had such a politician in Britain.
By the way, I forgot to mention the hypocrisy of Gordon Brown in criticising the Germans for their “beggar thy neighbour” policies while acquiescing in, if not engineering, a deep depreciation of the pound against the euro.
Prof. Pettis:
Thank you for responding in the comments. The whole surplus/deficit state relationship is a simple principle that I always have trouble wrapping my head around.
Maybe it’s a good thing the surplus states are having healthy deliberations on policy responses. The United States government pushed through a bunch of reckless legislation and bailouts too quickly and we’re seeing that there should have been more planning involved. Given that the surplus countries have taken the baton from the United States as the engines of global growth over the past 5 years, it would make sense for them to play a major role in influencing the international financial system of the 21st century. Taking care to craft policy at home that works would make a great statement about their leaderships’ competency.
Hello bomlat, hello Michael,
first of all I consider it interesting that none of you are challenging my hypothesis that the named countries are structurally bankrupt. In fact, if this crisis would be addressed as a debt crisis rather than a financial crisis, we could expect different political answers. It’s an illusion that monetary policy can solve today’s problems.
Second, if other other countries benefit if German consumption goes up from a government stimulus, than you yourself admit that Germany is indirectly creating external financial stimulus for those countries.
Third, apart from the automotive industry Germany’s industrial sector is specialized on investment goods (think of infrastructure, factory equipment etc.). That would not benefit from a German consumption stimulus. In fact, and I expect that economists like Krugman know this, a large share of such a stimulus would from a German perspective evaporate as it would only stimulate other countries. (I call that throwing good money after bad investments.) Apart from that, the US has shown us that in today’s environment consumption stimulus is simply likely to add to savings. A better deal for Germany would be a bilateral trade agreement with China as each others industrial sectors fit each others needs and both countries could benefit.
It’s a fallacy to think that increasing consumption can lead out of a debt crisis. This thinking has brought us to this situation. I also question you bomlat saying that deficit countries can adjust quicker then surplus countries. If it were like this, I wonder why Argentina is not the prospering star of South America. Defaulting on external debt via devaluation + inflation of a deindustrialized country is very likely a more difficult situation than accepting massive losses on your investments in a country with a strong production base.
As long as deficit countries try to conceal the true state of their economies (I think for example of the FED’s denial to reveal their balance sheets), the crisis would not see an end. We are already at a stage where the market can’t fix it anymore. It needs political answers. So far the the political answers have been to increase the stake of the game. Debtors and creditors must sit together and stipulate a realistic restructuring and debt relief. If debtors unilaterally decide to default on their external debt, I don’t see no reason to continue any trade with them.
RebelEconomist | 19/12/08:”There is no need for the current account surplus countries to adjust at least their current account balance”
This is the reason why I feel that the result of this will be catastrophic for the surpluss countries (mainly for China, by a lesser degre to Germany, due to the euro).
From a game theroy standpoint if no one will do anything,they will win(the surpluss players).
So,they just want prevent all of the other player from the action.
But after a while one of the other player (example the EU) will break the trade connection,after this ther remainied countries will have bigger pressure from China,so they will break too,and it will be a quick cataclism.
This will suprise the surpluss countries,because they just want to keep the current conditions.They will feel that they was cheated.
It could be a reson for a war, thank for God(or for the devil), we (US+EU) have more nuclear weapon.
Mika
There is two possible outcome of the german stimulus:
1., it will increase the internal consumption,and decrease the export
2.,it will increase the internal consumption,and increase the import.
Both of the possible outcome have the same result:the deficit countries have to increase the production,and they will able to decrease the external debt level without a bankupcy.
Every other possible way mean that the external invesment oportunities will disapear for the germans,and the value of the depts will drop.
This way will mean at the end of the day a drop in the overal economical activity,at least for the germans.
For the other countries,it will mean an oportunity,if they are able to revaluate the currency that they have (this is the only one way to keep the investment oportunity for the internal investors)
http://uk.reuters.com/article/usPoliticsNews/idUKTRE4BK0UR20081221?sp=true
“The United States began legal action at the WTO on Friday to halt Chinese government subsidy programs to boost the sale of Chinese-branded goods around the world.”
I find Michael’s blog very accurate. Take 19th century china with a net trade surplus against the British Empire and yet it was miserable. About 10% of Chinese were opium addicts!
I find it amusing that some folks here feel they should defend Germany (maybe for cultural reasons or something else) in truth all the major consuming markets have to do is exclude those that don’t want to play fair (China, Korea and Germany) and see who recovers faster! It is lot easier for the US to restart production: a stimulus package, time and vola! Go to any temp or employment agency in the US and you’ll find unskilled, semi skilled, and skilled workers ready to work. The infrastructure is there, the market is there and all it will needs is a little upgrade. With the clean energy credit system in place on a global scale the US will know exactly where to spend money.
For net surplus countries especially small ones, that can not function as an Autarcy, like Germany, the situation would be comparable to watching a Shakespearean tragedy as they figure out how to sell large ships to Hans six pack (Joe six pack!) or sell excess beer to an already over consuming population or say the case with Korea convince every Korean to borrow form the state and purchase 10 Kia’s and worse ones that run on petrol.
Mika,
You pinned many fallacies in the Keynesian thinking. Many economists like lousy Krugman oversimplify the current trade imbalance mess to consumption and production. It is not the same if you produce $1 t-shirts or $50,000 BMWs and just adjust consumption to balance peoduction. What is expected really from Germany? To start importing GMOs, or pickup trucks that are undrivable in most urban areas just to balance the trade? Americans are not buying their own lousy products and prefer imprts, why should the rest of the world do the opppsite? It was mentioned already a few times: it takes two to tango. I will add: offer something for the partner as well. This imbalance should be used to discipline the imprudent, simple Austrian School phylosophy.
I am amazed with it. It is a good thing for my research. Thanks