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Friday, May 15, 2009


the fruits of maastricht

lex in the financial times commenting on the data out today indicating GDP in germany fell (-3.8%) QoQ -- a stunning rate of collapse three times what we're seeing in the united states.

This has to be the worst of it. If it is not, then the eurozone’s prospects are grim indeed. The German economy shrank by 4 per cent in the first quarter compared with the last three months of 2008. That is far from the astonishing 11 per cent shrinkage suffered by Slovakia during the same period. But it was still the lousiest performance of any big eurozone country, by far. If the German economy continues to shrink at this rate, it will be a fifth smaller by the end of the year, entirely reversing the decade and a half of growth since unification.

That has worrying implications for government revenues, which will fall as the recession bites. Even the hairshirts in Berlin forecast a budget deficit of more than 4.2 per cent of gross domestic product next year. At €90bn, it will also be Germany’s biggest, in absolute terms, since the second world war. Further tax rises and spending cuts required to return the deficit to within the 3 per cent limit stipulated by stability pact rules will only slow growth further. All eurozone countries, but especially those with proportionately bigger deficits, such as Italy and Spain, face the same challenge. That being the case, the credit quality of European sovereigns can only get worse.

of course the difference is not all down to government deficit spending. but it is undoubtable that the american reaction to the crisis has been much more aggressive than the german, and it is at least in part showing up in economic performance.

more important will be the forward outcome. now faced with tax revenues that will collapse even more precipitously than in the united states, the german government has an extremely hard row to hoe to fulfill its eurozone obligation, encoded in the maastricht treaty, of a budget shortfall no greater than 3% of GDP. i'm frankly not sure they can while being more or less certain that they shouldn't try.

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The German economy declining at a quicker clip than the U.S. economy because they were less aggressive just means they are getting to where the U.S. is going faster. U.S. actions delay the inevitable.

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george, i would say that the future is not written. the outcomes in every country will be dependent on both past actions and things beyond their control, to be sure. but it will also be heavily dependent on the measures they take to mitigate their situation. we are not helpless.

i can easily forsee a situation where germany -- vulnerable due to the nature of its export model anyway -- experiences a vastly worse outcome than the united states. germans would undoubtedly consider this unfair, as they've been a surplus nation and a savings nation, and the prejudice is for that to be considered "good" -- and therefore punishment unmerited.

that goes to the heart of the deep human bias to see the crisis is mythological/moral terms. this misses the reality entirely, imo. there is no easy moral bias to national surplus or deficit accounts.

the US is, i think, in a good position to ride this crisis out with a minimum of damage, much as britain did the great depression. they are the repository of excess demand; they have a relatively low government debt balance as a percentage of GDP; there is considerable natural room for currency devaluation. but the government and people have to have the intelligence and courage to proceed in spite of the moralizing bias of many citizens and politicians.

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>they are the repository of excess demand;

By this I assume you mean (please correct me if I’m wrong) the U.S. can supply where international demand is in excess. I don't know that we any longer have the burgeoning industry that would allow for this - let alone the signs that our policy direction would support a reemergence.

>they have a relatively low government debt balance as a percentage of GDP;

Our debt balance as a percentage of GDP is already quite high and climbing. A declining or slower growing GDP, our unprecedented deficits, and the accelerated approach to the day of reckoning for Social Security and Medicare will make our debt load unsustainable.

>there is considerable natural room for currency devaluation.

I would greatly appreciate the information/data that back up this statement. Also, what do you believe is the maximum level of currency devaluation that would be tolerable, and why?

I think the U.S. economy is positioned for a long decline and possible collapse somewhere along the way – the near-term not ruled out. The specific reasoning for this I will be posting on my own website in the near future. The hope in intelligence and courage of which you speak I believe lies in realizing the errors of the U.S.’s past and current economic approach and allowing the natural (and painful) economic correction to take place. I fear that doing anything else is setting us up for additional, unwarranted pain.

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By this I assume you mean (please correct me if I’m wrong) the U.S. can supply where international demand is in excess.

i actually mean that US is a country where demand, even post-debt-collapse, is significantly higher as a ratio of domestic production supply. in other words, we're an import-model to counter the export-model of germany, japan and china. this is a far better place to be in a depression and trade collapse -- a much easier adjustment. the character of the situation in export-model countries is much, much different than for the US.

Our debt balance as a percentage of GDP is already quite high and climbing.

the float is actually one of the lowest among developed nations at under 50% of GDP -- though few americans would believe that, given the many years of obsessing and indoctrinating over the national debt. many people are sidetracked by the $4tn accounting ruse of social security (or worse its net present value); it's a non-debt, likely to be "paid" out of social insurance cost controls/cuts not only in our country but most every other. the real problem w/r/t social insurance is not the debt but how we will pay for senior care with less spending.

what do you believe is the maximum level of currency devaluation that would be tolerable, and why?

all i mean to say is that we still have a quite large current account deficit, which implies an impetus for currency devaluation to encourage export development and discourage imports. i see this in conjunction with the US excess demand position -- the easier adjustment will be a cheaper currency and corresponding relative decline in imports fuelling domestic capacity building. vastly harder is the opposite, which was what we were tasked with in 1930 -- more expensive currency, relative decline in exports fuelling domestic capacity collapse. this is why countries like germany and japan are being hit very hard. that's also the lesson of past global crises.

to be sure, much must change in the US. but that's true around the globe in places that either took the same side (UK, spain) or the other end (japan, germany, china) of american imbalances. relative to others, i'm actually encouraged by the american position. that is NOT, obviously, to say this will be pleasant.

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I agree we can accommodate Social Security debt by offering its beneficiaries less and devalued money, but that certainly isn’t a net positive for the economy. Additionally, Medicare is the much larger mounting debt problem, and an attempt to ease the blow through Obama’s health reform is likely to backfire with higher costs. Even if it works according to plan over the next decade, the resulting savings growth is negligible relative to the size of the shortfall.

I agree that the import-to-export transition is an easier adjustment all else held constant, but the currency devaluation needed to service our social programs, existing debt , and tremendous budget deficits is likely to ignite a currency crisis and/or bring interest rates to unbearable levels for the already crippled economy (and likely to become more crippled before this transpires). This, coupled with U.S. policy direction and inevitable tax increases (both counter to domestic economic growth) tells me there is no clear path, let alone a path at all, toward improved international competitiveness that would support U.S. export development.

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The problem with the Germans is that they insist on pandering to the mass delusion that 2 plus 2 to equal 4.

George W learned by his fathers mistake that being rational about debt and deficits gets you nowhere.

Deficits don't matter as long as tax collections cover the interest payments.

If you did an apples to apples accounting of German and US GDP you would most likely find the US fall to be greater. but 2+2=16 in this hemisphere.

When US tax receipts fall below interest costs then we have a prisoners dilemma. If Japan/China/Arabs pull out they will have nothing to show for it.

So the US gets to ride the slow train to the bottom. I doubt anybody will let us get on the gravy train back up to Prosperity Town but who is going to say no to someone packing 6,000 nukes.

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