Entering a New Mercantilist Era?

While we have enjoyed a period of relative calm after the 2007-2008 financial crisis, the improvement in economic conditions exists in parallel with growing geopolitical tensions. None of the causes of the crisis have been resolved. We still have global imbalances. We still have powerful, predatory, and unconstrained capital markets players firmly in control of the global debt markets, which are crucial to commerce. We still have the deflationary pressure of a massive increase in labor available to produce goods for advanced economies. And the major device that papered over those issues, the willingness of countries keen to maintain trade surpluses lending to creditor countries to support their consumption, is now under attack. Both borrower and creditors are concerned about debt levels and a new found religion of austerity is on the rise.

A common reaction is to see the savers as virtuous and thrifty and the borrowers as profligate, and to generalize from what happens at the household level, and simply view an heavily indebted economy as profligate. But these stereotypes are misleading. For instance, the EU version of this story is to characterize the Germans as tough frugal competitors and the Club Med countries as now having to pay the bill for living beyond their means. But as Martin Wolf explains, this simplistic picture is misleading:

Mr Wilhelm offers a disturbing paragraph: “The key to correcting imbalances in the eurozone and restoring fiscal stability lies in raising the competitiveness of Europe as a whole. The more countries with current account deficits are able to increase their competitiveness, the easier they will find it to decrease their public and foreign trade deficits. A less stability-oriented policy in Germany would damage the eurozone as a whole.”

I find it impossible to agree. What is fascinating about these remarks is that there is no mention of demand. Mr [Ulrich] Wilhelm is inviting everybody to join a zero-sum world of beggar-my-neighbour policies in which every country tries to grab market share from the rest. At a time of global weakness, this is a self-defeating recommendation for both the eurozone and the world.

More precisely, what Germany wants to see is a sharp cutback in fiscal deficits throughout the eurozone. With the fiscal deficit contracting and output weakening, the way out for each country would be via falling relative unit labour costs and higher net exports. If successful, this would shift each country’s economic weakness to other eurozone countries or, more likely, to the world, via a bigger eurozone net export surplus…..

I am saying Germany’s surpluses were made possible by other countries’ deficits, and so German stability by other countries’ instability. I am saying that part of Germany’s net exports were illusory, paid for by excessive borrowing, often financed by Germans. I am saying that if peripheral Europe is to improve its external accounts, either Germany must offset some part of this, or the current account of the eurozone itself must shift towards surplus, with adverse impacts on the fragile world economy.

In short, economic policy is about more than competitiveness. When the world is trying to struggle out of a deep recession, demand matters, too. As the world’s fourth-largest economy and the core of the eurozone, Germany has a role to play in rebalancing global demand. I appreciate that this is a difficult challenge. It must be met, all the same.

Yves here. Rob Parenteau has argued in a pair of posts (here and here), using Spain as an example, of the dangers of the EU austerity moves:

…there are a whole range of possible combinations of current account and domestic private sector financial balances which could be consistent with the 7% of GDP reduction in Spain’s fiscal deficit. But the simple yet still widely unrecognized reality is as follows: both the public sector and the domestic private sector cannot deleverage at the same time unless Spain produces a nearly unimaginable trade surplus – unimaginable especially since Spain will not be the only country in Europe trying to pull this transition off….

As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. European economic growth will prove extremely difficult to achieve if the current fiscal “sustainability” plans are carried out. Realistically, policy makers are courting a situation in the region that will beget higher private debt defaults in the quest to reduce the risk of public debt defaults through fiscal retrenchment. European banks, which remain some of the most leveraged banks, will experience higher loan losses, and rating downgrades for banks will substitute for (or more likely accompany) rating downgrades for government debt. A fairly myopic version of fiscal sustainability will be bought at the price of a larger financial instability…

It is not out of the question that fiscal rectitude at this juncture could place the private sectors of a number of nations on a debt deflation path – the very outcome policy makers were frantically attempting to prevent but a year ago.

Yves here. The end game of lending too much money is creditor losses. The better path is to accept writedowns and restructurings, for the lenders to take their lumps. The record of past financial crises is clear on this matter. Even though it leads a larger initial economic downturn, its duration is comparatively short. Even though US policymakers refuse to listen, the Japanese are strongly of the view that their prolonged slump is mainly the result of the failure to write down bad loans and recapitalize its banks, rather than insufficient fiscal and monetary stimulus. And a deflationary spiral produces the same result, creditor losses, in this case via default, with more damage to the economy and higher costs of repairing the financial system.

But the fissure points are ultimately even greater than this gloomy account suggests. Ultimately, as Wolf points out, the Germans are demanding that the rest of the EU become more German, a lean, mean export machine. But all the big exporting contries want to hang onto their markets, while at the same time wanting their export surpluses loans repaid. As Parenteau pointed out, the only way for that to work is for the current borrowers/importers to all become exporters. But it is collectively impossible for every nation to run a trade surplus. Stratfor describes the implications in an article “Obama’s Export Strategy” (no online version):

One of the leading reasons the world has been so stable is because the traditional merchant powers have had a deep market to sell into: the United States. Part of the peace accords and reconstruction of Japan included granting it full access to the U.S. market as well as full American protection of Japanese trade lines. Part of the peace accords and reconstruction of Germany included a similar arrangement. These arrangements proved so successful in containing Japanese and German imperial ambitions, revitalizing and enriching their economies, and giving them a powerful incentive to be part of the U.S. alliance structure that the pattern was repeated throughout Western Europe, in Taiwan and Korea, and to a lesser degree in Indonesia and elsewhere.

By granting these states privileged access to the American market — and not necessarily demanding American access to their markets in return — the United States created conditions extremely favorable for its allies’ economic development and prosperity. “All” it asked for in return was the right to determine military strategy, ultimately creating a global alliance network that served American interests. The United States traded some market share to turn adversaries into allies, both reducing the number of foes and intimidating the remainder by the sheer size of the U.S. alliance structure. As a result, some of the world’s most aggressive mercantile powers became placid. They no longer had to go to war for access to resources or markets.

This entire arrangement, however, rested on the basis that the United States generally did not use the full force of its state power in pursuit of its singular economic ends. The United States was content to buy others’ goods and run trade deficits to command the loyalty of its allies in security matters. The question with the Obama administration’s export strategy is whether it marks a change from this mode. To increase exports, one has to increase penetration into foreign economies, and a number of countries’ economies and social systems only work the way they do because they have taken shape with minimal outside pressure — i.e., minimal competition from the United States. This is not to say that many countries do not already perceive the U.S. presence as overbearing, but rather that the United States simply has not spent much energy in competing for foreign market share over the past half century. If it suddenly exerts itself in opening up the doors of trade around the world — and doubling U.S. exports would mean finding buyers for an additional $1.5 trillion dollars worth of goods — it will disrupt a lot of places.

We are not saying that the Obama administration’s export strategy is good, bad, wise, unwise, feasible, unfeasible or anything else. It simply raises the question of whether it is a coincidence that when the dominant global power did not use state power to seek foreign markets, the degree of competition and ultimately violence among players on the international stage was markedly lower than in previous periods. If not a coincidence, then the full weight of the American nation behind a strategy of maximizing exports could have massive unintended consequences.

Yves here. And just as with Spain, if US is to reduce private sector and government borrowing at the same time, other than via selective private sector/public sector defaults, we too would have to run serious trade surpluses.

Be careful what you wish for.

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  1. vlade

    I found it incredibly funny a year ago that the consumption-drive countries implemented consumption stimulus, and investment driven countries imlpemented investment stimulus.

    I have a serious doubt on how many people realize that all our economy rests on two parties willing to exchange stuff – and that it always has to be two parties. For every debtor, there’s a lender and vice versa. This has rather large implications on the dynamics of the system. Again, funnily (in the you have to laugh otherwise you’d have to cry way), it is one thing that Keynes was a strong proponent of – but now everyone seems to associate him with the fiscal consumption stimulus.

    I disagree that the household metaphor is wrong – but I do believe it is used incorrectly. In fact, the society metaphor is even stronger, as in the same way that we can’t have ever increasing surplus/deficit countries it is bad for the economy to have ever increasing wealth gap.
    Except for China subsidying US you have savers (in general better off-poor keep their savings in cash) lending to those worse off to buy stuff which creates profits for the better off (part of their savings is investment), creating a wealth transfer which can be only funded by another wealth transfer – of money from the futuer to the present (lending).

    The savings make sense only if they are there for future consumption – otherwise they are dead weight.

  2. attempter

    I’d say the world never really departed from mercantilism. As Yves says, it was always on its face a scam that everyone could run a surplus at once, but in effect that’s what globalization claimed. This was meant to ideologically elide how rich “countries” were still the same old mercantilists.

    The system was more sophisticated, however, since elites now consciously saw their own peoples as “foreign countries”, neighbors to be beggared.

    It’s easy to see how America’s Wall Street-Washington is a predatory lender country foreign to us, sucking our real indebted America dry. That’s why we the real people should take this to heart:

    The end game of lending too much money is creditor losses. The better path is to accept writedowns and restructurings, for the lenders to take their lumps. The record of past financial crises is clear on this matter.

    The criminals would’ve been wiser to take their profits and lay low for awhile. They’re counting on the rest of us never to wise up to the fact that as the debtors we have all the real power. We can unilaterally impose the jubilee. One example would be if underwater mortgage holders finally woke up to the fact that they should walk away. That would be not only rational for them in detail, but it would be a levelling of power in the aggregate.

    Getting back to the global picture, mercantile globalization always depended upon finding new pre-capitalist strata to repeat the prior accumumations. A rich “country”, or a rootless cosmopolitan elite, could always look first to the Global South, and later internally imperialize its own people.

    And undergirding it all was the American “consumer”:

    One of the leading reasons the world has been so stable is because the traditional merchant powers have had a deep market to sell into: the United States.

    Thanks to printing the reserve currency, America could serve as the debtor of last resort. Dollarized debt could prop up this potemkin “middle class” the longest, since everyone else agreed to pretend the fiat dollar had value, since it was temporarily profitable to them.

    But now with Peak Oil and probably the intrinsic limits of the debt tower in itself, we’ve reached the end of the scam. There’s nothing underlying the now disintegrating American consumer. Without endless cheap oil the mythical Asian consumer won’t arise to take his place.

    Now, finally, the simple accounting identity must be squared at last. With no blood left to suck, the mercantile vampire must finally go thirsty. With no one left to borrow, and no one any longer able to service the existing debts, the lender must finally face reality.

    From here on, if there’s ever still going to be such a thing as textbook “capitalism”, it’ll have to live within its means.

  3. Kevin de Bruxelles

    The Stratfor piece, at least to me, confirms the notion of the US acting as the de facto global sovereign. In other words we have the US monarch providing security, creating and managing the coin of the realm, and to a lesser extent writing international law through its domination of several international organizations while his Nobles (Europe and Japan) Merchants (BRIC) and the Peasants go about their various activities. But while the reality of this hierarchy is obvious, no one dares speak its name as it is highly upsetting to the pride of many. Therefore Potemkin(in the sense of powerless) organizations like the United Nations help create the illusion of a cooporative global order.

    In the language of Hobbes, the international system has moved from a State of Nature – think hunter gatherer tribes locked in perpetual low-intensity warfare–to a Commonwealth – an ordered society but where some level crime and injustice still exist since in reality the sovereign is neither all powerful nor totally disinterested. In fact the weakness in Hobbes’ view of the world is that while his sovereign should be disinterested, the fact is that they never completely are. But the sovereign should at least give the impression of being above the petty competition of his Noblemen, his only concern should be in keeping the peace and administering justice to his subject. But for this to happen (or for this illusion to be sold) requires the sovereign to withdraw from productive activity and therefore become parasitic in the sense that his subjects must pay taxes for his services. In return the sovereign’s court helps boost the aggregate demand of his realm by engaging in vast military spending as well as splendid conspicuous consumption, and by these means they not only provide a market for excess production but they also set the fashion and cultural tends for the realm. While not perfect, this does describe to a large extent US actions after WW2 and especially after the Cold War.

    And this is exactly where the contradiction arises from Obama calling for the US to suddenly lower itself into the fray and start competing again – as much as I may personally agree with this sentiment due to my romantic visions of manufacturing. This claim to interest by the sovereign ruins the illusion necessary for any ruler to rule and inevitably many to view the world through the State of Nature paradigm, where the US becomes one of many competing Nations in a perpetual low-intensity conflict. But the sovereign’s lowering himself into the fray creates tension and distrust since he will be seen to be using to his own narrow advantages his currency, his laws, and his security forces. This pressure only gets released by removing those advantages from the soon-to-be former sovereign.

    So one obvious solution to these imbalances is for the world to swallow its pride and to just recognize the US’s role as global sovereign and to pay the necessary taxes. In other words the rest of the world would send free money, instead of loans, to the US. In return the US renounces any claim to petty interests and busies itself with the job of being sovereign. The problem up until now is that the US fuelled both its military and its conspicuous consumption first by running through its vast reserve of wealth accumulated over previous decades and then by running up debt financed by the rest of the world. This charade has to end.

    The other solution is for the US to retreat back into being just one of many nations competing within an international State of Nature (think the pre-WW2 global order). Not only does this require cutting back on conspicuous consumption and military spending, this means the dollar is no longer the reserve currency or the world, the US military abandons most of its foreign bases and retreats back to the homeland, and real international organizations arise to replace the US dominated ones. Economically the US must strive for a balance of trade. The danger in this scenario is chaos and rising militarism as other nations must increase military spending in a now suddenly more dangerous world.

    1. Kevin de Bruxelles

      And this sovereignty framework also helps explain the disappointment at recent self-interested German statements. Whether they realize it or not, many are hoping that Germany can rise above the fray to provide disinterested (or at least the illusion of) leadership in this crisis. In other words they expect Germany to play an analogous role (limited to the economic realm for now) on the European level to that the US plays on a global scale.

      For the EU to prosper we need to very soon hear German politicians making the case for disinterested German (or Franco-German) leadership. They fought two wars to impose interested German hegemony over Europe; and now that people are begging for a disinterested version of this leadership, the Germans are hesitating.

      1. Swedish Lex

        Håller helt med. Mitt intryck är att den nya tyska generationen drabbats av både fartblindhet och hybris. Övriga länder håller nog som bäst på att omvärdera sina enagemang/åtaganden gentemot EU i ljuset av Tysklands nya modell att ensidigt vilja diktera villkoren.

        1. Kevin de Bruxelles

          Det skulle förvisso bli följden om de forstätter på den banan, men jag försöker att vara optimistisk och tänka på att det tog USA ett par år att överge den själviska Morganthauplanen till förmån för den framsynta Marshallplanen.

        2. Anonymous Jones

          As usual, I agree with Kevin as well. His is a useful framework for analysis. At the same time, internal tensions (and the difficulty of “herding cats”) make any nation-state response to the developing meta-framework a difficult thing to judge and/or predict, especially over time. Here we also enter into the problem of the limits of our ability to analyze, as our ideas are usually anchored to certain imagined states of equilibrium when equilibrium may not actually exist at all and may have never existed (when viewed from close perspectives). As a very, very, very simple example…Who governs ‘France’s’ response to perceived ‘German’ attempts at EU hegemony over the next ten years? The elected officials, the elites, the voters, the next revolutionaries? Our assumption that France maintains its current borders may also be proven inaccurate over ten years. It has happened before!

          Also (and as always), when someone offers a “solution,” I like to ask “solution for whom?” I understand Kevin’s larger point, but I need a more granular explanation as to how the “obvious solutions” affect the powerful and powerless and all those living in the vague areas in between the two. Who benefits? Who loses? What do the winners do next? What do the losers do in response? The world doesn’t stop changing after the “solution.” It just develops new (and often unanticipated) problems.

          1. purple

            How did that pre World War 2 global order work out ?

            The last year has been about nation states preparing for war, trade or otherwise.

          2. Kevin de Bruxelles


            I’ve been thinking about your inspired comment all day and I think I can respond to some of it.

            I’ll simplify the question to: who wins or loses as these models of international systems change?

            The systems are groups of nations held within different types of frameworks, like a group of planets within a system. The are two variables to the wealth of each nation: the total amount and the distribution. These variables are free to move independently within each nation, but at some point we should be able to predict what effect the overall metaframe will have on the group of nations. In other words what impact the various solar systems will have on both the total wealth and distribution for the international as a whole.

            As for distribution, if we imagine a continuum of nations from rich to poor, one general pattern is that, except at the extremes, as the nation gets richer the distribution of wealth gets more even. At the two ends of scale the trend folds back upon itself. On the rich end we have the United States with its extreme differences in the divisions of her great wealth, while on the poor end we have hunter gatherer societies with very even distributions of their small amount of wealth.

            In terms of connecting a political system with the amount of wealth created we also see a pattern. Let’s define the political systems with a combination of the ideas of Hobbes and Aristotle. From Hobbes we get societies living in a State of Nature or a Commonwealth (his Leviathan, or more commonly known as a state). To subdivide the Commonwealths, lets use Aristotle’s three types of government, the rule of one or monarch, the rule of the few or aristocracy, and the rule of many or democracy(or republic). In general the trend from rich to poor would be: Democracy, Aristocracy, Monarchy, and at the poorest end, State of Nature.

            In the international systems I proposed, I only included the pre-WW2 State of Nature and the current system of US global monarchy. By continuing this thought though we see that these are not the only two choices and that the current system could also evolve into a global system of Aristocracy. In other words instead of just the US, a series of powerful countries would basically set up a system to serve as global sovereigns. And eventually this system could evolve into some stage as some sort of true global Republic (not the fake UN stuff we have now). And concerning total wealth and its distribution, if the analogy to national system holds true, then the global Republic system should provide both the highest amount of total and most even distribution of wealth.

            I just thought of this all today so I am still not certain about it but it is fun to contemplate!

    2. fromchina

      Excellent analysis.

      I don’t know who Stratfor is, but that’s a rare candid piece from any authority. It acknowledges the fact that US has been running an empire for decades. All meaningful discussions should start from candid assessment of reality.

      The situation now is, Europe and Japan are no longer “nobles”, as you put it, in this global system, when emerging countries particularly China is overtaking them all in wealth and power (G2 anyone?). As much as the West and Japan would like to maintain the arrangement established during the Cold War, fast changing reality on the ground makes that impossible.

      China is the game changer.

  4. /L

    Broke? Buy a few warships, France tells Greece
    In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.

    “No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

    “The Germans and the French have them over a barrel now,” said Nick Witney, a former head of the European Defense Agency. …

    France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft.

    Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis.

    1. Kevin de Bruxelles

      This would explain why France is pushing more of a Marshall Plan for Greece. France might have to share some of these goodies to get Germany off of their current Morganthau Plan.

      1. MichaelC

        In that case Germany may not want to share the goodies, rather they’d want to eliminate the goodies. It’s not in Germany’s interest to fund France via Greece.
        France could provide vendor financing. The transaction is an intra EU wash.

  5. Capricorn

    May I suggest that something is missing from the debate?

    Characterising a country’s trade as “surplus” or “deficit” hides what may be a crucial factor.

    Trade, in its simplest form, is simply “I have an excess of coal, but a shortage of corn. You have an excess of corn, but a shortage of coal. Lets’ trade”.

    So a deficit country needs to expand its production of tradeable goods. That doesn’t mean it has to “out-produce Germany”, only that it has to “produce goods that Germany wants”.

    And,in this simplistic view, if Germany doesn’t want to import anything, but still wants to export, it can’t – because there is nothing that it will accept in trade.

    That, to me, is simple market-enforced discipline.

    When money and, particularly, credit, enters the picture, it gets a lot messier, but I don’t see that as actually changing the basics. It just gives more flexibility – and enough rope for people and countries to hang themselves.

    And the basics are still, if a country imports, it has to produce, sooner or later, the equivalent in exports.

    So that means that any government has a strong vested interest in ensuring that its’ country produces sufficient exports to balance its imports. I’m not sure that labelling such action as “mercantilist” helps.

    1. vlade

      The problem is when you say “I have surplus of x, but you don’t have anything I’d want. Here, I also happen to have surplus of money, so I will lend you to buy my surplus”.
      If the trade is tit for tat, all’s well. What we have now is vendor financing combined with the vendor unwilling/unable to take anything but cash from the purchaser.

  6. i on the ball patriot

    The pernicious neo-con elite predatory rich have debt trapped the globe, have the masses by the balls, and thrown them into a deflective and divisive conflict where they now dissipate their energies arguing about all the wrong shit — surpluses, exports, imports, etc.

    The problem is the pernicious neo-con elite predatory rich and their central bank global debt trapping ways.

    They will not accept write downs and restructuring, nor will they take their lumps, as the old guard vanilla greed folks would have. If that were so you would have seen some positive remedial regulation by now. There is none — nada — all you are getting is lip service and deflective bullshit.

    This is the big global take down of the middle class and the global masses — we have not had a period of relative calm since the global crisis of 2007-2008. We have had a tremendous incremental impoverishing of the masses, especially the global middle class.

    Rehashing old vanilla greed voodoo economic theory and sputtering on about; surplus, exports, imbalances, yada yada, etc., is exactly what the wealthy ruling elite want you to do. Turn that shit OFF!!!!!!! The controlling imbalance is rich and poor. These pricks want you off the planet — they want your lunch — focus on them and beat them into submission in any way that you can.

    Deception is the strongest political force on the planet.

    1. zaknick

      That is exactly true. Have ourselves a sweet little revolution a la Bastille and you’ll see people prosper loose from the global financial mafia.

      But back to mercantilism… could this be true? This is the elites’ economic response to 40 years of ripping off the country’s future? Exports? Which are a tiny part of US GDP? Gimme a freaking break. Has to be for I see no massive instertate building metaphorically speaking. Beautiful.

      Will it really mean the end of the US dollar as the reserve currency? So that’s why its turning on China, to get rid of a competitor? Oh man, this is gonna be freaking sweet.

  7. jake chase

    Those who worry endlessly about trade balances miss the essence of modern business enterprise. Corporations are international. All that Chinese drek flooding the US market and destroying US jobs is creating the profits of multinational companies dominating the US stock market. China gets technology and pays for it by accumulating (ultimately) worthless dollar balances. Who will buy Treasury paper when China stops accumulating? What American made goods could be profitably sold to China under the best imaginable circumstances? Airplanes, weapon systems, oil exploration equipment? Competing with coolie labor on a global stage is not a recipe for economic success.

    A business system engages in production for profit, not to sustain life. Corporations engage in business to enhance vendability of stock shares. Thus corporate life is two degrees removed from human life. If human life is or is not sustainable at the margin, that is incidental to corporate life. Unemployment matters only to those unable to find work. Money matters for as long as the vast majority of humans never have enough. They have fixed the credit system by parking most of the toxic waste at the Fed and permitting the rest to be marked to fantasy. The game goes on. Those expecting this system soon to be shutting down are blind men describing an elephant.

  8. Gottwald

    “Yves here. And just as with Spain, if US is to reduce private sector and government borrowing at the same time, other than via selective private sector/public sector defaults, we too would have to run serious trade surpluses.”

    Yves, you don’t really mean it, do you?

    With those reductions, we will have less trade deficit,
    which is so big that we have get used to it.

    Whether that’s good for the export countries such
    as China, Germany,and Japan, is another story.

  9. RebelEconomist

    There is no need for increased global demand; just a switch from consumption to investment in the deficit countries, so that the capital inflows can be repaid. As I have pointed out on this blog before, the US has public sector investment opportunities with expected returns that comfortably outstip the interest cost of increased debt. Stop moaning about “mercantilists” and play them for fools by making a profit out of their desire to lend to you.

    1. /L

      But the problem is for most of us that we have to be indebted in foreign currency, only No1 can operate in a global scale in its own currency – money made by fiat in USA.

      Lets say China didn’t want to hold Dollars, they had to hand them over to some willing buyer, and what should this “fellow” do with them? Somewhere down the line they will come home to USA. Before GW Bush administration the majority of dollar returning to USA was returned by the global private sector, when the yield of investment in USA declined the Central Banks became the largest vehicle returning USD, the global private sector handed over the hot potatoes to CBs. One could get the idea that there ultimately isn’t anything voluntarily in returning American trade deficit Dollars to USA.

      In the present situation with big under utilization of labor and other recourses large scale public investment would be a good way to get things going, but that is against neo-liberal dogma. But in general public sector investments is not a large part of investments, the 3% deficit target in EU GSP is probably aimed at a common level of 3% public investment, EMU countries is allowed to borrow to public investments.

      Private sector won’t invest when there are idle resources, you don’t buy larger suite when you can’t fill out the one you have, more consumption is needed to fill the present suite. Public investment is just to get something useful in the first turn of the money, in the next round in the hands of those who made a killer in the public investment jobs it will probably be consumption that generate even more production. Sort of dynamic effect. Its really no big difference between real investments and consumption, real investments is only a means for feature consumption. But still the common perception is that consumption is something sinful and reckless while real investment is very good and something very different. Only in a situation of full employment and resource utilization one have to sacrifice consumption for investment, in a recession with unemployment expansion of consumption is at tool to promote investment in the private sector.

    2. craazyman

      I am “the dumbest guy in the room” (have to admit I didn’t make that up myself but stole it from talkradio host Ian Punnet).

      Still, I’m dumb. I’ve been mind wrestling with this surplus/deficit macro equation for weeks and don’t feel I have a hold on it. At a level of intuition, it just doesn’t feel right to me. It seems to leave out important hidden variables. I’m not an economist and certainly not a macro economist. So all these terms and definitions sort of spin me a bit.

      I certainly do get the idea that not every country can run a trade surplus — that is mathematically impossible — but I don’t get the notion that the world can’t grow if internal growth in nations is somehow faster than the slowdown in export growth in mercantilist countries.

      What I don’t get is what triggers internal growth, in terms of key drivers of demand. Clearly, in a poor country, there is plenty of demand. There just isn’t the wealth to manifest that demand in spending. When I think of what wealth is, it gets very complicated and transcends easy quantification. It touches on abstractions such as security, shelter, access to food, freedom of action, etc. Striving for these, as people will, results in generation of “demand”, but without a social equilibrium that allows creativity to flourish, there is a limit to how much wealth can exist. When the striving is between groups, it can reduce wealth through destruction and violence.

      A mercantilist nation can lend to other nations, producing demand for exports. It can lend internally, or pursue policies that result in that, creating internal demand. If the wealth produced exceeds the debt created, the country has gotten richer, not poorer. In other words, its assets grow faster than its debt, boosting its “book value.”

      When I channel this stuff I see a yellow bouquet of flowers expanding like a mind memory image, with lots of furious back and forth energy going on around the petals. This is my model of internal demand resulting in wealth creation. More for everybody, driven by creation and cooperation. The creation and cooperation are the hard parts. They often must surmount massively negative historical karma.

      I channel most things. So I’m sure my reasoning is fuzzy, just like money and wealth. It’s all fuzzy. I don’t think there’s any way to ratioanlly predict what’s going to happen. I still need a 10 bagger but can’t figure out if it’s a long or a short.

  10. PJM

    Do you remember the battle about who must pay the greek bailout? The battle between frecnh and germans? Well, after the elections, french agreed to support germany and tomorrow we will have a extraordinary meeting, to change european treaties, concerning fiscal discipline.

    After wall we will not have a new war. Politics in Europe is more special than americans are used to see. ;)


  11. Hugh

    “Rehashing old vanilla greed voodoo economic theory and sputtering on about; surplus, exports, imbalances, yada yada, etc., is exactly what the wealthy ruling elite want you to do. Turn that shit OFF!!!!!!! The controlling imbalance is rich and poor.”

    You know that is singularly well put. Ultimately, it is not about the numbers but the quality of life they represent. If the quality of life is not there, then the numbers are meaningless. What most people want is a certain level of security with regard to home, family, job, health, education, and retirement. What they get instead are houses they don’t own full of junk, bad healthcare or no healthcare, a deteriorating education system, high unemployment and job uncertainty, disappearing pensions and renewed threats to Social Security. Stock market bubbles and plans to return to mercantilism simply hide and distract from the real concerns of most Americans, and indeed most people on the planet.

  12. don

    When talking of surplus and deficit, lets focus on what really counts: the deficits of the poor, the surplus of the rich. Think of it internally to any country, and think of it globally – either way.

    It all comes down to that, and the notion that some grand balance can be attained globally while the most profound imbalance of all (between rich and poor) continues to exist, is simply ridiculous.

    Generating wealth necessitates generating inequalities. To think that all boats rise (the ideological thrust of global trade), while maintaining inequality is nonsensical.

  13. Panayotis

    What happened to the Portoguese that did not want to offer any solidarity to Greece! Now rating companies and the specukators will play havoc with the Portoguese debt! However, Greeks will offer Poertugal solidarity because you need it!

  14. PJM

    Dear Panayotis, dont worry. We will fixe it. We dont blame Fitch or others for our problems.

    The most important thing is that we will have fiscal discipline. Do you see, sometimes is good listening others to know where we failed. And improve.

  15. Jim

    Hugh and I on the ball:

    So lay your cards on the table–where do you want to go and how do you want to get there?

    Perhaps, if each of us becomes more specific in terms of our fundamental assumptions and premises for modifying our economic and poliical system maybe the debate can move forward and greater insights can be gained.

    Recently the MMT perspective has been introduced on this site. From my viewpoint, this tendency within the NC blogger community, helps to clarify how our modern monetary and fiscal system actually operates On the other hand, this same tendency, because of its war on the deficit terrorists or erroists, tends to reassert the primacy of a left (state sympathetic) vs. a right (market sympathetic) paradigm which I view as outmoded and a hindrance to launching the type of political/economic reforms I see as necessary to turn around our country.

    The contemporary architecture of both the market and the state have failed us. I favor a radical decentralization of power through the gradual creation of system of parallel institutions which would eventually attain hegemony through more and more people directly creating and working in new types of economic, political and cultural institutions at a regional and local level.

    Stated in its most utopian terms I favor a 21st century self-managed Republic drawing on our Jeffersonian traditions. The vehicle I would support in order to get to that goal would be a majoritarian, insurgent democratic movement.

    A key premise of my dream is that democracy is more than an idea–it is a way to act and a way to live.

    1. i on the ball patriot

      “The contemporary architecture of both the market and the state have failed us. I favor a radical decentralization of power through the gradual creation of system of parallel institutions which would eventually attain hegemony through more and more people directly creating and working in new types of economic, political and cultural institutions at a regional and local level.

      Stated in its most utopian terms I favor a 21st century self-managed Republic drawing on our Jeffersonian traditions. The vehicle I would support in order to get to that goal would be a majoritarian, insurgent democratic movement.

      A key premise of my dream is that democracy is more than an idea–it is a way to act and a way to live.”

      Jim, I share many of your dreams, especially about building parallel institutions. Living a life parallel to the system is essentially what the prudent do. It allows them to be more self directed in their own lives and less of a ‘burden’ to others. I subscribe to that now as best I can in my own life.

      But zaknick raises a good point, there is a well established system of the wealthy ruling corporate elite that ruthlessly preys upon all of us, the prudent and less so, and they must be dealt with along the way as parallel institutions are built over time.

      For instance, I believe that working within the system is a futile energy dissipater and so I favor election boycotts as a vote of no confidence in government. Running a parallel citizens election in tandem with that effort would be an integral part of those boycotts. And so it is with each parallel institution built, there should be an active confrontational component to all of them.

      Another instance would be to build a confrontational model corporation, competitive with an existing corporation, that would provide better opportunity for employees, be socially responsible and have elected citizens on its board of directors proportional to dollar gross of the corporation as it grows.

      Unfortunately some measure of confrontation is essential to positive lasting change.

      Deception is the strongest political force on the planet.

  16. yoganmahew

    Mr. Wolf says:
    “what Germany wants to see is a sharp cutback in fiscal deficits throughout the eurozone. With the fiscal deficit contracting and output weakening, the way out for each country would be via falling relative unit labour costs and higher net exports.”

    As Capricorn and other point out above, this is not really what Germany is saying. Mr. Wolf, IMO, mistakes the German frugalness for stupidity. The Germans are not saying “let them eat cake”, they are saying “let them eat bread”… it is not exports that deficit countries have to worry about initially, it is imports. They need to stop buying stuff they cannot afford.

    The EU allows consumption taxes to be as high as 25%. Many countries that don’t make anything they use, but have excessive balance of payment problems, Spain, for example, has a VAT rate of 16% just above the EU minimum of 15% (it is planning to raise it to 18%). The nordic countries (Norway and Sweden anyway, have VAT rates of 25%).

    The point being, if you are not making the money, you can’t continue to borrow for the lifestyle. It does apply to countries as much as it applies to people…

  17. PJM

    Dear yoganmahew, exactly. Youre saying the truth and is the portuguese problem. Excessive internal demand because we arent exporting enouph.

    There are more errors that some anglosaxon opinion makers are deliberately doing. For example, when germans are talking about labour costs per unit, they arent saying that we must have lower wages. No, is adding vallue to our production. I.e., with same wage costs improving productivy and selling goods with more margins and value added.

    In Germany thats what they did in almost their entire export productive sectors. Annd that is what theyre doing in Portugal, in their factories. Like Volkswagen or Siemens.

    And it isnt only Germany. Ducth and danish companies are discovering that is better stop production outside their countries because they pay lower wages but the productivy and quaity is lower. So they return their production at home because is better paying higher wages but with less costs per unit labour.

    The anglosaxon opinion makers are lying or they dont understand industrial economics. I bet they are misleading their readers intentionally.

    In my cowntry, Portugal, is our challenge. How to have better production with same wages. Some sectors are doing better than others but the challenge is improving value to our production without having a fall in standard of living of workers.

    Maybe that chalenge will put pressure in lower prices and maybe we will have deflation but its unlikly because “prices have memory”.

    Thas why this anglosaxon war against “mercanthilists” is only the way to cheat others and trying to impose trade wars, sanctions or deliberated bad marketing against american competitors. Like Toyota or even Mercedes.

    I never saw this level of decadence in american politics as today. We feel that Obama Admnistrarion are like the normal looser who dont have other economic policy than blame others and cheat his international partners.

    Do you see, we were betrayed by USA with lies to atack Iraq. Now were beeing betrayed regarding international trade. Everybody is seeing that and Mr. Obama will notice too, soon or later. We cant be cheated by USA in this way. Its time to americans weak and dont pretend launch a international trade war, like in the thirties.

    But, hey, were still smiling.

  18. PJM

    What is sad is this. if you study economic history you know what kind of economic system that USA is implementing today. Do you see, wich economic system protects his oligarchs, is proteccionist-socialist against international partners and has a lot of propaganda to deceive their people? I can sugest the name of that economic system. But I dont. You can discover by yourself.

    Regarding China, who his the main winner with outsourcing and international trade flows? I dont need to pretend to give new ideas. We can read american thinkers, like mr. Charles Snith.

    “Alarmist headlines blare the “bad news”: China’s trade surplus with the U.S. is at record highs. But if this is so bad for the U.S., why are U.S. corporate profits at record highs? Could the two facts be related? Of course they are. U.S. companies’ manufacturing of goods in China is creating enormous profits, not for the Chinese but for American corporations.”

    In http://www.oftwominds.com/blogs/China-trade.html

    Of course this is an chinese-american problem. But to the world is one example. As others.

    When USA are in trouble what does? Proteccionist propaganda do hide their own problems.

    This isnt good. USA is making some mistakes. And I think denying the benefits of free trade is wrong and is strange to see USA is behaving like a rogue state.

    Of course if USA will start a trade war, I think USA will loose more than thinks. Thats the problem to having too much teorichal people in the governement. Theorichal persorn is good to teach, not doing things. Inside Obama Admnistration… Too much theorichal politicians. Dont fits good academic persorn with good politican.

    But I still believe that american people wakes and blame his leadership and elites instead others or foreigners. And start doing the right thing. Because, these kind of thinking and behavior is the same as in the thirties. We now how that mess starts but never how it finishes.

  19. Sundog

    Yves wrote: “A common reaction is to see the savers as virtuous and thrifty and the borrowers as profligate, and to generalize from what happens at the household level, and simply view an heavily indebted economy as profligate.”

    Well said. This fallacy is all to prevalent.

    The Stratfor quotation is correct on preferential market access in exchange for security cooperation during the Cold War era.

    However, what is the reader meant to conjure from the expression “traditional merchant powers”? Japan, for example, pretty much closed itself from the outside world for 300 years until Admiral Perry’s black ships arrived in 1853. Its empire was more an instance of megalomaniacal psychosis than a program for obtaining resources and market access.

    “…the United States simply has not spent much energy in competing for foreign market share over the past half century….” As a continental power, the US has never interested itself much in exports with the exception of heavily subsidized agricultural products and military equipment (of which civil aviation has been a subset in this country). The desire on the part of US-based multinationals to dominate industry abroad, while very real, is not about exporting anything.

    I would argue that what kept the peace (ignoring the many vicious proxy wars, though this is unconscionable) was Mutually Assured Destruction combined with real pacifism on the part of the Japanese and real desire to avoid future hostilities on the part of the Germans and the French. And Mao’s murderous blunders, of course.

    “…the full weight of the American nation behind a strategy of maximizing exports could have massive unintended consequences.” The US has always preferred to implement industrial policy helter-skelter through tax expenditures; the only thing the full weight of the American nation will ever get behind is greater social acceptance for its rapidly growing numbers of the morbidly obese.

    On tax expenditures, for those unfamiliar with the concept:

    What you may not know — I confess that I didn’t — is that the cost of existing tax breaks rivals the costs of Medicare and Social Security and is growing every bit as fast as the two giant entitlement programs. In fact, the automatic escalation of tax breaks is very similar to that of entitlement programs.

    Aggregate revenue drain from tax breaks topped $1 trillion in 2009 and actually exceeded the total money collected from personal and corporate income taxes. By contrast, Social Security outlays are expected to hit $730 billion this year and Medicare to hit $451 billion.

    The cost of existing tax breaks is soaring three or four times as fast as inflation. Even if Congress doesn’t add a single new one, the automated escalation — above and beyond inflation — will cost the government $2.85 trillion between now and 2020.

    Edmund Andrews, “The entitlements no one is talking about”

  20. jdmckay

    Hi Yves… :)

    ok, I’ve said what I have to say in past comments on this subject I think Wolf is off purpose, and line of discussions he initiates are gibberish. It seems you like… no, embrace these notions. It also seems, from comments to your postings, that at least in NC’s corner of influence you are taking some minds w/you: eg. you are “persuasive” to some degree.

    Congratulations… I wish you the best in deciphering how the new world order will constitute itself.

    An observation: (from memory) you put up a post 2-3 weeks ago saying (among other things, and again from memory):

    “it could be that globalization may be unworkable”

    (I think that’s pretty close).

    Then about 10 days (or so) past, you said something to the effect it was now official:

    globalization is unworkable

    It now seems, from this and your last few days posts, that work has begun in earnest “rethinking” from new bedrock of the “globalization is unworkable” assumption.

    Again, just an observation.

    We’ve had +/- a decade, especially from “conservative” (WSJ, NR, CATO, WS, Republicans & K-Street etc.) econ “thought”, driving home to America and the world that globalization, “free trade” etc. was the way to go, to “build wealth”, and all the rest. Among the core mantras behind all this, particularly in “deregulated” finance, was underlying free market notion:

    Capital will flow to where it’s most needed

    Now… in a very general sense, given current US economic/financial fragility, we do have what you all like to call a “liquidity” problem, right? So logically (correct me if I’m wrong) I see 2 possible conclusions to be drawn when considering our “fragility”:

    a) that this “law” of capital flow worked (it’s a law, right?) as advertised… that the $$ flowed exactly where most needed, and that those of us who think otherwise really need to rethink meaning of “most” and “needed”.


    b) Our captains of finance/economics/business picked the US economy, Federal Government, and functioning of US instituions, savings/investment of collective US “wealth” clean… they have stole it all fair and square, we’re broke, we lack a purpose relevant to indentifying >> solving the “most needed” thingies, etc. etc.

    I’m of the 2nd opinion… but what do I know? As you’ve told me in the past, I don’t understand “trade accounting”, or “extended supply chains”.

    Now, if there’s one thing I’ve learned from this decade of “free market” functioning and “capitalism” in action, it’s that… as our captains of industry/finance have told us, this model produces “winners and losers”. And I must admit, I grossly underestimated the proportionate dispensations this “moral” system of “capital flow” would produce.

    I also grossly… no, completely missed the domain of productivity quotient… eg. that “hard work” is rewarded. (Maybe I need to look up meaning of “reward”… seems my concept of that one doesn’t fit the landscape either.)

    Briefly, what I’ve seen in last +/- 10 yrs: US biz financed factories and stuff manned by +/- 1 billion little 3rd world yellow people that made all our stuff. Now, until your realization (globalization unworkable), as I followed the econ news, this was a good thing. And God bless those Chinese… they worked +/- 70+ hr. weeks, improved their skills and product, and delivered increasingly more/better “stuff” to our doorsteps and all that.

    And all the factories US investment built over there that helped fullfill that other globalization promise of “cheaper goods”… by avoiding the messy environmental considerations we have (had?) on our shores that so impedes progress, and pumping whatever byproducts our “stuff” left behind into ground/rivers/air, US biz improved productivity and delivered more stuff and everyone was real happy.

    Until about 2 years ago, when somebody realized WS had been cooking the books for 10 yrs and more or less blown all our savings. Who could have known? Or to quote what’s her name, “Quelle Surprise”!!!

    Now, again… as I understood the rules of “hard work is rewarded”, it ocurred to me that it was just ok that these furriners, joyfully making our stuff and living on the cheap, managed to save a few bucks and buy some things for themselves… even reinvest a little so they could experience the “American Dream” of ownership.

    But… as you pointed out to me prior, eg: my ignorance of international accounting and such, this Chinese saving was illusory:

    The savings result from the cheap peg. The currency accumulation results from the cheap peg. In all honesty, you clearly do not know this terrain at all.

    Anyway, I see where you’re coming from. Clearly… as in like a wrecking ball in my forehead, I really don’t understand international accounting whatsoever. In fact, for that matter, I don’t understand US Federal gov. accounting, nor ENRON off book accounting, nor derivative balance sheets.. really, none of that shit makes much sense to me at all!!!

    So I dive on the sword, and appreciate your determinations that, well… the $trillions we dumped into Iraq don’t matter/need review, and that now that the “finance system has been stabilized” there’s no need to reevaluate whether all that capital is flowing where needed, or a few other little thingies like a media that can’t tell a freedom fry” from 90,000 enemy combatants” in Bagram prison, or (…)

    I anxiously await the results of your conclusions filtering out into the system… can’t wait to see the Chinese revaluation trickle back onto our shores and get things go just right.

    God Bless you Yves!!!

    Oh, let me give a little meditation for the day, a nice little shapshot of Earth’s human makeup. I know, I know… totally off purpose and irrelevant to internatial accounting and such.

    Never the less…

    If the World were 100 PEOPLE:

    50 would be female
    50 would be male

    20 would be children
    There would be 80 adults,
    14 of whom would be 65 and older

    There would be:
    61 Asians
    12 Europeans
    13 Africans
    14 people from the Western Hemisphere

    There would be:
    31 Christians
    21 Muslims
    14 Hindus
    6 Buddhists
    12 people who believe in other religions
    16 people who not be aligned with a religion

    17 would speak Chinese
    8 would speak Hindustani
    8 would speak English
    7 would speak Spanish
    4 would speak Arabic
    4 would speak Russian
    52 would speak other languages

    82 would be able to read and write; 18 would not

    1 would have a college education
    1 would own a computer

    75 people would have some supply of food and a place to
    shelter them from the wind and the rain, but 25 would not

    1 would be dying of starvation
    17 would be undernourished
    15 would be overweight

    83 would have access to safe drinking water
    17 people would have no clean, safe water to drink

  21. TC

    By MarketWatch
    HONG KONG (MarketWatch) — People’s Bank of China Vice Gov. Zhu Min said Thursday China was committed to shrinking its trade gap with the world by encouraging growth in imports, building on a trend reflected in the trade data for the first two months of the year.

    “China should and could import more to keep the [trade] surplus smaller,” Zhu told reporters in Hong Kong. “This is good for China and this is good for the rest of the world.”

    Zhu also said that the real exchange rate of the Chinese currency had been appreciating, but didn’t elaborate on what he meant.

    Zhu said the value of China imports rose 60.3% in January to February, outpacing a 30% growth of exports during the period, resulting in a trade surplus of $21.8 billion.


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