Recent Items

“Trade Imbalances Lead to Debt Imbalances” or Why Mercantilist Nations Shouldn’t Beef About Their “Profligate” Customers

Posted on by

Michael Pettis, a respected economist and commentator on China, provides an important contribution on the global imbalances theme. Many observers have pointed fingers at debtor nations like Greece, Portugal, Spain, and the US and argue that they need to start consuming less. While narrowly there is some merit to that argument, Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it it the trade surplus countries that must take the lead in making adjustments.

The problem is that trade surplus countries gain substantial advantage from adopting mercantilist policies (the most important is high levels of employment) and under our international trade system, they bear few costs. This defect was why Keynes proposed his Bancor system, which would penalize both trade surplus and trade deficit countries.

I’m excerpting Pettis at some length, since he constructs his arguments in a step-by-step manner:

Whichever argument you think is the more just – that the imbalances are mainly the fault of the US or the fault of China – since the Chinese accumulation of US Treasury bonds was the automatic consequence of Chinese policies that the US opposed, it seems a little strange that the US should feel any strong obligation to maintain the value of the PBoC’s portfolio…

Likewise with Germany…. for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production – Spain and the other peripheral countries of Europe had to run large current account deficits. If they didn’t, the euro would have undoubtedly surged, and with it Germany’s export performance would have collapsed. Very low interest rates in the euro area (set largely by Germany) ensured that the peripheral countries would, indeed, run large trade deficits.

The funding by German banks of peripheral European borrowing, in other words, was a necessary part of deal, arrived at willingly or unwillingly, leading both to Germany’s export success and to the debt problems of the deficit countries…

In that case it is strange for Germans to insist that the peripheral countries have any kind of moral obligation to prevent erosion in the value of that loan portfolio. It is like saying that they have a moral obligation to accept higher unemployment in order that Germany can reduce its own unemployment. Whether or not these countries default of devalue should be wholly a function of their national interest, and not a function of external obligation.

But aside from whether or not there is a moral obligation for creditor countries to protect the value of portfolios whose accumulation was the consequence of policies that those countries opposed, there is a more concrete reason why it does not make sense to demand that deficit countries act to protect the value of the portfolios accumulated by surplus countries…. It turns out that the maintenance of the value of those obligations is largely the consequence of trade policies in the surplus countries.

To explain why this is the case, let me again, following my practice from last month’s newsletter, simplify matters by calling all surplus countries “Germany” and all deficit countries “Spain”. Germany and Spain jointly have put into place policies that ensure that Germany runs a large current account surplus and Spain a large current account deficit for many years. As I argued three weeks ago, I think that it is far more likely that German policies rather than Spanish policies created the huge distortions, but for our purposes we can ignore the direction of causality.

As long as Germany runs current account surpluses for many years and Spain the corresponding deficits, it is by definition true there must have been net capital flows from Germany to Spain as Germany bought Spanish assets (which includes debt obligations) to balance the current account imbalances. The capital and current accounts for any country, and for the world as a whole, must balance to zero….

There is no adjustment mechanism – specie flow or imperialism – that permits or prevents persistent current account imbalances.

This means that if Germany runs persistent trade surpluses with Spain, there are only three possible outcomes. First, Spain can borrow forever to finance the deficit (of which the ability to sell off national assets is a subset). This may seem like an absurd claim – no country has an unlimited borrowing capacity – but it is not quite absurd. If Germany is very small – say the size of Sri Lanka – or if Germany runs a very small trade surplus, for all practical purposes we can treat the borrowing capacity of Spain as unlimited as long as the growth in debt is more or less in line with Spain’s GDP growth. However if Germany is a large country or runs large surpluses, this clearly is not a possible outcome.

That leaves the other two outcomes. First, once Spanish debt levels become worryingly large Germany and Spain can reverse the policies that led to the large trade imbalances. In that case Germany will begin to run a current account deficit and Spain a current account surplus. In this way German capital flows to Spain can be reversed as Spain pays down those claims with its own current account surplus. Neither side loses.

Second, Spain can take steps to erode the value of those claims in real terms. It can do this by devaluing its currency, by inflating away the value of its external debt, by defaulting on its debt and repaying only a fraction of its original value, by expropriating German assets, or by a combination of these steps…

Without unlimited borrowing capacity these are the only two options, and once the market decides debt levels are too high, a decision must be made. Either Germany must accept a reversal of the current account imbalances or it must accept an erosion in the value of the Spanish assets it owns as a consequence of the current account imbalances….

It is pretty clear that the countries of the world represented in my example by Germany (Germany, China, Japan, etc.) are doing everything possible to resist the first option. They are not taking the necessary steps to reverse their anti-consumptionist policies and plan to continue running current account surpluses for many more years. Even Japan, for example, a country that has abandoned its old growth model and has finally been adjusting domestically for nearly two decades has been unable, or has refused, to take the necessary steps to reverse its current account surplus.

In that case some mechanism or the other must erode the value of the Spanish assets the German banks have accumulated. Either Spain must devalue, or if must inflate away the real value of the debt, or it must default, or it must appropriate German assets – perhaps in the form of a large German gift to Spain…

Given the limits, especially debt limits, it is irrational for anyone to expect that Germany can continue to run large current account surpluses while Spain does nothing to erode the value of Spanish assets held by Germans…

China, for example, implicitly makes the same argument when it demands that the US raise its savings rate while China avoids making the necessary domestic adjustments, including to the currency. But of course this means nothing more than that some other country must replace the US as the current account deficit country of last resort. This obviously cannot solve the underlying problem. It simply pushes off the imbalance onto another country, and ultimately with the same dire consequences.

This is why I find the moaning and gnashing of teeth over the possible erosion of the value of claims accumulated by surplus countries surreal. There is only one possible way to avoid that erosion of value, and that requires that the surplus countries work with the deficit countries to reverse the trade imbalances. If the surplus countries refuse to take the necessary steps, an erosion in the value of those claims is the automatic and necessary consequence. In practice that means that either the claims must be devalued or they will lead to default.

Print Friendly
Twitter24DiggReddit0StumbleUpon0Facebook11LinkedIn2Google+7bufferEmail

111 comments

  1. Neil Wilson

    The other option for a sovereign currency nation is to create as much money as export nations refuse to spend back in your nation.

    That counters the ability of export nations to buy and stock foreign currency to keep their exports competitive and moves the boot to the other foot. A sovereign import nation can then take the goods of the export nation to boost its standard of living – at least until the export nation realises the game has changed.

    In the example in the article the country’s spending limits are only there because the currencies are effectively pegged together. Remove that and there is more policy space.

  2. IF

    “simplify matters by calling all surplus countries “Germany” and all deficit countries “Spain”.”
    Ah, so we are talking non-reality based fairy tale. Fine.

    “There is only one possible way to avoid that erosion of value, and that requires that the surplus countries work with the deficit countries to reverse the trade imbalances.”

    In my fairy tale “China”, “Japan” and “Germany” have an inverted population pyramid. Once enough people there retire the trade imbalance can be reversed by trade deficit countries delivering goods to the “Chinese”, “Japanese” and “German” retirees. This can happen via superior goods shipped or via population migration and services provided (nursing etc.) I know. Surreal.

    1. Cahal

      ‘Ah, so we are talking non-reality based fairy tale. Fine.’

      Are you disabled? Simplifications allow us to tease out information that we can’t in otherwise complex world. As long as we recognise their limitations, they remain useful.

  3. attempter

    It’s simple accounting, isn’t it? How can there exist a trade surplus without a trade deficit? Yet pseudo-moralizers among politicians and the media pretend not to know this.

    It is like saying that they have a moral obligation to accept higher unemployment in order that Germany can reduce its own unemployment.

    A common sentiment among globalists. How often have I seen the anti-globalization movement or a labor cause attacked along these lines: “By trying to preserve your (job/wages), you’re trying to deny someone in (India or wherever) that job.” Evidently capitalism’s invisible hand doesn’t work after all. (Of course the swine who say things like this are never the ones who are being liquidated, at least at that moment.)

    It’s always divide and conquer, and the fraudulent evocation of a zero-sum game, when in fact the only zero-sum fight is humanity against the criminals. Fighting along these lines would be a win-win for all people who actually work, everywhere.

    Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it it the trade surplus countries that must take the lead in making adjustments.

    This blog has often said the opposite, and I agree: It’s the debtor who’s got the real power, since he can default at will. The creditor is really dependent upon the debtor, for that the debt shall be paid at all, and for the continuation of the creditor’s whole business model.

    It seems to me there’s plenty of worthy adjustments debtors can make to improve their position.

    Typo in the second sentence: It says “creditor” where it means “debtor”.

    1. Ransome

      The neoliberal economic freedom worldview is a one way wealth transfer system presented as sustainable. It is a border-less wealth transfer system that is advantaged over national economies that are constrained by borders and citizens. Harm is ring-fenced, theoretically.

      “Investment Freedom – In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities both internally and across the country’s borders without restriction.”

      The shared euro facilitated investment freedom but the harm was not contained. Germany took the medicine and is now in the winner’s circle of a system where there are only winners or losers until the system collapses and the Monopoly game restarts. It is the complete opposite of what Keynes envisioned. It is a sophisticated but medieval system where wealth is accumulated by theft using the pen rather than the sword. The benefit of the Bancor model is that no worldview is imposed and countries are put on notice of extended poor leadership and unbalanced capital flows. (Eliminate cross-border banking.)

  4. Cedric Regula

    Pettis and Seltzer used to tell us how stuff works, so none of this is new to me.

    Except that I have MUTATED!

    Pettis still says this:

    “There is only one possible way to avoid that erosion of value, and that requires that the surplus countries work with the deficit countries to reverse the trade imbalances.”

    I am now the kind of guy that doesn’t worry about Smoot-Hawley or the WTO. I think if you have a Merc coming after your domestic market, you set up bi-lateral import duties.

    Also, ever since I discovered countries all over the world were taxing interest on my international bond funds because they didn’t really want my inflows strengthening their currencies, I have decided I should tax foreign treasury holders too, especially foreign central banks. Maybe even at the same rates they do. I think S. Korea is keeping 16% of your interest payment on it’s sovereign bonds.

    P.S. O/T, but MMT sucks.

  5. Maju

    It’s an excellent analysis indeed: Spain as buyer of German (or also French) goods sports huge chronic unemployment (it was bad since the 70s but has doubled in the last years becoming totally unbearable), while Germany sports low unemployment.

    To this I would add that Germany has managed to keep housing prices very low (decreasing in fact), what has a major impact in real and specially possible salaries, while Spain has allowed (like many other countries but even more), home prices to reach truly astronomical prices (so salaries are very rigid). It is hard to say if this has been incited by German or otherwise foreign investors but it is clear that both phenomena are convergent.

    I cannot think of a single cost that affects salaries rigidity as housing does. So Spain could only fight this situation by means of devaluing the currency (but wait, it’s the same currency as the Germans use!) or by defaulting. So default or kicking Germany out of the euro is unavoidable (unless a new non-capitalist economic system is implemented instead of the one we have).

    Another possibility would be to allow the housing market to collapse (as it should) and that way help flexibilize the salaries. But that seems to be a no-no for the ruling elites, Spain being the only state I know of where foreclosure does not end the mortgage (the remaining debt persists if the home has lost value, making the housing market a tool for debt slavery).

    Not all the blame is in Germany: a lot is in Spain because the politicians apply policies against the people and the people allow politicians to do that once and again. It’s a lack of civic culture and persistence of a culture of cronyism and certain practical illiteracy (believe it or not 15% of Seville citizens were effectively illiterate a few years ago, when a Cuban project was implemented).

    1. Diego Méndez

      A few years ago? A Cuban project? Which country are you talking about?

      Not mine, for sure. And please don’t produce any stupid, fringe stat about functional illiteracy. I remember seeing ads on German TV that “4 million Germans can’t read properly. Please have patience with them”, so yes, you can find functionally illiterate people anywhere, just don’t overdo it.

      I suggest you go visit Cuba or Venezuela and see how things work there before claiming alledged favours and bashing a Spanish region.

      1. alex

        “A few years ago? … Which country are you talking about? Not mine, for sure.”

        Oh come on Diego. Anybody can learn to spell in English, but if you have to learn logical spelling, as in Spanish, rather than random spelling, as in English, it may be another matter. How is _your_ literacy in Spanish?

      2. Maju

        I’m talking of Seville (Andalusia, Spain). I’m not sure if the project is still going on but it was organized by the City Hall. I said a Cuban “project” but it’s a Cuban method or program, also used widely in Latin America with high success. See: Yo sí puedo Sevilla.

        It has nothing to do with logical spelling, which is actually easier that the chaotic spelling system of English, but with a poor educative system (still much better than that of the USA, at least before university) and, I presume, junk TV and such. If you watch Tele5 you are bound to be a functional illiterate that votes for Camps once and again in spite of knowing how corrupt and rotten he is. (Ok I’m mixing Valencia with Seville but I hope you get my point).

        Also no idea which is the functional illiteracy in Germany but I guess that the Cuban method would need to be adapted.

        1. Diego Méndez

          Maju, I think voting for Camps has more to do with the electoral law and the two-party system than with any cultural values.

          Nowadays, no region in Spain has a significant illiteracy rate. It’s a myth (though some people are very interested in saying Andalusia is culturally inferior to other regions, which it is not). Illiteracy was relatively widespread in some Andalusian regions in the 70s, but also in parts of any other Spanish region (including the Basque countryside).

          Here you can read about the 14% of German workforce considered to be functionally illiterate:

          http://www.thelocal.de/society/20110301-33431.html

          I don’t think you can reasonably say the problem is larger in Spain or Seville nowadays than in, say, Germany.

          But what I find most troubling is that you seem to think illiteracy or watching stupid TV programs has something to do with civic values. Not at all.

          Civil values mean generosity, community values, criticism of power, differentiating between what’s lawful and what’s fair, denouncing unfair situations and, above all, respecting your neighbours, respecting their opinions and ideologies and rejecting political violence.

          Where in Spain can you find those values? I’d say in most of Spain. Definitely, the Spanish regions lacking civic values are not southernmost like Cádiz, but rather far from there, where good educational levels are not matched by civism.

  6. Frequent

    “Germany and Spain jointly have put into place policies that ensure that Germany runs a large current account surplus and Spain a large current account deficit for many years”

    “…requires that the surplus countries work with the deficit countries to reverse the trade imbalances”

    Abstracting is nice, but I’m curious as to policies that should be implemented to achieve a trade balance?

    After all I can neither see Germany forcing companies to shut down their export departments nor that raising wage levels would make much of a difference in high-end industries. Staying with the country theme… how do you want to force German carmakers out of Spain, as long as there is demand for their products? Also, high-end-product price sensitivity is not a given, so wage increases will not necessarily translate into reduced exports.

    I’d rather envision some sort of transfer union (likely) within a politically unified EU (unlikely) and all member countries working with a balanced budget (next to impossible…) = spend what you collect through taxation… would save everyone a whole lot of bailouts.

    1. Diego Méndez

      Some re-balancing measures for Germany: reduce your VAT to increase real wages (and increase social-security charges instead), liberalize the internal market (you shouldn’t need a 3-year course to open your own hairdresser’s), increase demand through new infrastructure projects, etc.

      Some re-balancing measures for Spain: increase VAT to reduce real wages, decrease social-security charges, liberalize the house-rental market, make it easier for both people and companies to go bankrupt (in order to achieve debt relief), etc.

      1. JakeS

        “Liberalize your internal market” is almost always stupid, if not nakedly ideological, economic advice in this day and age. There is almost no sovereign regulation of the internal markets that have not been under sustained attack for the past three decades. If anything, a great deal of re-regulation is needed.

        For Germany the productive first steps are much simpler: Repeal the Hartz reforms.

        - Jake

        1. Diego Méndez

          People should be able to choose between an educated hairdresser and a talented, non-educated hairdresser. Similarly, people must be able to choose the time they want to buy at.

          These are only two examples of arbitrary constraints on consumption.

          On the other hand, repealing Hartz laws now would also be a good idea.

          1. JakeS

            “People should be able to choose between an educated hairdresser and a talented, non-educated hairdresser.”

            Well, no, for the same reason people should not be able to choose between a qualified mechanic and a talented tinkerer to fix their cars.

            Hairdressers work with a number of chemicals that are really not very nice. These chemicals must be handled with some care for the sake of both workplace and customer health and disposed of properly to avoid contamination of our wastewater treatment that is outside its design parameters. It is completely appropriate that this business is regulated.

            “Similarly, people must be able to choose the time they want to buy at.”

            Sure, but employees must be able to choose not to work outside ordinary office hours. And even if they do choose to work outside ordinary office hours, they must be adequately remunerated (which is to say *at least* double what they’re paid during ordinary office hours).

            In a civilised country consumer convenience does not trump decent working conditions.

            - Jake

  7. a kranky kraut

    So back in the 1990′s Germany was the “Sick Man of Europe” and there was no shortage of arrogant “advice” coming from the Anglo-American realm. Lower your labour costs, they said. Increase flexibility in the labour market, they said. Slash your social security net, they said.

    Well, we did. We adjusted our social security systems to meet the demographic realities. Our unions agreed to very modest wage increases. We increased labour market flexibility and reduced nominal unemployment by reforming lay-off protection laws and by creating a low-wage sector that didn’t really exist before. We accepted an every increasing tax burden to put state finances on solid foundation.

    We did everything we were told to do and we gradually returned to being internationally competitive again and having a somewhat reasonable state budget. Believe me, it wasn’t fun.

    Now, a few years later, we’re blamed for fucking everything that went wrong in Europe. We went from the Sick Man that draged down Europe to some sort of economic predator that is “plucking” it’s neighbours. At this point, I am simply not interested anymore in what sort of “analyses” are gushing forth from the cesspool and Anglo-American economists or those who fashion themselves to be such.

    Make up your frigging mind.

    1. Yearning to Learn

      Kranky:
      perhaps you are reading this article differently than I am.

      the issue is not that the German people are to blame. nor the Spanish people. the problem is that we have developed a global system that leads to prolonged distortions and imbalances, and those imbalances cannot continue forever. thus, an adjustment of some form must be made at some point.

      at one time you were “too sick”. Thus, adjustments needed to be made. now Spain is “too sick”. it is not desirable from a world point of view for either Germany or Spain to be “too sick”. thus, now that Spain is “too sick” we need to make adjustments again. it’s got nothing to do with morals, it’s a necessity of life. Note: I’m not telling you what adjustment must be made. That can be decided between your and the Spanish peoples. (and the French and the Italian and the Greek and the Irish etc etc etc)

      I’ll use this as an example:
      Pretend that Germany is drowning and Spain is in a boat. Germany needs to adjust. Let us pretend that Germany does this by grabbing Spain and pulling hard… this pulls Germany into the boat but pushes Spain out. Is this an improvement? Although I may be impressed by Germany’s determination and skill, it would seem that having Germany in the boat and Spain drowning might not be the best option. Is Germany “to blame” for Spain now being in the water? who cares! We need to get Spain out of the water!

      Instead, what might be more optimal (depending on one’s perspective) is for Spain to help Germany up into the boat gently… and if the boat starts to teeter and Spain starts to fall out then Germany will work with Spain to try to rebalance so both can perch precariously on the teetering boat.

      you see? It’s not that Germany or Spain are “bad”. It’s that they both have a problem balancing. Today, some Germans “blame” Spain for being morally bad, and laud Germany for being morally superior. However, there can be no morally superior position without a morally inferior position. Thus, Germany is only where it is because of Spain.

      but the imbalance cannot persist. thus, a change must be made. Spain and Germany must decide together how to change it. But the German idea of making the Spanish pay morally simply won’t work long term. (it will short term). Severe austerity for Spain will eventually pressure Germany through multiple mechanisms that have been elucidated many times.

      In sum: the Germans cannot continue the course as they have the last decade or so AND also keep their employment high AND also keep the value of the debtor nations debts… They must choose. it’s not a moral thing… it’s just a choice that must be made.

      I, as an American, am in the same proverbial boat. USA and China have almost identical problems, especially since the Yuan is basically pegged to the USD… making us have a pseudo-common currency.

      we are out of balance. Is China morally superior and America morally inferior? Perhaps, but it doesn’t matter. The Chinese-US experiment cannot last forever. thus, eventually we will have to rebalance. China pegging their currency to ours makes rebalancing nearly impossible. thus, they are in the boat in part because they dragged us into the sea. are we blameless? hardly, because my govt leaders loves international near-slave labor to crush local American labor in order to increase corporate profits. ugh.

      1. alex

        “the issue is not that the German people are to blame. nor the Spanish people. the problem is that we have developed a global system that leads to prolonged distortions and imbalances, and those imbalances cannot continue forever”

        Well put. The whole “blame” and moral superiority/inferiority thing is used as a distraction to avoid the real issues and fixes needed. We’re talking about economic imbalances here, not genocide. “Blame” can take a hike.

        1. Siggy

          If the system is to blame, then: does it not follow that the people are to blame in that it is the people who have created the system? Or, is the system a mushroom spawn from shit?

      2. Jason Rines

        Well put Yearning to Learn. Here is the real problem. Once wealth has been centralized, it doesn’t return by mere “agreement”. That would be a wonderful world wouldn’t it?

        The last two cycles of “imbalance” led to world wars. So will this one. I am down to working on loss mitigation and design preparation for an evolved system after the big exposions phase.

    2. Jim Haygood

      Ditto!

      Pettis: ‘I think that it is far more likely that German policies rather than Spanish policies created the huge distortions, but for our purposes we can ignore the direction of causality.

      Yves Smith: ‘Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it is the trade surplus countries that must take the lead in making adjustments.’

      Both of these are US-centric arguments from a country which since 1946 has enjoyed the exorbitant privilege of seignorage on the world’s major reserve currency. In 1971, to continue its unsustainable consumption spree, the US stopped redeeming dollars in gold.

      Forty years on, the deviant ideology of MMT advocates printing fiat currency in unlimited quantities so that we can consume beyond our wildest dreams, while bombing the living sh*t out of various Third World nations to which we’ve taken a whimsical dislike.

      It’s insulting for Federal Reserve PhD know-nothings such as Bernanke to accuse surplus nations of ‘too much saving.’ The US is a no-saving nation. Clearly this phenomenon is grossly abnormal — even squirrels have enough sense to set aside nuts for the winter.

      Germans, Chinese and Japanese should take careful note of Pettis’s entirely sincere statement of intent, substituting ‘the US and UK’ where he writes ‘Spain’:

      ‘Spain can take steps to erode the value of those claims in real terms. It can do this by devaluing its currency, by inflating away the value of its external debt, by defaulting on its debt and repaying only a fraction of its original value, by expropriating German assets, or by a combination of these steps …’

      This is precisely what the decadent Anglo-Saxon empires plan to do in coming years. For surplus nations, the challenge is to formulate a strategy to avoid being victimized by their deficit counterparts’ openly stated bad intent.

      One obvious adjustment mechanism for surplus nations is direct investment in production facilities in deficit nations. But Pettis illuminates the downside — when you’re dealing with the perfidious Anglo-Saxon mentality, there’s an ever-present risk of blocked dividends, regulatory expropriation, and the like.

      Besides cozying up to Russia and China, the single most important action Germany must take to defend its interests is to expel the US occupation troops which have stayed on for an absurd 66 years, and now use Ramstein Air Base as a platform for destabilizing the Middle East and Asia.

      Only by getting its neck out from under the American boot can Germany have the freedom of action to deal with the predictable chicanery (as outlined by Pettis) and extortions of the dying U.S. empire. This is the sole aspect of the problem which I blame squarely on Germany: its compromised leadership hasn’t the courage to expel the exploitative alien occupiers.

      1. Yearning to Learn

        For surplus nations, the challenge is to formulate a strategy to avoid being victimized by their deficit counterparts’ openly stated bad intent.

        seems rather simple, though, doesn’t it? especially since I agree with what you say: THE INTENT IS OPENLY STATED. In other words, Germany, China, etc ALREADY KNOW THE END GAME. And yet they play.

        all the surplus nations need to do is to stop parking their reserves in dollars. If China were to start buying Gold or Silver or Oil with all their surplus then the dollar would tank, and the Greedy Evil Americans couldn’t use their worthless paper to buy anything. Fait accompli!

        But you see, that’s not what happens, now is it? The Greedy Americans are FACILITATED by China who recycles the surplus back into Treasurys and other American Debt instruments, allowing the Americans to go further and further in debt. Not only that, they are ENCOURAGED by china who has pegged the yuan unnaturally low to the dollar to ENCOURAGE American profligacy and DISCOURAGE Chinese consumption.

        Why are the Chinese doing this? is it because they fear the Military Might of the Americans? hardly. It’s because they want full employment, and are willing to sacrifice to get it in order to keep their own social order.

        Likewise with the German GOVERNMENT (Not talking people here). the German government has facilitated a mercantilist type of strategy using the Euro to keep peripheral European nation’s purchasing ability stronger than it “should” be. Likewise, the ECB and German Banks have lent foolishly to allow this over-spending by the profligate peripheral nations.

        so you see… it is not as simple as you make it. the only reason the debtor nations got into so much debt is because the surplus nations ALLOWED it. They could have stopped extending credit at ANY time, including NOW. But they refuse to do so. Why? because it is in the surplus nation’s interest to allow the debtor nation to borrow. Sorry, your little moral rant is crumbling beneath you.

        Is my country guilty of imperialism? Most definitely, it makes me want to barf. But don’t try to use American Imperialism as an excuse to why ECONOMIC imbalances have gotten so large in the EU. Much of the reason we are where we are is because the major western governments decided on the Dollar Reserve System, and they actively support that decision to this day. When Americans ran into trouble other western nations didn’t abandon the Dollar as Reserve Currency as they should have, they made concessions. Thus, they are complicit.
        much of the reason the EU is where it is today is because they decided on the Euro, which poses some problems. And as long as countries remain in the Euro, and as long as Eurozone nations lend to other nations, then they too are complicit regardless if they are a debtor or a surplus nation.

        It takes two to tango.

        but again: your anger DOES NOT MATTER to the problem at hand. Kick out the Americans from Germany, I am personally more than happey to retreat from all our wars and foreign bases. but that will hardly help your problem with Spain.

        1. Maju

          You cannot quit the dollar, the same that a junkey cannot quit his drug, much less when the dealer comes with a couple of thugs demanding this and that while offering the old good stuff at the same time.

          The US dollar is backed by the most powerful banking system on Earth ever: the conflation of Anglosaxon (both English and Yankee) and (widespread and ethnically organized) Ashkenazi banksterism. PLUS nukes, lots of nukes… and marines and aircraft carriers and de facto extra-territorial military bases and NATO and the CIA… in fact most of the benefits the US Empire gets, it reinvests in the military branch, the thugs that will make sure that the bosses in Washington and Wall Street get what they want, whatever it is.

          You don’t quit the dollar the same that you don’t quit NATO. You could in theory but it’s calling for BIG problems. China, Russia, Germany… have called for a truly neutral international reserve but Washington has sabotaged these plans (of course). It’s probable that this key advantage won’t be enough to save the US Empire for much longer anyhow but it is an advantage that Washington will not yield unless it goes suicidal or is effectively forced to concede by means I cannot fathom yet.

      2. Maju

        Good analysis, I think. What does China do? Keep the yuan more or less pegged to the dollar, so when the dollar goes down, the yuan follows.

        What does Germany/EU do? Keep the euro strong suicidally. So far Germany has avoided losing industrial productivity for lack of competitiveness but most of EU has. The Deutsche Mark model is unmanageable: keep your currency at parity with the USD or lower, never higher as the euro is.

    3. F. Beard

      The Germans are not to blame; the bankers are.

      The banks should be put out of the counterfeiting business by requiring matching maturities and every citizen of the Euro zone including German savers should be mailed monthly bailout checks till all debt to the banks was paid off.

      It is typical that the banks pit people against each other but people are wising up to their filthy business.

    4. Maju

      I for one do not blame Germany only (even if there has been such a racist and imperialist discourse pouring from it that it’s impossible not to feel offended and backslash). I have just said that I agree with Merkel that a de facto default is better…

      I just think that Greece should not have been forced to sell any island or basic public services before reaching to that point: just default and let bankers worry – they are private actors and it’s their private problem, do not make their problems public.

      Similarly I also think that Ireland should not have been pushed into nationalizing the “Irish” German&British-owned banks with their debts. Bankruptcy of the banks should have been declared before intervention.

      But I blame the Greek and Irish authorities for that and for not taking a more radical stand and at least threatening with unilateral bankruptcy if their peoples and public budgets were not respected.

      I think that Merkel’s appeals for de facto bankruptcy are weak and very very late. And I also think that with all the racist junk that the German media and politicians have happily spouted in the last year or so (and even more happily repeated by English language media) you can’t pretend to lead EU or even be a respectable member of it. Alliances are built on mutual respect not on imperialist jerkiness.

      After all this failed Eurozone model was forged essentially under German direction, following the apparently successful Deutsche Mark model. Yet the first one to break the rules were Germany and France and they managed to get away without any penalty. But when it comes to bullying little Ireland or little Greece, then all penalties are too little.

      What the heck!? Is this an alliance of equals or a colonial empire? Get your facts straight.

    5. F. Beard

      So back in the 1990′s Germany was the “Sick Man of Europe” and there was no shortage of arrogant “advice” coming from the Anglo-American realm. a kranky kraut

      The bankers have no end of good economic advice except when it comes to their usury and counterfeiting. That is unquestionable.

    6. JakeS

      “So back in the 1990′s Germany was the “Sick Man of Europe””

      Yes, it was.

      That was due to Kohl’s opportunistic idiocy when he decreed D-Mark:Ostmark parity, a policy that has been almost as destructive for Germany as the General Stupidity Pact and Merkel’s latest idiocy have been for the Eurozone.

      “and there was no shortage of arrogant “advice” coming from the Anglo-American realm. Lower your labour costs, they said. Increase flexibility in the labour market, they said. Slash your social security net, they said.”

      That was always stupid advice liberally tainted with the same diseased ideology that has thirdworldised Britain and the US. The proper response would have been aggressive industrial policy for East Germany, and much, much higher inflation to reduce the disparity in price levels and living costs between East and West.

      “We adjusted our social security systems to meet the demographic realities.”

      No, you destroyed social security systems to meet a phony threat cooked up by the people who want to thirdworldize Europe.

      “Our unions agreed to very modest wage increases.”

      Which was stupid and counterproductive.

      “We increased labour market flexibility and reduced nominal unemployment by reforming lay-off protection laws and by creating a low-wage sector that didn’t really exist before.”

      Which was an arbitrary cruelty that could easily have been avoided by the simple expedient of printing money to employ all unemployed.

      “We accepted an every increasing tax burden to put state finances on solid foundation.”

      No, you drained private purchasing power. Balanced sovereign budgets are not a “solid foundation” for a growing economy, since a growing economy requires sovereign deficits to input new money into the economy (sovereign deficits is the only sustainable way to inject new money into the economy).

      “We did everything we were told to do”

      You fell for the bullshit hook, line and sinker, and now want to export this thirdworldization to the rest of Europe.

      “and we gradually returned to being internationally competitive again”

      Export surpluses is not “internationally competitive.” *Balanced* foreign trade is “internationally competitive.”

      And there is nothing wrong, by the way, with securing balanced foreign trade by permitting your currency to depreciate. Let bondholders eat the pain of the adjustment.

      “Now, a few years later, we’re blamed for fucking everything that went wrong in Europe.”

      Because you did. You followed the idiotic, neoliberal (but I repeat myself) Anglo-American ideology. And see where that got us all.

      “Make up your frigging mind.”

      Oh, I have been quite consistent: Inflation targeting is stupid. 2 % yearly inflation target is criminal. And a fixed exchange rate regime with a country that subscribes to this criminally stupid hard money ideology is inherently unsustainable.

      - Jake

  8. reason

    I also think there is a relationship between trade deficits and housing booms (basically monetary authorities are forced to run loose monetary to stave off deflation and unemployment and that translates in the right circumstances to housing booms).

  9. pj

    “Likewise with Germany…. for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production…”

    This is what’s happening right now in the U.S., no?
    Suppressing consumption: the unemployed and underpaid can’t consume much.
    Subsidizing production: it is much easier for our industries and businesses and bankers to make money when the government hands it to them or lets them keep all their “profits”.

    It’s nice to see there is a plan, after all.

    I think the wicked witch of the west said it best: What a world.

  10. RebelEconomist

    This is nonsense. In an ageing world, Germany and China have been doing the right thing by saving more, and chose whether to do so by investing at home or by accumulating net foreign assets according to the prospective returns and risks on offer. The bonds that Germany and China bought were sold freely to allcomers by Spain and the US for their own reasons. Of course Spain and the US have a moral obligation to make their best endeavours to service this debt, whoever holds it. It would surely be particularly immoral for the US, with a GDP per capita several times that of China, and an aversion to taxes on gasoline and estates under $5,000,000, to short-change China. Morals exist to help us live together, and it is unwise to try to pick and choose between them according to which is convenient at the time. Sometimes I think that, in an effort to disown a tiresome burden, some commentators will argue that black is white.

    1. Diego Méndez

      There is no moral obligation to repay a debt beyond what the law requires. If you create a company and it gets a loan, and your investment goes bad, the company goes bankrupt and that is the end of your moral obligation.

      The same happens to any loan, including bonds. The US and Spain offered bonds, but they did not choose the yield; it was the Germans and the Chinese who promoted excess savings and malinvestment as they flooded the market with goods/money and reduced inflation and interest rates beyond their borders.

      If I can have negative real interest rates because of Germany’s and China’s policies, why would I not benefit from them? Of course any investment is risky! Of course any investment can go bust! That’s why bankruptcy exists. It’s not anyone’s problem if Germans are wasting their savings because they find no better place for them.

      The eurozone’s problems cannot be analyzed as a moral problem, but rather as in how to avert a global financial meltdown.

    2. Yearning to Learn

      Rebel:

      In my opinion, you are making a different argument than Yves, but I could be wrong.

      Many of us are saying that it doesn’t matter what the moral argument is, because it isn’t helpful in this case.

      If you sign a contract, should you be morally responsible to do your best to uphold that contract? Of course. I’ll agree with you. But it doesn’t matter.

      here’s why:
      At this point, Spain owes a crapload to Germany. Spain is UNABLE TO PAY. They can’t do it. You see? So we can get on the pulpit all day and damn them straight to hell. Feel better?

      Ok, now what are you going to do about it, now that we’ve damned them to hell?

      You have a few options
      1) force them into an austerity so that they can pay you back. this is the morally just thing to do evidently. Ok great. Thus they will have an immediate depression. Their depression will obviously make it impossible for them to buy your goods. Thus, you will lose a consumer to export to. Also, with their immediate depression it is clearly possible that they will default on all that debt because they can’t pay it while in a depression. Thus, the way for you to get your money back is to go to a morally just war for it. Just like France did to Germany prior to WW2. Crush those morally bad Germans and take everything they “owe” you in a moral way… war??? who could have foreseen that mercilessly crushing a country in a moral way for their own moral good would have led to that.
      Thus: prepare your warships to go get what Spain owes you.

      2) restructure the debt. This is a terrible idea evidently, because first of all your morally just German Banks have played a lot of accounting games and cant afford to restructure the debt. Thus, if you try it the German People will get to bail out their morally superior banks. Also a terrible idea because we don’t want Spain to get a “free handout”.

      3) decrease the purchasing power of the Spanish people, and increase the purchasing power of the German people. this is what many people advocate, as it will allow rebalancing over time. in the end it has to happen at some point anyway, because as we all keep trying to tell you; WE ALL CANNOT BE SURPLUS NATIONS AT THE SAME TIME. Duh.
      there are many mechanisms to do this.
      yes: the german people are aging. so are the American people, the british people, the spanish people, the chinese people. almost everybody is except for the African/Arab world.

      Thus: perhaps the answer is to stop crushing Africa and allow them to be the “last consumer” nations for a while.

      hopefully you see what I’m getting at… in the end the moral arguments, although perhaps interesting, aren’t really very useful.

      we (US and China) and you (Germany and rest of EU) must make some hard decisions.

      1. Yearning to Learn

        “decrease the purchasing power of the Spanish people, and increase the purchasing power of the German people”

        on a side note, to expand on this point:
        one way to do this would be to adjust the currencies of the Spanish and German people…

        WHOOPS!!!! can’t do that because of the Euro. Who agreed to the Euro again? oh yes, it was Germany wasn’t it. So in other words, one of the reasons this distortion was able to get so bad was because of the Euro which prevented German vs Spanish currency fluctuations that might have helped with this trade imbalance. The same problem we see with the USD-Yuan peg.

        thus: looks like Spain was allowed to get so morally rotten in part due to the holy Germans and their Euro project which led to unnaturally strong Spanish currency (Euro > peseta) and low interest rates (due to German Banks and ECB which is located where again?), which BOTH the Spanish and Germans agreed to. An unforeseen complication evidently, but one germane to the problem today.

        thus: another easy moral answer is to simply have Spain and Greece and Ireland and Portugal leave the Euro. Their currencies will crash relative to the Euro, so their immoral profligate spending population will have to rein it in which will reverse their trade deficit ways.

        Funny, the Germans don’t seem to be proposing that…

        1. Yearning to Learn

          last last point:
          notice the tenor of my last post. see how it’s more emotional? more vitriolic? more hyperbolic?

          you see, it’s because instead of talking about the problem RATIONALLY and trying to look for SOLUTIONS, I brought up a bunch of moral arguments so that I can feel righteous. this brought out a lot of emotional arguments…

          and makes discussion about how to get out of this much harder.

          so now perhaps you see why many of use refuse to look at this as a “moral” argument. Because that just gets us all emotionally hot and bothered, and doesn’t lead to any better answer… at least not in this case.

          I feel for the average German citizen who has worked hard and sacrificed much so that his/her leaders could embark ont his wondrous Euro experiment that I hope survives. I feel for the average German who has been duped by his/her shady banks who have lent foolishly and unwisely to people who unfortunately will not be able to pay it back. I weep for the sacrifices the Average German must make going forward… but sacrifices must be made.

          I feel for the average Spaniard, who saw real estate skyrocket due to external forces. I feel for the average Spaniard who overborrowed, partly due to poor decision making skills perhaps, and partly due to the skyrocketing cost of living caused in part by the debt enabled property bubble. I feel for the average Spaniard who had a difficult time gaining employment these last few years due in part to international trade agreements done by his/her government. and I feel for them now that they must sacrifice much and go through much misery.

          I feel for the average German and the average Spaniard.
          and together they must come to an agreement on what to do.
          there is no simple answer.
          there is no pain free way
          there will be likely no winner or loser.
          hopefully they will help each other into the boat.

          you see?

          Regards,

      2. RebelEconomist

        I was reacting to Michael Pettis’s assertion that “it is strange for Germans to insist that the peripheral countries have any kind of moral obligation to prevent erosion in the value of that loan portfolio”. I think there is a moral obligation, but I agree that that is not the same as ability to pay. But the Greeks etc are not just asking not to pay; they are asking for more. I am not suggesting that the Germans have a moral right to send gunboats to Greece etc, but I am saying that they would be unwise to throw good money after bad.

      3. RebelEconomist

        By the way, all countries may not be able to run a current account surplus as you say, but that should not stop them trying. What ought to happen is that this attempt should lower long-term interest rates and promote investment, which is, short of trade with Mars, the only way that the world can generate the overall increase in savings that is required to deal with its ageing population. This failed in the US (ie the resource inflow was consumed on McMansions etc) because its dysfunctional political system prevents it from preparing properly for even known future expenses (eg medicaid). The US can’t blame China for that.

        I have been saying this for years ( http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html ) and had this discussion with Michael Pettis and Martin Wolf before, and neither of them accept it, for different reasons I suspect.

        1. F. Beard

          By the way, all countries may not be able to run a current account surplus as you say, but that should not stop them trying. RE

          Yep, we should all attempt the impossible for our banker overlords including finding interest for loans that does not even exist in aggregate.

          Yep and drag in the old folks whose pensions you would also like to sacrifice? Am I wrong?

          1. F. Beard

            The whole point of the global need to save is to provide the resources for pensioners. Reactionary Economist

            You confuse “money” with “capital”. What is needed is a healthy economy not global money hoarding.

        2. Anonymous Jones

          Wow, Pettis and Wolf don’t agree with you?!?!?!

          How could that be?

          Did you ever, for a second, consider the possibility that you’re, well, let’s say, not persuasive at all?

          I mean seriously, many people with whom I often disagree at least make me think, and reconsider, many of the things I believe.

          You? Not so much.

          I mean seriously, you have this fantasy that the things you consider “moral” are part of some universal standard of morality. I don’t believe the things you think are “moral” are “moral.” And you’re going to say that’s just because I don’t understand that there is a true universal morality (or that I know it and reject it just because I want to). Sorry, try again. It’s foolish and naive, and this is why people reject your stillborn ideas. Not for their “different reasons” or whatever you’re attributing it to.

          As F. Beard said, your idea that in your “World of Should” that everyone (in every country, no matter what their demographics or their culture or their lack of desire to engage in a race to the bottom) “should” try to have a current account surplus, is so myopic, so truly indicative of your complete and total lack of ability to understand the complexity and wonder of the world, that I’m not at all surprised that you are able to maintain this delusional belief in the truth and persuasiveness of your arguments.

          1. RebelEconomist

            In the case of Michael Pettis, he seems to overlook investment as a form of saving. Martin Wolf sees the issue as a Keynesian, with Germany and China contributing to a demand shortfall. Where he thinks that the world is going to get the resources from for everyone to produce and consume more, I don’t know. I would be glad to discuss these issues with either of them, but obviously their time is more limited than mine.

            Given the need for the world to save more, all countries trying to maximise their current account surplus is a bit like all firms to maximise their profit – they don’t all achieve their aim, but we all benefit from their efforts.

          2. Diego Méndez

            @RebelEconomist, no matter what you think abstractly about the role of savings and investment, Merkel’s policies are about to create the largest global financial crisis ever.

            This is not a question of how the world should look like in 5 or 10 years. This is about avoiding a depression in Europe that will make the Great Depression seem small.

            Unfortunately, it seems too late now.

    3. alex

      “Germany and China have been doing the right thing by saving more, and chose whether to do so by investing at home or by accumulating net foreign assets according to the prospective returns and risks on offer.”

      In which case they’ve seriously underestimated the risks of accumulating net foreign assets to the extent that they have. At the very least they should fire their “investment advisers” and read a history book or two.

      Accumulation of net foreign assets on that level has never worked as an investment, and it defies my credibility to believe these countries pursued it as an “investment strategy”. They’re just not that stupid!

      Do you really think the Chinese government doesn’t understand that the USD must eventually fall relative to the yuan? The US government will pay its debts, but in a currency that’s worth less than the yuan (and no, I’m not talking about a hyperinflation scenario or anything).

      “Morals exist to help us live together, and it is unwise to try to pick and choose between them according to which is convenient at the time.”

      When it comes to nation-states, let’s first talk about the immorality of unnecessary wars, or letting their citizens go hungry, homeless, illiterate or without medical care. Or of jailing and oppressing their citizens without regards to basic human rights. Even if you consider not paying foreign creditors to be immoral, it’s as far down as you can get on the list of immoral things that nation-states can do.

      1. RebelEconomist

        I always say that if the Fed holds US inflation at its informal target of about 2%, China cannot complain if it loses by dollar depreciation. But there is an increasing number of “respectable” economists like Blanchard and Krugman calling for the US to deliberately engineer higher inflation. In that case, in my opinion, China would have valid grounds for complaint.

        1. alex

          Doesn’t there come a point where domestic necessity trumps US “moral” obligations to a foreign country? Every country’s first obligation is to its own citizens. This is not to say I necessarily like the higher inflation approach (I don’t), but if one believes that it’s useful for the US economy then its not hypocritical to say the Chinese government’s concerns are of lesser importance to the US.

          It’s not as though China keeps its USD forex hoard as a rainy day fund for hungry citizens or something. While the USD may still be the world’s reserve currency, there’s no justification for reserves of 50%/GDP other than supporting a trade surplus. Nor is there anything to stop China from diversifying its forex holdings to other currencies (their current experiments with that are a joke, not a policy) or of buying foreign assets. The Chinese government isn’t stupid, and they know that their USD forex reserves are a way to support their trade surplus rather than any form of “savings”.

          Moreover, you’re overlooking the fact that China can loose on its Treasuries (in terms of yuan) even without excessive domestic US inflation. And that currency rebalancing is inevitable – it’s just a question of whether its done now in a controlled manner (ala the Plaza Accord) or allowed to crash some time in the future.

          1. RebelEconomist

            “Doesn’t there come a point where domestic necessity trumps US “moral” obligations to a foreign country?” Of course, but I think that the present US situation – eg with taxation near a historic low as a proportion of GDP – is far, far from necessity.

            I agree with your last point; I was trying clumsily to say that China cannot complain about routine currency risk, but would have a stronger case if the Fed actively promoted higher inflation.

        2. Andrew

          Them’s the breaks. If you loan someone money (buy a tsy security), you don’t know if you’re going to get your money back and if you do, you certainly don’t know what you’re going to be able to buy with that money. Maintaining the value of the currency in which the loan is made is not the problem of the borrower.

          This is not always bad thing for the lender. Perhaps there is deflation. In that case your money will buy more than you probably expected. Does the borrower get a refund?

          The bottom line is that people who depend on long term lending for their income aren’t people who need money very badly, or they wouldn’t have lent the money in the first place. One shouldn’t feel too sorry for them if money they didn’t need in the first place happens to vanish. It’s like taxation without government intervention :)

    4. Greg Marquez

      The problem with moral arguments is that they turn into moral justifications and I’m pretty sure that we don’t want the Chinese or the Germans to feel morally justified.

  11. yetagain

    In that case it is strange for Germans to insist that the peripheral countries have any kind of moral obligation to prevent erosion in the value of that loan portfolio. It is like saying that they have a moral obligation to accept higher unemployment in order that Germany can reduce its own unemployment. Whether or not these countries default of devalue should be wholly a function of their national interest, and not a function of external obligation.

    But aside from whether or not there is a moral obligation for creditor countries to protect the value of portfolios whose accumulation was the consequence of policies that those countries opposed, there is a more concrete reason why it does not make sense to demand that deficit countries act to protect the value of the portfolios accumulated by surplus countries…. It turns out that the maintenance of the value of those obligations is largely the consequence of trade policies in the surplus countries.

    Red herrings and straw men.

    Of course it is the moral obligation: of nations, and people, to pay their debts, To twist this into “supporting portfolios” is just sophistry and of the most dishonest sort. A wholly straw man arguments that merely attempts to refined terms such that moral obligations are obscured.

    1) Buying German goods or services do not mean that these nations have to “Accept levels of employment”. That is just nonsense. It does not logically follow at all. Has he ever heard of comparative advantage. If this “thesis” were true than the whole history of commerce would never had happened. What nonsense. It is not the fault of the the Germans that they are more efficient and productive than their competitors.

    #) The real howler, however, is the notion he puts forward that the other nations of the EU “were oppose” to this “policy”. Nothing of the sort was or is true. They were out rattling their tin cups from the start. That is why they were in the EU in the first place. Germany ws seen as the Sugar daddy. Now they fret that the Mark as seen through the con game.

    This is all just the usual agitprop targeting the German because said Germans want to look after their own interests and not be patsies to the Tranzi Euro ponzi scheme.

    You should really stop presenting it as anything else but that.

    1. Ya Vol

      “Hence today I believe that I am acting in accordance with the will of the Almighty Creator: by defending myself against the Greek, I am fighting for the work of the Lord.”

    2. alex

      “Of course it is the moral obligation …”

      I get a mental image or a Puritan preacher spouting fire and brimstone.

      If it’s a moral obligation, then is bankruptcy immoral? Should we bring back debtor’s prison to punish people for their immorality?

      Should we eliminate the limited liability aspects of incorporation because it allows owners to escape much of the obligation for their debts? Talk about institutionalized immorality!

      If debtors have a moral obligation to pay their debts, don’t banks have a moral obligation not to make irresponsible loans? (and hence run the risk of not paying their creditors, also known as depositors).

      1. F. Beard

        I get a mental image or a Puritan preacher spouting fire and brimstone. Alex

        The Bible forbids usury between fellow countrymen and commands periodic debt forgiveness for even legitimate loans. How much more then is debt forgiveness commanded for so-called “credit” which is actually counterfeit money?

        Please. Don’t confuse the God of Abraham, Isaac, And Jacob with the god of the bankers, Mammon.

          1. F. Beard

            Good point! What’s his name, Calvin, reasoned away the prohibition on usury. What would he say now, assuming he could stand the cultural shock?

        1. Foppe

          “between fellow countrymen”? That wouldn’t haven’t prevented even half of the problems.

    3. Jesse

      If they did not have a single currency what this person says might be true.

      But since they do not, Germany takes on obligations it might not otherwise have.

      Comparative advantage is a theory with which I am very familiar, but like the efficient markets hypothesis, it crushes quite a bit of complexity into a simple concept that squeezes the life out of reality, and creates a piltdown man of economic theory.

    4. Maju

      “Of course it is the moral obligation: of nations, and people, to pay their debts”.

      C’mon! There is no morality in all this game and survival is anyhow always before any compromise acquired. Appealing to the “morality” of paying non-payable debts is like demanding seppuku (better known as hara-kiri) from debtors.

      But in any case nations, peoples, have no obligation to pay debt acquired by governments who lied and mismanaged. Rulers and MPs and corrupt business which benefited should pay it (at least from an ethical viewpoint) but the people only has one obligation: to make sure themselves and the generations to come have a decent, dignified life.

      As the Catalan poet said: sometimes is necessary and forcible/ that a man must die for a people/ but never, never, must a whole people/ die for a single man./ Remember always this, Sepharad.

      The people must never, never, be sacrificed to private whims, even if these are those of the nation’s leadership. The people, a healthy and dignified people is the only moral goal of all politics and all economics.

      This is the only moral code at play: make sure that peoples do not suffer and that speculators do not suck their blood.

      “[then] the whole history of commerce would never had happened”.

      It happened: it is just not the nice hard work and success story of commerce, it is a story of depredation, scam, speculation and slavery.

      “It is not the fault of the the Germans that they are more efficient and productive than their competitors”.

      They are not. Ironically enough they are not more productive: Greeks specially and other Southern Europeans are in fact more productive in terms of income-GDP ratio (or at least they were in 2006). Swedes and Finns, Dutch and Irish are also very productive… but Germans, French and (quite variably) some Brits are rather unproductive. See also ‘those lazy Germans!’, where the myth is again dismantled with different data.

      So how can regions that have less productivity still have favorable trade balances? I am not totally sure but the main reason seem to be that the Eurozone’s South has been severely damaged by following the “Deutsche Mark” recipe of monetary stability, which has increased costs and made the whole are non-competitive. Germany and the like instead have seen by the same reason their costs reduced, even if only inside the Eurozone rigid monetary corset, and they have been able to export to Spain, Greece and such for some rather fictitious bubble time.

      The bubble has exploded and this is bad for all. Germany should soon notice a decrease in demand and how it reaches to a situation similar to that of Greece at least to some extent. Van Rompuy is right: all passengers are equal when it comes to boat sinking.

      In any case Southern Europe, including France, has lost 8-17% of industrial production, while Germany has only grown 4%. The 43% growth of… erm… Slovakia no doubt does not compensate the losses in France, Italy, Spain…

      In all the Eurozone youth unemployment is above 10% (except in Germany and its small allies: Netherlands and Austria). Excepted a few more small states, all have youth unemployment above 20% (which I’d say is rather explosive) and Spain has youth unemployment of 44% which is the almost exact figure behind the Arab Revolution.

      And the situation is worsening. The EU has to restore competitiveness in general… by any means necessary and must do now. This implies severely devaluing the euro – and that means that defaults are not that bad after all, because they should weaken the euro and help restore European competitiveness, at the rather desirable “cost” of being able to import less.

      A default is unavoidable but it’s also the way to go. Euro Jubilee!

  12. steve from virginia

    Pettis gets the picture half-right.

    The mercantilists bankrupt their customers, that is the part he gets.

    The mercantilists’ products rather than policies are the instruments of bankruptcy. The capital flow problem is that from PIIGS to Saudi Arabia — not in Pettis’ argument — for the fuel needed to run the German products sold to the PIIGS on credit.

    Saudia is the bankrupting angel, Germany exports some of its consumption to Spain in the form of luxury automobiles and energy consumption- enabling ‘engineering’ along with credit. PIIGS get the bill: once ‘invested’ in the consuming goods at the current high level they must buy the supporting energy at whatever cost or the investments are stranded.

    $120 crude is simply annihilating the PIIGS. They will all be bankrupt in months.

    The prob with the economists as they consistently ignore energy. What is an economy? It’s the means to manage energy flows. Period.

    The PIIGS made the mistake of believing the hype about modernity and its ‘blessings’ … of mobility on demand and store-bought status. Now, they are trapped along with the rest of the industrialized world. None of the Europeans dare to exit the euro b/c individual currencies would be highly discounted in F/X markets except for French/Swiss francs and D-marks. Without F/X none of the PIIGS could buy fuel. They don’t have the export goods to swap for fuel any more than they have goods to swap for euros now.

    Right now the euros are needed to swap for the fuel. For PIGGIES no euro means ‘welcome to the 19th century!’ No wonder the PIIGS are selling their souls and everything else they can get their hands on. They have their (stupid) priorities: cars first everything else last.

    Also missing from Pettis’ analysis is that without captive customers for bank ‘services’ and autos, PIIG- like Germany and France will also rapidly fall bankrupt.

    Without a vital and productive industrial economy as a prop, France’s fifty eight nuclear power reactors and its massive nuclear weapons programs will become unaffordable expenses. I can see the stupid French boarding up abandoned reactors with plywood and running away as fast as they can like the Japanese are doing at Fukushima.

    futures to the automobile appears to turn toward being a fatal — as in death — error.

    Pettis should look out his back door, China is caught in the same ‘Modernity Trap’. It’s Mercantile Meltdown is preordained, simply a matter of time.

    1. Leverage

      This comment is SPOT ON, steve.

      Indeed you’re getting the picture right, and PIIGS (and USA or UK) are just the beginning of story. This energy-dependency and high prices will spread like a plague causing short cycles and demand-shocks. The age of volatility is here, and deleverage is just a part of it.

      The data supports your post: Today trade balance of Spain has been released. The deficit gap is being closed very fast, with an exception: ENERGY. If it weren’t for energy Spain would be in surplus. In fact, Spain runs a surplus with some European nations. It does not matter the moralizing fairy tales about the relation of creditors-debtors, it’s all about commerce in the end, and commerce it’s all about the energy in the end.

      “It’s the energy, stupid!”

    2. Blissex

      Your argument about energy costs for most countries is good, but it is just a special case of the general problem for all countries in the world which is how to pay the Saudis for their dwindling share of a dwindling oil supply.

      But the Saudi case is just part of a general issue with exporters supporting their sales, because the Saudis too have been lending colossal amounts to their customers, principally the USA.

      «without captive customers for bank ‘services’ and autos, PIIG- like Germany and France will also rapidly fall bankrupt.»

      Germany/France and China/Japan and Saudi Arabia monetary policies were in effect a colossal case of vendor financing: exporter countries and their banks have been lending importer countries a colossal amount of money to support the exporter countries business profits, and the importers took that vendor financing to win elections; for example GWBush effectively paid for two wars and huge tax cut (I think that was the first time in history that wars were “paid” with tax cuts) for his constuencies by borrowing the money for nearly free from China and the Saudis.

      The greeks quite obviously (just compare the graphs of their trade good imports and their borrowing from abroad) decided to just take the vendor financing and then play chicken, the other importer countries just went along to please voters.

      «They don’t have the export goods to swap for fuel any more than they have goods to swap for euros now. Right now the euros are needed to swap for the fuel.»

      But yes, at the root the problem is the dwindling oil supply and the need to pay for it. In effect paying the Saudis is acting as a gigantic deflationary pressure on all countries, and Germany/France and China/Japan are trying to export that to their importers.

      The German/French and China/Japan policies have been to pay for their more expensive oil imports with greater exports of goods, and the importer country policies have been to pay for those with greater exports of capital (IOUs turn into that in due time), but they are now not that willing to hand over that capital to foreigners.

      1. steve from virginia

        Germany/Japan/China vendor financing is exactly what it is w/ marinade of ‘leveraged buy-out’ US jobs were ‘too expensive’ for US manufacturers so USA exported the jobs to China along with the capital to make use of them.

        US has put itself into a position where it still exports capital — interest on +$3 trillion in govt debt — to mercantilists! Don’t forget that dollar carry trade.

        Funny: $5 a day jobs are worth more to China than the same jobs @ $25 per hour jobs were to Americans. To cut business expenses (and gain a political edge) the Establishment exported its customers! Go ahead and laff about that ‘paradigm’.

        ‘Paradigm 2.0′: a hundred years of ‘progress’ and nobody has figured out something to do with our fuel — our childrens and grand childrens’ — but to burn it up for nothing.

        Excuse me while I stalk off and seethe.

        1. Blissex

          «Funny: $5 a day jobs are worth more to China than the same jobs @ $25 per hour jobs were to Americans.»

          Ahh but neither the chinese nor the american *governments* are stupid.

          The chinese are getting pretty amazing capital goods along with the $5/day jobs. In practice they are underpricing their labor to lure in capital investment by foreigners, and will end up with a giant modern industrial sector almost entirely paid for (and only theoretically owned) by foreigners.

          The americans are not stupid either: if you noticed, the pattern for the past 30 years has been that the USA government policy has been trying to undermine and discourage all the heavily unionized industries (e.g. cars), and to subsidize all the non unionized ones (e.g. finance), and a major way to do this has been to make it easy to export union jobs.

          This probably was the consequence of unions becoming too politically powerful and also arrogant (e.g. the self defeating morons at PATCO in the USA or NMU in the UK).

          For american asset owners exporting union jobs to China means lower costs and bigger profits, and more power for business owners w.r.t. their workers. It has worked very well, so far.

  13. alex

    Pettis makes perfect sense, as usual. And Keynes’ Bancor proposal was as far-sighted as anything he ever did. He understood the danger of trade imbalances and the dual responsibility of deficit and surplus countries.

    Dean Baker also has some good points. Even if the US were able to use a magic spell to increase its savings rate, then absent an exchange rate adjustment it would just worsen the recession in the US as it would decrease our domestic consumption without increasing our exports. And absent a reduction in Chinese savings rates, it would hurt their economy as they would have a reduced US export market without a commensurate increase in their domestic market. The “virtuous savers” vs. “un-virtuous spenders” story is indeed a silly fairy tale.

  14. Gordon T

    The current account balance is just the wrong metric to really evaluate what is really going on here. Both Yves and Pettis say/imply that Germany does not (like to)buy from foreigners, this does not match the facts. Whilst being the 2. largest exporter worldwide, it is also the 3. largest importer, last time I checked there was no German policy saying that they will buy from Eastern Europe but not from Spain. Most of German exports are actually re-exports so even the effect of a currency revaluation(if Germany still had the Dmark) is not as clear cut as Yves and Pettis seem to imply, as import costs for intermediate goods are an important factor for final export prices.
    To given example, of why the current account balance is a really bad indicator:
    Assume the 50-100 largest German exporters started to get worried about the PR effect and potential countermeasures to correct current account balances, they could very well decided to run all of their distribution and exports through their Spanish subsidiaries(sell the goods at low internal transfer prices, export via the subsidiary, repatriate the profits) which would make it possible to pretty much choose any level of current account balance desired. But assume the current account balance for Germany and Spain where to be brought into equilibrium by such a scheme, would that really solve any of the underlying problems?
    That´s why I would argue, the current account balance is just an ex post indicator of what currently is, attempts to use it as diagnostic tool or to derive policy prescriptions from it are misguided and really don´t even scratch the surface of the underlying factors.

    1. alex

      “current account balance is just the wrong metric to really evaluate what is really going on here”

      Ok, so what is really going on here?

      I think that excessive current account surpluses/deficits are problematic in and of themselves, as they lead to the sort of problems we’re seeing now (as Keynes well understood with his Bancor proposal). However, I’m certainly willing to listen to other arguments.

      1. Gordon T

        I´m not claiming to have the answer, but simply stating, that all the answers flow from the level of the current account balance, because it´s an accounting identity seems a bit simplistic. Especially if you mix it with misleading statements about the willingness to buy from abroad, German imports in absolute terms as well as per capita are a lot higher then Spanish ones for example. Most exports of high-tech goods nowadays are the product of fairly long supply chains, covering many countries and often many currency areas. Take Switzerland for example, the export industry is surprisingly similar to Germany´s (machinery, chemicals,…) the CHF/USD ratio has gone from ~1.30 5 years ago to ~0.80 today, according to everything described here Swiss manufacturing exports should have crashed, instead they have risen.
        Im not saying I have all the answers but the line of argument given in this article just doesn´t match up all that well with the facts.

        1. Diego Méndez

          As far as I know, you start noticing the initial effects of a large devaluation 18 months after the fact, and you don’t have the full effects til around 5 years later.

          Since Switzerland’s exchange rate started to shoot through the roof last year, I’d say they’ll feel the pinch some months from now, and Swiss manufacturing has very difficult years ahead if the trend continues.

          Regarding your current-account balance analysis, you should argue why stats are manipulated right now. Of course if you manipulate *any* stat (GDP, GDP per capita, inflation, etc.), you get the wrong conclusions; but why should we think this stat is distorted and does not correspond to the real situation, namely, that Germany has positive net exports and Spain imports more than it exports?

        2. Maju

          Germany and hinterland (includes Switzerland) produce very high-tech kind of industrial products that have little competence. Portugal instead produces nearly the same as, say, China (textiles for example) and this kind of low-tech product has been allowed to be easily competed in international markets (by the high value of the euro) and even inside EU (because of lack of almost any protectionism).

          So Portuguese producers cannot compete with Chinese ones, not just in an international market like, say, Chicago or Sao Paulo, but in the internal EU markets, like Paris, either. They had to close down, increasing unemployment and weakening the EU as a whole (less Portuguese salaries, less German sales, unless they compensate elsewhere).

          Usually Portugal would have devalued the currency gradually (a chronic but bearable pain) and recovered competitiveness. But with the Eurosclerotic ECB design, they can’t and Brussels won’t either.

          And it’s not just Portugal: it’s all EU. Even Germany could be growing faster than it is with a somewhat weaker euro. The only reason to have such a strong euro is in order to import cheaply, what is maybe part of the German economic scheme: import cheaply low-tech stuff (including components) and export costly high-tech stuff, which has no competence or almost.

  15. Jesse

    Good piece.

    If the international currency markets were freely trading, the currency valuations would mitigate and even prevent such radical imbalances.

    As one country created a surplus by beggaring their neighbor, their currency would rise in value, while the deficit nations would decrease.

    This is why the allowing of China to devalue and fix their currency in 1996, and be granted trading status by Clinton, was an act at odds with the good of the US. Recall the Chinese contributions scandal, and they manner in which they tried to hang it on Al Gore. And of course there is the matter of his long term supporters and groomers in Bentonville.

    And of course Bush gave it the coup de grace for the benefit of a different set of constituencies.

  16. Jesse

    ‘Free trade’ is a canard, a corollary of the efficient markets hypothesis.

    Trade amongst nations with disparate public policies and forms of government can never be truly free and neutral in its impact on the participants. This is the same problem Europe faces in trying to cram different countries into a single currency, controlled largely by a handful of the strongest countries.

  17. Cahal

    Btw, anyone who comments on global trade imbalances and the U.S. dollar should really be required to read Michael Hudson’s ‘Super Imperialism’ first. Clears things up a bit (as Hudson’s views tend to).

  18. Hugh

    Pettis says what some of us have been saying around here for an age. There are always at least two parties to a transaction. The story of the virtuous lender and the profligate borrower is just that a story. It leaves unanswered why the “virtuous” lender lent to the “profligate” borrower in the first place and then continued to do so. The hoocoudanode explanation fails after a while, unless we assume that the “virtuous” lender is mindlessly stupid. The more common sense explanation is that the “virtuous” lender gets some other benefit from continuing the arrangement.

    From a kleptocratic point of view, this setup with the multiplicative effect of leverage allows looting at both ends of the flow. When this becomes unsustainable, the debt is pushed off on to the sovereign and then the state is looted. This is the stage we are in now in Europe with Greece and the periphery, and in the US with regard to the banks.

    1. Blissex

      «There are always at least two parties to a transaction.»

      As I have written below, it is very important to note that the transactions at the centre of both the USA and European crisis have THREE parties, where the the third party is the lender who provides the vendor financing is the one that really counts, because these financial intermediaries own or blackmail governments.

      You may have noticed that in all crisis countries the governments have been much quicker to bailout the third party, the vendor financing lenders, than the sellers or the buyers.

      1. Hugh

        I don’t disagree. As I said, we have been discussing here what Pettis is saying for a long time. Financial intermediation occurs at both ends of the financial flow. This is part of the kleptocratic dimension I was speaking of. Its effects are magnified through leveraging so that the resultant damage is much greater than the balance of payments difference would indicate. This is how both the trade cycle and looting could go on as long as it did.

  19. ScottS

    I suppose it’s a stupid question, but can’t the Spains of the world just repudiate their debt and go back to consuming, and the Germanys of the world go back to producing? It seemed to make everyone quite happy.

    1. Diego Méndez

      I am afraid the newly unemployed in Spain, Greece, etc. would like to produce something instead…

      1. ScottS

        Fantastic idea! Switch roles for a while. Spain and Greece produce, Germany and China consume. We’ve had quite enough bellyaching from the Germanys and Chinas about the rest of the world spending too much. Let’s see how they like it when we stop spending and start producing. Call the CA surplus nations’ bluff.

        1. Blissex

          «Switch roles for a while. Spain and Greece produce, Germany and China consume.»

          And who pays for the oil that they all need? The whole mess started because Germany/Japan, China/France want to fund their oil imports with exports to the USA/Spain, as a previous poster mentioned.

          Because Germany/Japan, China/France are *value added* exporters, that is they import a lot of lower value added stuff like oil and steel to export higher value added stuff like TVs and planes (and of these China has the lowest value added, but they are working hard on that).

          The oil producers are the ultimate drain; because they don’t need many imports to produce their exports, because they are primary exporters. The imports to oil producers are just for consumption, and they can only consume so much (except Saudi Arabia and Iran which are wildly overpopulated).

          1. Maju

            We could get without at least part of the oil if we used solar energy and other renewables. But here is where the kind of Spain clearly fail: R+D? Please, “let them invent!” (not us) that proclaimed Unamuno, so fond of historical glorious pretense, so much lacking common sense.

            Today Germany produces several times as much solar energy as Spain, having a much worse climate for such a purpose. Never mind researching and developing such technologies (not just solar but almost ANYTHING). The important thing is to accumulate power somehow not thinking, researching, developing, investigating. And I’m thinking of universities: all is Roman-style politics by which administrators were supposed to be corrupt or lose money. Now they cannot lose money but they are often corrupt and cronyist.

            And that is why the Spanish glorious entry into modernity was little more than a bluff.

            Mind you that there is good stuff and honest people but there is too much dishonesty, too much rot, too much power-mongering and cronyism destroying all that potential. Ok, it also happens in the USA… but the USA is not in Europe and anyhow they buy foreign brains for breakfast.

          2. Diego Méndez

            @Maju. I agree that corruption is widespread in R&D in Spain, which is usually based on public subsidies.

            However, I think this is due to the fact that over the last 7 years, public R&D subsidies grew too fast to make that spending eficient. I hope this will change in the future.

            On Unamuno’s quote (“Que inventen otros”, “let other peoples invent, we’ve got more important aims”), I must say he was wrong on the surface, but right in all its depth.

            Mathematics, science and philosophy are the basis of any invention (in fact, they form the basis of *anything worthwhile*). Spain has always envied other countries’ inventions, but has never invested heavily in knowledge. Knowledge is not R&D; knowledge is the pursuit of truth.

            I long for the day Spain devotes 10% GDP to (capital-K) Knowledge!

          3. Maju

            I did not mean corruption in R+D specifically but in all aspects of society. Spain has a serious chronic problem of lack of civic sense (since at least the Golden Age). Why? Because it has been ruled most of the time by autocrats and the rule was always: “eat and shut up”.

            Unlike France or Switzerland, it has never experienced a revolution on which to build such civic pride and responsibility.

            So nobody seems able to raise their voices against corruption nor trust the institutions, much less the inquisitorial hyper-inefficient court system.

            The Basque Country, where I live, was largely spared in the past such decadence because of our traditional democratic autonomous institutions, which set us closer to Switzerland than to Spain-proper in all that matters except the sea. Sadly they have been demolished in the latest centuries and, since at least Ardanza, corruption has become relatively pervasive (and now with that proconsul of López is reaching abyssal depths). I fear that in a very Unamunian sense, we are falling towards the darkest side of Spain, while Spain does not advance almost at all in the line of greater democracy, transparency and civism (with honorable exceptions of course).

            I can really understand the frustration and ire of the M-15 youths (and not-so-young ones) because there are deep structural problems embedded in the socio-political fabric that in truth require of a radical revolution (and not any mere pointless reform). It is a shame that Spanish politicians do not dare to face Brussels and the IMF (ones) and the others side with Brussels and the IMF against the state’s sovereignty and dignity, all of them while allowing and cheering corruption everywhere.

            Really something radical must happen if Spain wants to live to its full potential and not just being ripped off as a neocolony (again).

          4. Diego Méndez

            @Maju. The idea of Basque exceptionalism is very parochial. Get over it. Most Basques would love to talk about politics in public without fear of retaliation, including denouncing corruption in a non-partisan way or mass-protesting for non-partisan political reform the way the rest of Spain has.

            The Basque country has never been a complete, functional democracy in its history, unlike the rest of Spain. You didn’t have any democratic institutions in the Middle Ages, sorry; just the same kind of consultative institutions for the privileged you could find in Castille.

            And certainly, the power of the Catholic Church and the economic right is nowhere so large as in the Basque country, so you could argue the Basque country has kept the tradition of “democracy for the privileged” instead of advancing like the rest of Spain.

            Basques are giving their first steps in democracy now, but there is a risk that some of them are steps backwards.

            That region also has some very positive things, I am just mentioning the negative ones because you seem to have received all kind of distortions about Spanish history and culture. If you think the Basque country was ever at the forefront of democracy and science, I suggest you just look at how many internationally renowned scientists and political philosophers Switzerland produced and compare with the Basque country. Or with Spain, for that matter; how many Basques have received a Nobel Prize?

          5. Maju

            “The Basque country has never been a complete, functional democracy in its history, unlike the rest of Spain”.

            What the heck are you talking about? We have the oldest democracy in Europe. I mean Navarre had a representative Parliament before England and the autonomous Western Basque provinces had representative institutions since they were chartered in the 13th century, after the Castilian invasion.

            Instead Castile and Spain have been all the time under absolutist monarchs and fundamentalist dictators since at least Charles V.

            “the power of the Catholic Church and the economic right is nowhere so large as in the Basque country”

            Where nearly everybody is agnostic to atheist, mind you.

            But well I don’t want to get off topic. It’s always quite annoying to try to communicate with a Spaniard and realize he understands nothing and results patronizing and insulting. That’s why I decided many years ago not to travel to Spain proper unless strictly necessary – I had forgotten. :(

          6. Diego Méndez

            @Maju. “We have the oldest democracy in Europe.”

            I am sure you’ll also have 13-th century hand-made pictorials of all those civic Navarrese peasants going to the polls. It’s a pity no one outside the Basque country has ever heard about that kind of democracy.

            Not that different from the rest of Spain, really. You may go to other places like Barcelona, where they’ll tell you *they* were the oldest democracy in Europe. It’s pretty obvious Basques don’t want to travel to other Spanish places like Barcelona; if that were the case, Catalans would know the Basque democracy came first!!!

            There’s nothing wrong with having a past less than perfect. No one has. Get over it.

            Take care and greetings!

  20. Blissex

    «It leaves unanswered why the “virtuous” lender lent to the “profligate” borrower in the first place and then continued to do so.»

    As I have just written above, a gigantic case of vendor financing (via “friendly” banksters) to support otherwise unsellable exports.

    Within the context of a game of shifting the burden of paying the Saudis for oil for exporters, and of chicken for importers.

  21. Blissex

    «can’t the Spains of the world just repudiate their debt and go back to consuming, and the Germanys of the world go back to producing?»

    Sure, they could if there were only spanish consumers and german producers.

    But there are also german asset holders, and these are the people who have lent the spanish consumers the money used by pay the german producers.

    Now the big deal is who suffers from the cancellation of the debt: the spanish consumers (if they have to cancel it by repaying it), the german asset owners (if the spanish consumers repudiate it and nobody compensates the german asset holders), or the german producers (if they get taxed or similar by the german government to pay compensation to the german asset holders).

    Because whoever gets stuck with the consequences will have to reduce their consumption very hard (they will become rather poorer).

    Ultimately when energy costs more and becomes scarcer, everybody has to become poorer, but the question is how the impact can be divided among worldwide consumers, producers and asset owners.

  22. Blissex

    «Ultimately when energy costs more and becomes scarcer, everybody has to become poorer»

    I may misremember but the estimates that I have seen imply around 5% (and some up to 10%) of worldwide GNP, which is a pretty gigantic amount of adjustment to do.

  23. Blissex

    «to support otherwise unsellable exports»

    To a large and scary extent this applies also to Saudi Arabia, who are totally dependent on oil sales for food imports (and everything else) and therefore have long had a very explicitly declared strategy of not pricing oil out of its market, as long as they can produce enough of it.

    The problem with Saudi Arabia is that they are using a lot of their remaining oil, and an ever increasing percentage, for internal consumption.

    That is in the long term terrifying, because since their population tripled in a few decades, they are now critically relying on oil fueled water plants, and if there is something worse than hunger that’s thirst (it drives people to insanity and violence where hunger stultifies people). They’d be mad to export oil were it needed to run their water plants, and if they don’t export it they will be hungry.

    Without massive oil exports the rest of world is going to suffer a huge cut in living standards, which is bad enough, but without massive oil exports Saudi Arabia is way above its carrying capacity, and that’s a much bigger problem.

    1. alex

      Mitchell is off base on several points. He repeatedly refers to the Bancor as a fixed exchange rate regime, where it was actually an adjustable rate approach. Not fully floating (and hence less susceptible to the speculative attacks he worries about) but adjustable as needed to reduce trade imbalances. Also, the whole point of the Bancor was to minimize trade imbalances, which would give greater national autonomy to an MMT approach, not less. If, for example, both the US and China had multilateral trade balances, and trade was in Bancors, then China wouldn’t give a damn about US monetary policy and inflation/deflation. Similarly, with a minimal current account imbalance, we wouldn’t worry much about how many Bancors we needed to pay off China.

  24. avgJohn

    This may be only tangential to the related topic of this article, but for me it is all part and parcel of the globalization debate.

    Common sense and experience tells me that international trade in its current form is not working for me (and millions like me) here in the U.S. If corporations sole obligation, in accordance with modern financial management theory is to maximize shareholder wealth, then I too as a citizen with rights equal to coporate citizenry under the law, feel entitled to set a goal of maximizing my own wealth, therefore I seek information on the true cost-benefit of globalization.

    Upfront, I will say I currently would like to see our trade policies dismantled, and renegotiated based on my current observations, experience, and logic. That being said, as just an average citizen, it is hard for me to really feel I am drawing on a full set of informed data for opposing current trade policy and lending my support to radical changes in the same.

    In particular, I lack information on what nations and citizenry are benefiting the most from global trade (however I already know that as a member of the American middle class that I am not) and which are bearing the most costs, keeping in mind that global trade carries with it the potential of both advantage and disadvantage.

    So, what I would like to see is some straightforward information provided to the average person for making an intelligent and informed decision about these trade polcies these bozos in Washington D.C and Wall Street have saddled us with.

    For beginners, I suggest that the Financial Accounting Standards Board and/or the SEC provide a requirement for the disclosure of four pieces of information all publicly traded companies must provide with their financial statements: 1). head count of total employment (including contracted labor and services), payroll tax and withholdings broken down by country. 2). revenues generated in each significant country (5% threshhold). 3). Reported taxable income and taxes paid to each significant country. 4). Capital Investment in equipment, real estate and other tangible property (to determine the knock on effect of creating economic growth).

    In this modern age of IT wizardry, this should not really be burdensome for a company to generate. I doubt if there are many companies that are not already slicing and dicing their sales and cost data for purposes of developing pricing and marketing stategies, as well as fixed asset ledgers listing capital assets, so it would be a simple matter to include as part of the disclosure process for financial reporting.

    I believe this would be a starting point for determining how well my elected officials are performing in developing trade policy protecting me and my family’s current and future interests.

    For example, if I operate a hamburger stand and there exists a corporation XYZ that employs 1000 total personnel, with 950 of the employees living in China and India, making dirt low wages, and the balance of the workforce are executive and administrative personnel in the U.S, and all of its capital projects are directed overseas, it’s not hard for me to see that this company is not putting much money in the pockets of my custumer base so that they might buy my product.

    Furthermore, if 70% of their product is sold in the U.S., and through clever tax planning, legal structures and product costing trickery they are able to attribute the lion’s share of their taxable income to foreign sources such as China or the Cayman Islands, then they are not even contributing to the reduction of our serious deficit problems. In my opinion, this company needs to move to China and pay a heavy tariff for exploiting the poor people of China (note: the tariff money could be set aside in trust for the Chinese people as far as I’m concerned, they are the ones suffering the most for this exploitation).

    So, for example, with just this little bit of info as a starting point, I will be in a position to determine whether providing an investor who has a long-term position in XYZ stock a favorable capital gains tax rate when they close out their position is a fair tax policy. I would also be in a better position to detrmine whether lowering tax rates on this company will be a net benefit to the U.S. and the average citizen.

    Let me ask you, do you think a hypothetical investor in a global corporation that generates over 50% of their revenues in the U.S., employs 90 % of it’s workforce off-shore paying dirt wages, pays little or no taxes in the U.S., and directs all of its capital investment to projects in foreign countries, should receive favorable tax treatment on the disposition of their stock? I don’t. By the same token I feel an investor in a company with heavy capital investment in the U.S., employing significant numbers of U.S. employees at a fair wage(who are paying taxes), and reinvesting profits in capital projects in the U.S. should receive a tax break.

    I would encourage the people of other nations around the world to develop similar tax and trade policy, rather than jumping through hoops and falling all over themselves in lavishing the global corporations with tax favors. Maybe then these top executives wouldn’t be able to afford all of these ridiculous bonuses, perks and golden parachutes.

    1. Greg

      AvgJohn says:
      “In particular, I lack information on what nations and citizenry are benefiting the most from global trade (however I already know that as a member of the American middle class that I am not)…”

      Try: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

      It’d help if you knew a little about supply and demand curves. But bottom line is that net importers suffer high unemployment, low investment, and deflationary pressures, net exporters gain high employment, high investment, and inflationary pressures. One benefits at the expense of the other.

      But here’s a book: “Free Trade doesn’t work: What should replace it and Why,” by Ian Fletcher and Edward Luttwak. Check it out on Amazon. No Diagrams, but lots of ammunition. If you really want to know…

      I agree with your desire for transparency in corporate operations. Unfortunately, incorporating is done at the state level, and several states, in order to encourage corporations to headquarter in those states, have competed in allowing opacity, and discouraging openness. There is much where no one has a clue as to who owns what. In theory, since most of these corporations are involved in interstate commerce, they could, and should, be regulated at the federal level. Maybe some even are. I’m not sure. But then regulators like the SEC, etc. are not always noted for their zeal.

    2. Blissex

      «a hypothetical investor in a global corporation that generates over 50% of their revenues in the U.S., employs 90 % of it’s workforce off-shore paying dirt wages, pays little or no taxes in the U.S., and directs all of its capital investment to projects in foreign countries, should receive favorable tax treatment on the disposition of their stock? I don’t.»

      Like the most rabid conservatives you see taxation as a morality issue: tax is a punishment for the wicked, and tax relief is a reward for the deserving. For conservatives the wicked are the unproductive malicious poor, and the deserving are the hard working virtuous rich, and here you instead you apply morality to companies.

      But taxation is a means not to punish the wicked or reward the virtuous, but to fund collective purchases in a non-inflationary way. The goal is to raise revenue in a mostly efficient and neutral way.

      Therefore good tax policy is not about who is good or bad (which is more properly the domain of fiscal policy), it is about sharing the cost of collective purchases as widely and equally as possible, on the basis of ability to contribute and ease of collection and of avoiding evasion.

      So in your example above that wicked company should be taxed on their USA net (or even gross) revenues, and the investor on their USA income. Whether the company is doing most of their production abroad or not, or the investor is good or bad, they just gotta pay.

      Tax policy should be boring, because it is just about a means to an end, and the fight should be over who gets what as to fiscal policy. But rabid conservatives know it is much easier to buy special case advantages by distorting tax policy, and so they make it a big issue.

      1. avgJohn

        Blissex,

        What’s immoral is a global corporation’s exploitation of 3rd world labor sources, as well as a 3rd world country’s natural environmental and acceptable health standards. All in the name of short-sighted greed.

        In addition, I thought that one of the purposes of the favorable capital gains treatment of long-term positions in stock of corporations was to encourage growth and employment in the U.S.. At least that is the argument many put forward when arguing for lower taxes.

        Clearly, the hypothetical XYZ corporation referred to in my original post is not providing employment opportunities here at home, nor are they reinvesting capital into on-shore capital projects lending to economic growth in the U.S., therefore why subsidize it with favorable tax rates?

        What I am saying is, employment growth and capital investment in the U.S. should be rewarded because it benefits the U.S. as a whole, while the off-shoring of jobs, capital and technology should not be encourage or subsidized with ignorant tax and trade policy.

        As I stated in my last post, I am concerned with the economic well being of the average citizenry of the U.S., first and foremost. However, this does not mean I wish to exploit other countries in the process.

  25. Kevin Rica

    The title of this post:

    “Trade Imbalances Lead to Debt Imbalances” or Why Mercantilist Nations Shouldn’t Beef About Their “Profligate” Customers:

    misses a very important point from Pettis’ article — You shouldn’t call it “Mercantilist” — You should call it “Imperialist.” Mercantilism was a primitive, ill-defined economic doctrine intended to encourage the accumulation of specie. Imperialism was about the venting of excess savings.

    If you don’t understand the distinction, read the article that Pettis cited, “Communist China’s capitalism, the highest state of capitalist imperialism” here:

    http://www.world-economics-journal.com/Contents/ArticleOverview.aspx?ID=455

    (You can accept the free one-week trial subscription to download for free.)

  26. JakeS

    “Whichever argument you think is the more just – that the imbalances are mainly the fault of the US or the fault of China – since the Chinese accumulation of US Treasury bonds was the automatic consequence of Chinese policies that the US opposed,”

    But this is wrong – the US never meaningfully opposed China’s policies. And we know they did not, because every step of the way the US had a choice – and they still do: There is no technical or operational barrier to the US discounting their currency right back at China, and there never was. There is no technical or operational barrier to the US pursuing full-employment along a sustainable economic strategy.

    There are *political* barriers to that, of course, because it would involve reversing the trend towards the “service economy” that makes nothing but hamburgers, creates nothing but lawyers and sells nothing but tax shelters.

    Greece, meanwhile does not have these policy options, because EU rules constrain industrial policy (it is branded “illegal state aid”) and you cannot discount your currency (or even permit it to depreciate under the weight of your foreign deficit) when you are in a fixed-rate regime with a central bank run by Austerian lunatics.

    - Jake

  27. Blissex

    «cannot discount your currency (or even permit it to depreciate under the weight of your foreign deficit) when you are in a fixed-rate regime with a central bank run by Austerian lunatics.»

    But there is an interesting problem here: whichever way the ECB lunacy goes, some countries under it are doing quite well, and some are doing quite badly. Exactly the same central bank.

    So it cannot be just the central bank, the countries themselves have a role in how they are doing. Perhaps the central bank runs policies more suitable for some countries than others, but then the countries for which those policies are less suitable could change their ways to become more similar to the countries for which they are suitable.

    If there is a generally valid criticism of that central bank is that their policies are generally wrong, and some countries suffer less from them than others.

    But as to Greece it is difficult to sympathize: it is largely like a kleptocracy, which is run by an elite of insiders for whom patronage on a grand scale, funded by foreign loans, is the main state policy. In other words a banana republic, the model to which the USA aims, this blog sadly notes regularly.

    1. Maju

      It has been explained in the comments above: ECB’s monetary policy is oriented for the German economic model and therefore hurts the rest. Germany’s model wants low-tech cheap imports because it exports high-tech low competence products.

      Germany does not compete in the EU or global markets or it does at another totally different tier. Instead peripheral EU countries typically do compete mostly at low-tech (or maybe mid-tech) products which have lots of producers. These countries need a weaker euro, so they can compete in equal terms with, say, China or Brazil or even Poland. But Germany is merciless in that. So the best advise would be to go back in time and not enter the Eurozone, which was no doubt an long term error for most members, at least in the draconian terms agreed to.

      But the bubble was big and shiny back then… nobody noticed, not easily at least.

      The logical thing would have been not to allow the euro to appreciate so much in relation with the US dollar (40% appreciation in 8-12 years is giving away a lot of competitive edge) and, in any case, to start devaluing gradually since 2008 or so (Euro QE 101).

      But Germany and the ECB’s design are merciless. So logically there should be a revolt of the southern European states… but, wait, it’s not happening at all: all they do is to nod to whatever Berlin, Paris and Brussels say. What the heck is this: suicidal circus?

      Or rather high treason?

    2. JakeS

      “But there is an interesting problem here: whichever way the ECB lunacy goes, some countries under it are doing quite well, and some are doing quite badly. Exactly the same central bank.”

      No, they are all doing poorly. Median real wages in Germany have not followed productivity for the past twenty years. That is not a sustainable outcome.

      “So it cannot be just the central bank, the countries themselves have a role in how they are doing.”

      But the central bank can make it easier or harder to conduct industrial policy, by either printing money for free (as it should) or by restricting the money supply to governments (so they have to pay completely unproductive subsidies to bondholders, which is destructive of real wealth creation). The ECB has done the latter.

      “Perhaps the central bank runs policies more suitable for some countries than others, but then the countries for which those policies are less suitable could change their ways to become more similar to the countries for which they are suitable.”

      Because clearly we can all be net exporters, in the same way all children in Lake Wobigon were above average.

      Your policy prescription is inconsistent with full employment, and thus is irresponsible in the extreme.

      “But as to Greece it is difficult to sympathize: it is largely like a kleptocracy, which is run by an elite of insiders for whom patronage on a grand scale, funded by foreign loans, is the main state policy. In other words a banana republic, the model to which the USA aims, this blog sadly notes regularly.”

      Please present a policy proposal for Greece that is consistent with uninterrupted full employment under the ECB’s 2 % inflation target and the EU no state aid to industry rules.

      Until then, you have no case for Greek mismanagement of their economy: They were fucked no matter what policy they pursued.

      - Jake

    3. financial matters

      I think that Greece as well as a lot of countries are going to have significant challenges as they eventually have to live within their means.

      I think countries are better off having their own currency that they can use for their own goals. I don’t think the Euro works because Europe doesn’t seem to be able to act as an entity. I think if a group of countries had similar interests and could even lawfully formalize those interests, a common currency could be beneficial.

      I also think countries should print their own currencies through their elected representatives and deal with the consequences. Having the Fed and other central banks as intermediaries seems to siphon funds from the public good into relatively few private pockets…

Comments are closed.