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.

“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.”

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)

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.

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.

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.

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.