Martin Wolf: China, Germany Commiting World to Deflation

The Financial Times’ Martin Wolf gives a cogent and sober assessment of what he deems to be a destructive refusal to adjust policies on behalf of the world’s two biggest exporters, China and Germany. The problem is that both simultaneously want to have their cake and eat it too.

As we stressed in a recent post, large foreign exchange surpluses, beyond what is useful to defend a currency, is NOT a sign of strength. They cannot be spent without causing the currency to appreciate, something that surplus-dependent countries are unwilling to do. Thus these holdings, which were incurred by acting as de facto export subsidies, cannot be utilized without serving as import subsidies. As Wolf elaborates:

China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses.

Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

Wolf stresses that this posture is a threat to open trade and the eurozone. Wolfgang Munchau parsed the so-called Schäuble proposal yesterday:

I was confused when Wolfgang Schäuble, German finance minister, proposed a European Monetary Fund….. I realised that the EMF is just a smokescreen. The real bullet in his proposal is that countries could leave the eurozone without leaving the European Union. This is not about helping countries in trouble. This is about helping them to get out.

The political message of the Schäuble plan is that Greece will be the last bail-out ever. As preparations for a bail-out reach an advanced stage, the German public reaction has become progressively more hostile. If the Schäuble plan had already been in place, Greece would already have headed to the exit. It is hard to conceive of a situation under the plan where a country simultaneously fulfils the criteria for aid, and needs it.

Wolf today teases out the implications:

Three points can be drawn from this démarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone.

I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand. The eurozone would not be exporting the demand the world now needs. It would export excess supply, instead.

Imagine that weaker eurozone countries were forced to contract their fiscal deficits sharply. This would surely weaken the entire eurozone economy. But the result would also be fiscal deterioration in Germany and France. Imagine that Germany then did don the hair shirt. Would it instruct France to do the same? After all, France already has a general government deficit forecast by the Organisation for Economic Co-operation and Development at close to 9 per cent of gross domestic product this year. Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the eurozone. These are a mere bagatelle. The threat is the public finances of big countries. Since Germany could not force such countries to behave and has no chance of expelling any member it disapproves of from the eurozone, it would have to leave itself. That is the logic of Mr Schäuble’s ideas. This must be obvious to him, too.

Yves here. Rob Parenteau, in a series of posts (here and here) explained longer-form, in the case of Spain, why adhering to austerity targets looked certain to produce a sharp economic contraction. Back to Wolf:

Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!

Speaking at the end of the National People’s Congress, Mr Wen declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.

What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.

Yves here. I am not sure Wen does. Per Upton Sinclair: It is difficult to get a man to understand something when his salary depends upon his not understanding it. Back again to Wolf:

Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports…..

In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust. Forget all the self-righteous moralising. Try some plain common sense, instead.

Yves here. This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.

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  1. Cindy6

    I can argue just as well it’s the debtor nations that want to have their cake and eat it. If they don’t want these trade deficits, tighten up. There will be no funny money to spend on imports anymore. They can also enhance their competitiveness by cutting prices, which no one on this planet or mars can do anything to stop, and boost exports tremendously. But no…that will be too painful for the civilized people. You see, only Latinos and Asians should be subjugated to stiff austerity programs administrated by the IMF.

    Deflation is not really that scary if you’re a creditor (I know, I lived thru one. It’s wonderful, ur purchasing power kept increasing:) Just like inflation is much more palatable to debtor. Yes, China and Germany don’t want to foot the bill for global imbalances. But then, why should they, it’s not like the debtors are doing anything remotely helpful. At least the Greeks tried…

    1. Yves Smith Post author


      The creditor nations are the ones that took steps to keep their currencies cheap and preserve their surpluses. For instance, China has been running a currency peg since 1994.

      Moreover, what is true for you as an individual creditor is not true for a creditor nation. Creditor nations do much worse in deflationary periods. They have to restructure their economies fundamentally, which leads to widespread unemployment. The debtors merely default selectively and depreciate their currencies. The historical record is pretty clear on this issue.

      1. bio

        And the debtor nations took steps to keep their currencies strong. Notably under Rubin. Everyone knew then that a strong currency will not be good for exports, but it was good for the financials.

        And after defaults, descend into “third world” status.

      2. Cindy6

        Was the RMB/USD exchange rate considered cheap back in 1994? I don’t think so. In fact, I remember quite well China was under tremendous economic and political pressure to DEpreciate during the ’98 crisis, as most other Asian currencies did already. Even Japan succumbed, at a great expense to its prestige within Asia. So you see, the peg has never been a tool to accumulate surplus, but a vote for stability. Besides, no one called the RMB cheap back then, why is it cheap now after after a 20% appreciation?

        Basically global imbalances need to the debtor nations to consume less and the creditors to consume more. But now, the debtors are not willing to do anything serious, so why should the creditors care? Of course, this will not end well. So it would become a game a chicken and a war of attrition.

        As for the pain suffered after the endgame, I would postulate that the creditors will last a LOT longer, since their savings will alleviate unemployment. In fact, this is the other side of Keynesian that the likes of Krugman never talk about. Fiscal stimuli should be funded by money saved up during good times. China can keep the factories humming with its reserve, for a while, and give the products to the peasants. In fact, this is the essence of last year’s rural home appliance program. There’s talk of continuing with another rural home improvement program. Given the disaster in SiChuan, I think this will be money well spent.

        Another factor you should bear in mind in your comparison w/ GD1 is that China’s urbanization rate is barely 45% now, about the level of the US in the 1910’s. Worst comes to worst, the migrant workers can just go back to their farm. Unemployment will not lead to starvation. The labor shortage we hear about this year is partly aggravated by workers don’t bother to return to the factories after the economy improves.

        Now, what could the debtors do? They can default of course. Existing debt has never been the problem. The problem lies in their fiscal deficits, that they need fresh, new money to continue their day to day existence. Even if the debtors default selectively, do you think the other investors will continue lending at these rates? And if you think losing an empire, suffering a horrendous war, and losing a reserve currency is actually doing better, then we live in alternate universe.

        The bottom line is if inflation is more preferable to deflation to the creditor nations, then we wouldn’t be having this discussion. China and Germany are only doing what’s in the best interest of their citizens. The same reason why the Fed will continue printing, to the detriment of other nations.

        1. Yves Smith Post author


          First, deflation is not a healthy state of affairs. Look at Japan, look at the US late 19th century where there were farmer uprisings, the UK in the early 20s. The deflation imposed on countries at various times is considered to be the prime reason that no one now (save gold bugs) wants to go back to the gold standard. Mild inflation is considered to be the least bad of monetary growth choices, and there is a school of thought that the view that 2% was a good level might be wrong, there is now some thought that somewhat higher levels might be better. I have no idea re the optimal level of inflation, but deflation is destructive to growth.

          Any currency peg (if a hard peg, which China’s was, and is still pretty hard) will lead to distortions. I say later in this thread quite explicitly that when China’s peg became too low is subject to debate (some say as early as 1999) but there is no question it was too cheap by 2002.

          Re urbanization, the 45% figure you cite is based on China’s own distorted metrics. China has unusually high density thresholds for a community to be classified as “urban”. Many significant manufacturing centers are called “villages” or “towns” when no one from abroad would call them that. Houston and Brisbane would also be “towns” in the Chinese schema.

          Your charge re debtor nations is off base. Unless a country goes into a trade surplus, it is impossible for it to lower its outstanding debts on an aggregate level. So China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt. If you want the US to delever, there is no way other than for the US to go into a trade surplus, or at least lower its trade deficit substantially so its GDP growth rate will exceed its rate of debt accumulation.

          1. Tiry

            Who says deflationary is not healthy? As far as I am concern, 100% of factory should be replaced by robots who will be taxed 100% and the state will redistribute these tax.

            (aka. japan inc.)

            Why should anybody care if a car is made 95% by robot, cost 30% less and 1000% more reliable compared to over priced manual labor?

            Does anybody expect manually made car factory line will run forever?

            Too bad if the rest of planet still trying to compete using ‘inflationary model’. Entire china still run on manual, and they are about to start adopting fully robotic line combined with ultra cheap high productivity labor. Japan times 10.

            That’s how china can build high speed rail overnight.

            Of course I wouldn’t want to be “a bank” since no bank will make money in deflationary situation. But it’s about time those fuckers die.

          2. jake chase

            This little debate exposes the vulnerability of the whole globalization game: persistent trade surpluses require stable financial flows. Unfortunately, it produces speculative short term financial flows which create boom and bust. Expecting China to become nineteenth century Great Britain, insisting the US can export its way out of insolvency if only China appreciates its currency may produce good academic sound bites, but I will not hold my breath for results. The United States needs to start turning inward and put this globalization idiocy behind it. Of course, this means taking on financial elites and corporations salivating over potential Chinese consumption of Coca Cola and Hollywood movies. Time to start making things and stop making money peddling useless shit.

          3. IBelieveInMagic

            The original sin was adopting the US dollar as reserve currency — Congress thought that they could have the cake and eat it too. But, now we are faced with the downsides of a reserve currency, namely the trading partners need to build up reserves to buy commodities that are denominated in the reserve currency.

            The US can reverse this trading imbalance by agreeing to replace the USD with other currency/synthetic currency. But, then Congress will suddenly have to adopt disciplines similar to ones being forced upon others such as Greece. In short, there are no palatable choices…

          4. Blindweb

            “I have no idea re the optimal level of inflation, but deflation is destructive to growth”

            Wow, are you really still in the economy must grow school of economics? Please take a basic ecology class. If we don’t stop the growth soon there will be systemic collapse; Easter Island Mayan style.

          5. Robespierre

            “but deflation is destructive to growth”

            I disagree look at the hightech industry. It is destructive to the financial industry and to the miss-allocation of capital. We had house inflation that took us here do you think that that was healthy?

          6. Cindy6

            “Any currency peg will lead to distortions.” Bretton Woods led to distortions? Stable currency and prudent fiscal policy are of no use to the world?

            “urbanization…figure you cite is based on China’s own distorted metrics” So the US std is the truth and only truth now? The fact that many Chinese towns had higher population density 200 years ago than Houston now should never be considered? For the record, Japan defines its urban area as population density of 4k ppl / 1sq. km. , compared to 1k in China and 386 in the US. I don’t have the corresponding figures for S. Korea & Taiwan at hand, but I bet they converge towards China rather than that of the US.

            “China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt.”
            Not true. The US (or France or whichever) can always increase exports and depress imports by lowering prices. Yes, this is deflation I’m arguing for. This was how Germany regained its competitiveness in the 90’s, by “internal depreciation”. And yes, it’s painful, which is why the Germans now absolutely refuse to let the debtors whine their way out of the medicine and steal their hard-earned savings.

            “If you want the US to delever, there is no way other than for the US to go into a trade surplus”
            Not true either. The debtors can delever by good old fashion default. What can China do to a nuclear-armed soverign nation? Not even the PIIGS are pushovers. This is unsecured credit card debts! Trade deficits self-correct. China via UST, Germany thru bank loans. All the debtors have to do is get their fiscal house in order and the threat of higher interest rate would be a hollow one. But then, this would mean Austerity. How dare those sneaky parasitic savers!

            So, at the end of the day, trade war is inevitable.

        2. Adam

          Cindy, you obviously don’t understand what those reserves represent.

          “In fact, this is the other side of Keynesian that the likes of Krugman never talk about. Fiscal stimuli should be funded by money saved up during good times. China can keep the factories humming with its reserve, for a while, and give the products to the peasants. In fact, this is the essence of last year’s rural home appliance program.”

          That is not true! How are US dollars savings for China? They are just proof of their export subsidy. How can China keep its factories running with US Dollars? Would that not require them to exchange them for Renminbi? Would that not cause the Renminbi to appreciate (hello)? Would the appreciation of the Renminbi not cause export to drop? Would the drop in exports not cause mass unemployment considering something like 60 or 70% of their economy is export oriented?

          It’s that last question that keeps China awake at night. They know damn well that they’ve back themselves into a corner because they can’t use their reserves. They can’t change and export oriented nation into a domestic consumer based economy overnight. Granted everyone involved in the imbalance is guilty of not doing anything about it when the party was going full tilt, but to assume that it now requires one party (the debtor) to fix it is ludicrous. IMF oriented deflation might work on a one-off basis, but if the world tries it now you’re going to find out that it becomes a great depression 2 with massive debt deflation and not just price deflation.

          1. Cindy6

            Adam, Pls educate urself on how Chile funded their fiscal stimulus w/ the “not-really-savings reserve” last year. And how Hong Kong squeezed the speculators with their “export-subsidy” during the Asian Financial Crisis.

        3. jdmckay

          I think you’ve got it about right, Cindy (and I’ve said about the same things you did every time Yves recycles this meme).

          Most incredible to me, however, is all these FOREX geniuses have these FOREX “laws”, but they never ever talk about the underlying economy of given nations and how that differentiates them.

      3. jdmckay

        The creditor nations are the ones that took steps to keep their currencies cheap and preserve their surpluses. For instance, China has been running a currency peg since 1994.

        Geez Yves, this time you forgot to say Germany and China both share cheap labor, undervalued currency, etc. etc. You imply it, just don’t say it directly this time.

        On this subject, you read like a broken record… utterly obtuse.

      4. jdmckay

        The creditor nations are the ones that took steps to keep their currencies cheap and preserve their surpluses. For instance, China has been running a currency peg since 1994.

        Geez Yves, this time you forgot to say Germany and China both share cheap labor, undervalued currency, etc. etc. You imply it, just don’t say it directly this time, as you have previously.

        On this subject, you read like a broken record… utterly obtuse.

    2. RueTheDay

      “Deflation is not really that scary if you’re a creditor”

      What a crock.

      Whenever libertarians/Austrians/goldbugs sing the virtues of deflation, they are always making assumptions which turn out to never actually be true.

      The most common assumption is that they will continue to have a job and that it will provide them with an income that does not decrease, thus allowing them to scoop up all these deflating goods for a song.

      In your example above, you are assuming that debtors will not default. If they do, and they most certainly will, then all of a sudden it’s not so good to be a creditor any more.

    3. J Ruane

      Very well and correctly put Cindy. Austerity seems to be a prescription that only works for the more darkly complected.

  2. John Moore

    The World can’t afford a global financial test to destruction because such a test could lead to actual national tests to destruction. The Great Depression led to World War II. If we have a Great Depression this decade, will we have World War III soon after? A war with nuclear weapons is not a war because there will be few survivors. Alternatively, the U.S. may collapse and become something akin to the Russian Federation. Are policymakers disconnected from reality, inept, or just insane? We already know that most economists who make policy seem to be incompetent, witness the Fed. What crazy times we live in.

    1. gordon

      “Alternatively, the U.S. may collapse and become something akin to the Russian Federation”.

      More like a South/Central American country, I imagine, with a small racial elite owning all the assets and rewarding itself very well, and a big, amorphous and very poor underclass below. Law and order maintained with the methods the US has learned South of the Border.

      Once the divide is made it is virtually unbridgeable, and I suspect the air of desperation which seems to pervade US political and economic discourse these days has a lot to do with that. The boat is about to leave, and people instinctively know that if they don’t get aboard now they (and their children’s children) never will. Sort of reminds me of the last helicopter out of Saigon.

    2. jdmckay

      Are policymakers disconnected from reality, inept, or just insane?

      Yes, yes & yes.

      Funny though, reading that… implication is that “policy makers” = law makers/elected & appointed (eg: gov) officials.

      However, AFAIC US’ big downward spiral is most attributable to fact the former group handed the “policy maker” mantle to their political contributers lock-stock-and-barrel. And it’s now to the point where, from all I can tell, they’ve been listening to themselves for so long they just don’t know any better.

      We have far bigger problems on our shore than an undervalued RMB, that’s for damn sure. We’re driving our economic car steering with the rear view mirror, and all these econ experts (Wolf, AEP etc.) want to blame it on all those $.70 p/hr chinese that we shipped all our jobs to.

      And Yves concludes globalization doesn’t work? It worked… it did exactly what those hammering for it wanted: cheap labor for their pocketed large profit margins at the expense of US society.

      US is getting exactly what it deserves. Unfortunately, most of the natives haven’t quite figured out what that is yet, they still think they are just good patriots.

      1. jonboinAR

        It looks to me like your 4th and 5th paragraphs are somewhat contradicting. In the 4th you say that we need to stop blaming the gigantic swamping Chinese labor supply. In the 5th you say we need to blame the American industrial leaders who have ruined us by using the gigantic, swamping Chinese labor supply. Do you mean that it’s the fault of US industrial/financial decisions and that the Chinese currency peg has no big effect? In that case you do at least agree that the gigantic swamping Chinese labor supply is a big problem.

        If we can somehow coerce China into appreciating it’s currency, and that will make made-in-America products more competitive, shouldn’t we, without all of this blaming talk?

        For me, if we have to conduct a trade war with China, or at least threaten one, in order to return manufacturing to the US, let’s get it started. I don’t give a hoot about whose “fault” the current imbalance is, I want it fixed.

        1. jdmckay

          Do you mean that it’s the fault of US industrial/financial decisions and that the Chinese currency peg has no big effect?

          uh-huh, ’cause that’s what they did.

          They did not re-invest here, improve product or R&D in most any relevant field, they offshored for quick large margins. BushCo aided and abetted the effort through tax incentives to do so while relying on (mostly) Chinese Treasury purchases to finance our housing bubble, off the books Iraq “liberation”, etc. etc.

          Crony capitalism eventually plays out to rude awakenings, US just hasn’t awakened yet.

          In that case you do at least agree that the gigantic swamping Chinese labor supply is a big problem.

          It’s a problem for US labor, in that, by standards we set by (essentially) financing China’s industrial growth w/cheap labor, US labor… now under trained by world standards, under educated by the same, and demanding standards of living 20-50 x that of equivalent Chinese labor…

          Well, I don’t know… how all these econ gurus think that all we got to do here is…

          a) cajole China into a 10-20% upward currency evaluation
          b) ramp up our dilapidated manufacturing sector

          … and that somehow Yves simplistic equation of “international accounting” will mean increased US exports, lowered US trade deficits, return of “high paying jobs” to our shores (etc. etc.)…

          These people are nuts. China doesn’t care that US ran up it’s credit card bill, screwed it’s economy, invested nothing @ home, delapidated it’s education system, and hung bill for banksters malfeasance around necks of taxpayers.

          China really doesn’t care. The reasons for this should be obvious on our shores, but they are not… a testament to our cultural myopia, and a result of US not practicing what it preached for the last decade plus.

          If we can somehow coerce China into appreciating it’s currency, and that will make made-in-America products more competitive, shouldn’t we, without all of this blaming talk?

          Well, that’s a mouthful… but 2 pertinent points:
          a) China’s upward evaluation, even 20%, is at best going to mean only incremental change in US balance of trade, exports etc. Yves (and so many others) say otherwise, but they’re dead wrong: it just won’t have much effect. One only has to look at China vs. US industrial infrastructure, worker compensation, reinvestment… everything like that to see why.
          b) For China, this is not primarily a currency valuation issue: it is a currency protection issue. For better or worse, China has decided and planned so that the derivative casino $$ guys can’t prey on their currency as they did in Iceland, (tried to in) Greece, and diluted $USD here. China’s currency is very much tied to their domestic production and they want to keep it that way.

          And if I was in charge in China, I’d do the exact same thing. US was the flagship for globalization, we set the rules. China worked for shit wages under those rules, and managed to save and reinvest.

          US rode Enron bubble, housing bubble, took the quick cash and now the bill is coming due. And the solution, by paradigm suggested in Wolf’s article cited by Yves, is that China needs to suck it up another few cycles so US populace doesn’t have to suffer the indignity of the lowered standard of living which is inevitable.

          Cindy is exactly right: US has earned a devaluation. China is simply calling our bluff.

          For me, if we have to conduct a trade war with China, or at least threaten one, in order to return manufacturing to the US, let’s get it started. I don’t give a hoot about whose “fault” the current imbalance is, I want it fixed.

          Well that’s fine. I have no idea what your backround is, or your understanding of these doings over last decade. However, as I’ve watched US econ engine stripped of it’s fuel, piece by piece over last decade, I’ve also watched most of ignorant US populace buy the various mantras from WS & bought-and-paid-for politicians that have been out and out lies.

          You may “want it fixed”, and a few 10’s of million co-citizens the same, but “wanting” and “doing” are 2 different things. The gap between them is what needs to be filled if “fixed” is going to occur. Unfortunately, US has not made it to the starting line in that endeavor at this point.

  3. Swedish Lex

    If Germany and Franc are unable to agree on this, they could at least agree on trying to push down the value of the euro. Like the rest of the world currencies.

  4. attempter

    Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke…..

    Yves here. This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.

    Yes, it’s fractal Walmartization. The same insane dynamic at every magnitude: Impoverish your own customer, force him into debt to remain your customer, and expect that you can stay in business that way forever. On its face, that cannot work.

    There’s been alot of lectures lately on accounting identities. It’s funny how such an elementary concept can be so systematically denied by everyone involved, so many allegedly “intelligent” people.

    That’s because just like with the zombie banks with their toxic “assets”, there is no solution which would preserve the power and wealth of these persons. The existential insanity of the finance sector is an iteration of the same insanity of globalization itself.

    In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust.

    When I see the term “both sides” and the word “adjust” I assume it’s class war code. I think the people have been “adjusted” more than enough. Far beyond the bounds of even normal tyranny and crime.

    But yes, in the end it’s up to us, the alleged debtors. We can keep paying these protection rackets, or we can eradicate them. In the case of globalization, America has the relatively easy option of repudiating the whole mess. We can restore our own manufacturing, this time at a sane level of rational use rather than demented “consumerism”.

    We can still grow our own food, once we restore the millions of small farmers we need.

    1. DownSouth


      You say “We can still grow our own food, once we restore the millions of small farmers we need.”

      True. The US produces its own food, plus much more. Mexico imports about 50% of its food stuffs from the US.

      However, keep in mind that food production and distribution is a very energy intensive business. And most of it requires a type of portable energy–gasoline and diesel–that cannot be easily replaced by electricity. The US imports about 2/3 of its oil.

      While greater efficiency can be accomplished rather painlessly in the transport of people (smaller and more efficient cars, public transport, doing away with the suburbs, etc.), is there such an easy solution with food production and transport? Maybe there’s a way. Gardens? Local farms?

      Anyway, I see the food production and distribution problem as being more intractable than the people transport problem, and much more important to human survival.

      To me food production and distribution, along with environmental degradation, are much more fundamental problems than some of the other problems we work ourselves into a lather about. Right now we’re basically concerned with how we’re going to keep the booze, drugs and cigarettes coming, and the underlying necessitates required to keep life going receive little attention.

      1. attempter

        Victory gardens (and Freedom seeds), local farms, permaculture, and all of it defossilized, you name it, we’ll have to figure out how to do it, for the sake of freedom and because Peak Oil is going to force us to do it anyway.

    2. Eric

      “Fractal Walmartization”? What the heck is that supposed to mean? I’ve been buying things in Walmart for many years and I have neither been impoverished by it nor been forced into debt to keep shopping there. I will allow that you probably do mean something specific by this new term, but try using real words with well accepted meaning in comments, please. Your comment might have a an important thought behind it, but using terms like the above just makes it seem you’re a crank of some sort.

      1. Tao Jonesing

        Actually, I thought attempter’s “fractal Walmartization” was a brilliantly turned phrase deftly applied and adequately explained.

      2. attempter

        I won’t vouch for the immortality of the phrase, but I thought the parallel would be clear enough.

        Sorry if you can’t follow the logic of how globalization has gutted American jobs in the aggregate, while Walmart does the same for individual communities one by one, and in both cases for the temporary ability to buy cheap crap.

        So what now? Is everyone in America supposed to work as a Walmart greeter? And then who’s supposed to pay for all the public services Walmart leeches off of? (Or I guess judging by your tone when a greeter turns up lame he should just be taken out back and shot.)

        As for your implicit claim that you’re either ignorant of what Walmart has wrought, or that you don’t care, I’ll let that speak for itself as to what it makes you sound like.

  5. Martin

    Yves, what you write is clearly false, dito what Wolf writes.

    They cannot be spent without causing the currency to appreciate, something that surplus-dependent countries are unwilling to do. Thus these holding, which were incurred by acting as de facto export subsidies, cannot be utilized without serving as import subsidies.

    There are no large foreign currency holdings in Germany. And if Germany would spend more, the Euro would go DOWN not up. There were as well no export subsidies via the buying of foreign currency. So please explain, what you mean with this paragraph.

    Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

    Obviously Wold believes the same nonsense. The German gov’t hasn’t bought up any foreign assets at all. And the German gov’t is NOT insisting that others stop to borrow. This is a complete misunderstanding. It just does not want to bail others out. Can Wolf point to one statement of a German official demanding Spain to stop borrowing?

    More over, the same mistake is done by Wolf in this piece as he often does.
    Germany DOES NOT want to have a trade surplus. The political decisions, that influenced the trade surplus HAVE NOT been made on the background to increase trade surpluses. The Euro IS NOT a German driven project, and in so far as it concerns Germany, the Euro is a political, not an economic project. France demanded German participation in the Euro as price for the reunification, and Kohl himself once declared, that he doesn’t understand a lot of the economy.

    And by the way, if Germany would withdraw from the Euro, it would most likely NOT lose any money, as of course just as in the case of a Greek withdraw Germany would not redenominate its debt, but just flowing variables.

    So while there are similarities between China and Germany, it doesn’t make sense to put them in one basket. Germany has not unilaterally pegged its currency to those of other countries. Actually more the other way around.

    1. Yves Smith Post author


      There are FC currency holdings by German banks. German banks, particularly Landesbanken were major buyers of dollar assets, particularly subprime debt.

      The price used for the conversion to the DM to the euro is now believed to have been too low. The rationale at the time was to aid Germany through the deflationary shock of absorbing East Germany. The problem is that now that after that adjustment was completed, there is no way to “reset” relative labor prices.

      1. Detlef


        “There are FC currency holdings by German banks. German banks, particularly Landesbanken were major buyers of dollar assets, particularly subprime debt.”

        I believe Martin wanted to point to the difference between China and Germany?
        In China the Central Bank “owns” the foreign currency to keep the dollar peg. In Germany it´s (private) banks and cooperations owning the foreign currency. And it´s not used to defend a Dollar-Euro peg. Something like that?

        “The price used for the conversion to the DM to the euro is now believed to have been too low. The rationale at the time was to aid Germany through the deflationary shock of absorbing East Germany. …”

        Are you sure?
        Pretty much every newspaper article I´ve read mentioned that the DM was overvalued when entering the Euro system.
        Saying that this was one of the main reasons why the German economy was stagnating in the early 2000s.

        Just to be sure I looked at some foreign currency rates from the 1990s. The French and Belgian Franc, Dutch Gulden and Irish Punt stayed pretty much constant during the 1990s. The devaluations here against the DM happened mostly in the 1980s.
        The Spanish, Greek, Italian and Portuguese currencies all devalued against the DM in the 1990s (before entering the Euro system).

        Italian Lira:
        1000 Lire = … DM (yearly average)
        1985: 1.5394
        1990: 1.3487
        1995: 0.8814
        1998: 1.0132
        Entered the Euro at 1000 Lire = 1.0101 DM
        That´s a devaluation of 25% since 1990.

        Same with the Spanish Peseta. A devaluation of almost 26% from 1990 until the Euro start.
        100 Peseta = … DM
        1990: 1.5860
        1998: 1.1779
        Entered the Euro at 100 Peseta = 1.1755 DM

        “Only” a devaluation of 14% since 1990.

        (Source for the data above: Deutsche Bundesbank
        and using 1 Euro = 1.95583 DM)

        Greek Drachma:
        (Source: Internet website historical currency rates)
        100 Drachma = … DM
        First week January 1990: 1.07
        First week January 1998: 0.63
        Euro entry at 100 Drachma = 0.57 DM
        Devaluation of 47% since 1990.

        I´m not sure if that indicates that the DM was undervalued at the Euro start? All of todays Eurozone “problem countries” devalued their currency in the 1990s.

        It does indicate that especially these countries might be in trouble without the possibility of devaluation.
        Don´t know why politicians didn´t want to see this back then. 47% in 10, 12 years is quite a lot.

      2. IF

        I think you are missing the point. Germany just went through ten years of deflation to become competitive. It only achieved this recently. Lets assume you give everyone in Germany a 50 percent raise. All that does is that Germany will go through 10 more years of deflation to become competitive again. You see, the Germans have an attitude problem. They believe in strong currency and export. It is ingrained in their psyche.

        But, and this is the good news, they don’t mind to retire in the Toskana, Southern France or the Canary Islands. This can easily be used to bring the current account into balance.

  6. bio

    Yves, I don’t understand why you feature this piece. In your other posts you give a diagnosis of what ails the US, and that is that the country is essentially captured by the “financial” industry. Until that calamity is resolved how can we bash Germans or Chinese? What are they supposed to do: destroy their productive capacity so we export to them? But what, what can we export? Furthermore, how could industry develop under the dominance of the “financial” industry?

    I also don’t get the bashing of China over the exchange rates. First of all, a good number of businesses have benefited enormously from the ability to manufacture things in China very cheaply and sell them in the US cheap. Second, at the point where we are right now, a big slice of the US population manages to survive because of cheap things made in China. Imagine that everything in WalMart and a good chunk of things in Sacks went up in price by 100-200% overnight – what a disruptive effect would that have on the populace. Are business and political leaders prepared to live with social consequences of such turn around? Could there be a less disruptive way?

    1. Yves Smith Post author


      First, an overly large financial sector and chronic trade imbalances, and financial instability are strongly correlated. A high level of international capital flows favors entrenched financial interests.

      Second, the idea that the US is incapable of manufacturing competitively is a canard. Advanced economies are supposed to be unable to compete in apparel, right? So how does (by all accounts not very well managed) American Apparel, based in LA, pay workers $12 to $13 an hour to make sweatshirts and t-shirts and show a profit? We ceded FAR more manufacturing than was economically warranted, because outsourcing was in vogue and Wall Street was pressuring companies to do it. I’ve put stories in Links about how US companies are bringing production back to the US. Another 10% off the dollar vs. the RMB and we’d see a lot more.

      Third, the US has a large domestic economy. Exporting more would be lovely, but just serving more of our domestic needs with our own workers would make a big difference.

      1. bio

        “…because outsourcing was in vogue and Wall Street was pressuring companies to do it.”

        So, why don’t we address the problem head on.

        As to manufacturing in the US, my reading is that many jobs that were eliminated in the recession will be resurrected abroad.

        1. Detlef

          The same happened in Germany.

          A Homecoming for Lost Jobs.
          (Der Spiegel, September 2007)

          “But many companies are reluctant to talk about such developments, and they shy away from discussing their previous offshore flops. “They bear the stigma of not having succeeded abroad,” says Ralf Löckener of Sustain Consult, a consulting company that examines, among other things, the long-term effects of moving production offshore.

          Instead of drawing attention to the fact that they are creating jobs in Germany and reaping the public relations benefits, companies “prefer to suffer the persistent negative headlines about their former offshoring of production,” Löckener says. “They are especially concerned about their rivals gloating.” “

      2. Tiry

        Kill the financial sector than. (yeah, I don’t see willingness to stop derivatives trading, or have more traditional balance sheet.) Or how about stop wasteful activity like going to war for neocon and Israel?

        The problem is not china, japan or germany, they create wealth the old fashion way. Sweat and hard work instead of front running the market. (40% of US GDP gain) The problem is Dollar overvaluation and the attitude brought by decades of dollar dominance.

        18% of dollar economy does not the world make. It cannot dictate the world. The bigger world wants something different.

        Welcome to capitalism 2.0.

        Chinese peasant does the work for 30% the price and 80% the quality. Japanese robot does 160% the quality for 80% the price.

        1. Walter

          “The problem is Dollar overvaluation and the attitude brought by decades of dollar dominance.”

          How can dollar overvaluation be a problem, and China’s pegged currency not be one?

          1. Tyra

            1 Billion + south east asia vs. 300 million?

            that’s like saying everybody is wrong except me. Sooner or later global reality will hit, that we are the one out of step.

            18% of dollar economy does not the world make.

    1. bb

      yves, are you really still writing in this blog or you have hired an intern to do all the work?

      you indirectly infer that it is china & germany’s task to reduce the u.s. trade deficit, because if they do not run trade surpluses, there will be no offsetting deficits as well.

      you can just go one step further and suggest that chinese & germans should buy american made cars so they can save the world from deflation.

      1. Yves Smith Post author


        I am writing this blog, you just don’t like the message.

        You present a straw man, and you seem not willing to read the argument. It is CHINA that is taking ACTIVE measures to keep its currency cheap. That is economically equivalent to a large export subsidy. If they did it as a subsidy, it would be a clear WTO violation. Doing it this way makes it more cumbersome to deal with.

        The US trade deficit with China is to a significant degree due to CHINESE action. Go look at the trade deficit with China starting in about 1999. There is some dispute as to when the RMB started being artificially cheap, but it most assuredly was by 2002.

        We similarly tolerated Japan keeping the yen cheap in the 1990s for different reasons, although the Japanese did not manipulate their currency in as obvious a way as the Chinese. Japan is very important to us strategically and was/is a basket case, we didn’t want to kick them when they were down, so we tolerated them having an export sector in overdrive in the hope they might be able to fix their domestic economy.

        1. Tim Coldwell

          Maybe the USA could get China to stop its peg to the US dollar if it were to accept that the days of the US dollar as the world’s reserve currency could be phased out so that the USA cannot resort so easily to the printing press. Cake and eat it indeed.

        2. bb

          i entirely agree with you that china has quite a mercantilist trade policy. it is a problem of its own society though, they are the people that tolerate being robbed with capped wage growth. they as well tolerate tremendous malinvestments that further rob them as a group.

          but on the other side, i think the chinese yuan may indeed be quite overvalued relative to other currencies: china is a resource hungry land, the masses are lagging in education relative to the developed world, the party wastes monumental amounts of money on fixed structures with strongly negative returns, the bank system is de facto bankrupt with those huge annual loan rollovers because they cannot be repaid, etc. on the last point: there is no reliable data, but the $1.6 trillion of bank loans made last year are not net loans, this equals to a 1/3 of the country’s gdp. this year there will be another $1 trillion flowing out, another 20%+ credit injection relative to gdp.

          i tend to think that china HAS TO run a significant trade surpluss to compensate for the monumental waste of money from domestic political decisions, otherwise they will go bankrupt in the matter of 3-4 years.

          so is the currency overvalued or undervalued? depends if you look relative to the price of the workforce (your position) or relative to the health of the economy (my position).

          1. bb

            and another area i did not touch upon: china keeps most of its ‘savings’ in the form of u.s. treasuries and banknotes (electronic form, no heating utility either). we all know too well about the willingness of u.s. politicians to raise taxes, the ever present fiscal ‘discipline’, the comparative advantage of the u.s. army over the chinese…

            do you really think china has any leverage, any real wealth to back its currency with anything? imagine a 10% imports duty imposed tomorrow on all imports by western countries and china is a toast. china is a serf to the west, you and i should be happy that someone is accepting paper backed by nothing in exchange for hugely discounted labor.

        3. pebird


          While it is manifestly true that China “manipulates” its currency (although when Argentina tried to peg their currency to the dollar, it wasn’t called manipulation), the US has accepted this practice – it is clearly a trade subsidy and could have been dealt via tariffs. But it wasn’t – it wasn’t a problem for the US in the past, but now it is.

          Clearly the only way China could execute its growth strategy was to have easy and continued access to US markets. They were going to accumulate excess dollars. If they were going to float their currency – the traditional counterbalancing financial FX forces would have restricted this strategy – either the dollars would have been recycled into the US economy or the RMB value.

          What is more important is that the US allowed this obvious subsidy in place for so long. We can’t claim ignorance – how can you have “free trade” if FX markets are wired? We were and are active participants in the peg. So what is really the current problem. I don’t think we have a good enough analysis yet.

          As far as China complaining about “depreciation” – hey, buddy we are on a floating exchange rate – the markets determine the rate. We didn’t peg the dollar to the RMB – you pegged the RMB to the dollar.

          1. bb

            you seem out of touch with reality. the yuan peg is not something agreed at high level or something u.s. businesses object. ordinary citizens wouldn’t object either if they understand that their disposable income will be much lower, the economy will be as well, were it not for the imports of extremely cheap consumables from china. how many iphones would apple sell at $1000? how many PCs would dell sell at 2x the price? how often would you change your sneakers if they were 2-3x more expensive? what other expenses (mostly movies, restaurants, vacations) would you have to do without to cover your basic needs?
            the currency peg is hugely beneficial to the u.s.: the country imports goods in exchange of money that it will eventually depreciate. who would vote to for a politician insisting on raising taxes to repay debts to the chinese? do you agree that the best way out of this situation is devaluation of the USD? how would revaluing the yuan improve the situation, the accrued debt is still impossible to repay.

  7. Martin

    Overall European banks including Landesbanken don’t have large Dollar/Euro exchange rate currency exposure. I’m pretty sure about that one. The Landesbanken have bought the subprime credit with borrowed dollars. The exposure is to default.
    But again, if Germany would import more and export less, the Euro would fall, as well against the Dollar.

    The price used for the conversion to the DM to the euro is now believed to have been too low.

    This is for sure false, and I don’t know who had that “rationale”. It is as well nonsense, that the reunification was a deflationary shock. It produced inflation, and lots of it. The Bundesbank increased rates over 8% at the time, to stop the start of a construction bubble.
    The DM entered the Euro at a too high value, and basically every serious economist agrees on that one. The Euro exchange rate was fixed 1998 and Germany ran continuously current account deficits to 2001.
    But more importantly the Euro introduction itself forced Germany to run current account surpluses for some time.
    Before the Euro introduction, German corporations could borrow considerably cheaper than e.g. Belgian companies next door. Due to the Euro, the Belgian corporations could suddenly borrow for the same price. This effectively meant, that Germany had overinvested compared to e.g. Belgium, because investments had been done on the assumption of the very low borrowing costs plus the assumption, that the neighbours could have done that investment, while in the other EU countries investments had not been done, that now were profitable.
    By the way, this is another difference between Germany and China. Germany has relatively low net investment – lower than e.g. France.

    Germany regained competivness via the rest of the Eurozone by internal devaluation ca. 2005. The internal devaluation continued afterwards, and produced problems. But it is short sighted to view wage restrained only from the point of view of trade. It has as well effects on productivity and factor substitution – high wage increases force more rationalisation. Germany (and the Netherlands even more so) managed very low productivity increases just before the crisis. Low productivity increases can be a GOOD thing, because the growth came from increased employment instead. And indeed even now the unemployment is relatively low compared with other times during the last decade.

    Nevertheless a reasonable way to reduce the trade surplus in Germany would be more investment. Again a difference to China, where the balancing has to come from consumption.

    1. Yves Smith Post author


      I have re-read the opening section, and can see where the development of the argument could have been clearer. I can see that by going from a mention of China and Germany to a sermonette on FX surpluses, it can be read that I am implying Germany has an FX surplus due to the sequencing, as opposed to is acquiring foreign assets. But the FX surplus discussion is stated as a general principle, and for US readers, the issue is the trade row with China.

      1. Martin

        Well, I can add to the US-China dispute only, that a revaluation would be a good thing for China as well, and the Chinese leaders are too much in the pocket of their export industry to see the cost for the rest of the people…

        However, you have Michael Pettis on your blog role, so probably you know that anyhow.

        1. Yves Smith Post author

          Yes, agreed with their version of a vested interest problem. Although I also have a pet, and unprovable belief: that even if they wanted to increase social services (which pretty much everyone seems to believe would be the way to get the populace to consume more), corruption at the local level would probably a major impediment to delivering services.

          1. purple

            I don’t think China will start re-implementing the iron rice bowl ; they spent a lot of energy carefully dismantling it starting in ’79 or so. Coastal elites are pretty happy with things in China now, with the -ignorant peasants- out of power. To be rich is glorious.

        2. Carrick

          a footnote — let’s not forget how deeply entwined the PLA is in Chinese business. The CCP leadership’s economic concerns aren’t solely with pacifying the population through economic growth or making political statements to foreign nations, they are also grappling with party politics — party leadership directly connected to the PLA or allied w/ it have an interest in preserving its vast business interests.

          Factions in the larger party have been wrestling with divesting the PLA from the economy (vocally) since Jiang Zemin. They’re bold enough to shoot down orbiting satellites w/o seemingly alerting the foreign policy folks. They might be just as likely to be twisting arms (necks) behind the scenes, despite larger national & intl interests, to preserve their grip on (economic) power.

  8. /L

    The situation have to be evaluated in context of overall productive capacity, in the present situation claim that the world is living beyond its means is ridiculous when unemployment is soaring everywhere.

    The mercantilists are a major problem in the present situation. What is somewhat amazing is how the mercantilists is able to sell their policy to its citizens, how it benefit them to live beyond their means, consume less than they produce an someone in the system is amassing illusory fiat money.

    In principle the deficit countries is now requesting that the citizens of the surplus countries raise their standard of living and get better part in the productive capacity created by an outstanding development in productivity and efficiency.

  9. /L

    If I not recall wrong Keynes in his approach to post war economic order his model was to “punish” surplus countries i.e. they had to increase their consumption to alleviate unbalance in the system. While we got the opposite in the Breton Woods system, deficit countries was to be “punished”. But it’s only a balance sheet that have to come in balance, just because one column is perceived as negative and the other is perceived as positive it’s not an issue of good versus evil. But there is probably something deep morally emotional about this about plus and minus, probably deep rooted in an Lutheran and Calvinist world. In a European context the dividing lines is pretty much Protestantism vs the Catholic part.

    1. RueTheDay

      Yes, Keynes came up with a mechanism for dealing with this very problem. Look up “Bancor” and “International Clearing Union”. Keynes correctly identified the problem – the existing system put all of the burden of adjustment on the deficit nations, who were least able to make the adjustment, and this led to global crises. Unfortunately, America was the leading creditor at the time, and so vetoed the proposal.

  10. renting_is_like_ownership

    Or we could just write this headline thusly – ‘U.S. and U.K. Committing World To Inflation.’ Which, as debtor nations (in several senses), is to their advantage, of course. And which may even shed a little light on why German society, at least, has a very broad consensus that inflation is deeply corrosive, due to the destruction of the savings of prudent and responsible citizens, and in turn how that destruction can further lead to the destruction of a civil society as those who have seen their future taken away look both for scapegoats and for solutions.

    The Bundesbank has never really played by the rules of those who advocate assuming debt and then inflating it away as a way to keep consumption high. Which has led to the completely unexplainable result, from the perspective of those that feel sacrifice in the present is worse than pain in the future, that after decades of protecting the value of German savings resulting from maintaining an advanced manufacturing economy, Germans still have both savings and a competitive manufacturing economy.

    And ironically, those living in nations without either of these see that as a problem to their own plans to simply try to shift the burden to anyone else – their children, for example.

  11. /L

    It’s highly emotional, as here in Sweden the Greens is basically very much ardent enemies of the evil “consumer society”, our continues huge export surplus is rarely or never mentioned but when it occasionally surface even the greens shine up and think it’s splendid. That gives the conclusion that they think its evil when their fellow citizens consume but when foreigners consume its very good. I fail to see the logic in such position, but it’s probably just “normal” greediness, one of the seven deadly sins. But ill guess they are happy that the ardent mercantilism comes to price of anorectic growth in the domestic economy. The only real need for export is to pay of import, to starve the domestic economy to achieve export surplus is stupid and is definitely not to the children’s benefit.

  12. kevin de bruxelles

    I’ll take a shot at this from a big picture perspective.

    There are three major economic organization models: the East Asian, the Anglo Saxon, and the European. The characteristics of the East Asian model are low consumption, high savings and investment into manufacturing, suppression of workers and wages, and in the end a high rate of exporting and large current account surpluses. The Anglo-Saxon model is just about the reverse, high consumption, low savings, and large current account deficits. The European model (not specifically Germany) is the balance between these two, moderate consumption, moderate savings, and a balance of trade (imports roughly equalling exports).

    What is becoming clear is that globalization can only be stable if, either every economic block has roughly a balance of trade or the accumulation of reserves flows from those accumulating surpluses back to those accumulating deficits. This worked beautifully between the US and China in the first half of the last decade where the Chinese were financing the real estate bubble in California. Hamburger flippers were able to buy half a million dollar houses as well as loads of Chinese consumer goods. The party only ended because the Chinese sent this money to California in the form of loans and these loans could not be paid back. Had China just freely sent this money to Californians, we would still be having a boom!

    But the funny thing is the exporting countries are loath to give free money to their customers!

    Only small imbalances of trade can be covered by debt. When the imbalances become too large, the debts become unserviceable and crashes occur.

    The problems are the same between Germany and Greece. While the balanced European model works well on the global stage, internally unsustainable imbalances have occurred. Europe made a huge mistake in implementing the Growth and Stability Act because it concentrated on fiscal imbalances. Far better would have been a Growth and Trade Act that disallowed imbalances of trade between members. In other words penalties should occur when within the EU when a country had either a trade surplus or deficit of say 2-3% (I don’t of course know the optimal figure). Or alternatively, if a country wanted to run a large trade surplus, they would have to provide transfers of wealth to the resulting debtor nations, a pretty hard sell to domestic populations.

    So in the discussion of whether it is China’s fault or America’s, whether it is Germany’s or Greece’s, the only answer is that both sides of the imbalance are at fault, an imbalance is an imbalance. The only remaining question is how to get back to a balanced situation; whether the imbalances have crossed the point of no return. Small imbalances can be made up only by BOTH diminishing imports for the debtor countries and increasing consumption in the creditor countries. This seems to be the path at least Greece is on but as has been pointed out the Germans will have to get on board too by increasing consumption or this will fail. Once the Rubicon is crossed though, after the level of imbalance is too much, the only possible result are free money transfers, whether voluntary (creditor bailouts) or not (debtor defaults). This surely seems to be the case between the US and China, and in this case the US seems to be in the better position since they will be the ones getting the free money!

    1. Tiry


      It’s basic frugality and productivity. Nobody is putting gun on californian head to be in debt to own McMansion filled with walmart crap.

      The American dream paid with credit card.

    2. Anonymous Jones

      Pettis has talked about this repeatedly (at least regarding China and the US), that it is impossible to have this state of affairs without both sides being complicit. That said, even though there is shared complicity, the “solution” may be to strategically attack a particular policy in one country (like currency manipulation in China) that will start a chain reaction to bring down the entire edifice of the imbalance.

      Identifying “fault” and determining “solutions” are two wholly separate things.

    3. Detlef

      Germany could of course point out in return that it was and is the largest EU net payer.
      (2008 data. “Die Zahler” = net payers, “Die Empfänger” = net receivers.)

      Roughly 25% of all EU net payments today. Back in the 1990s Germany paid roughly 50% of all net payments.

      And that Greece for example was the largest net receiver of EU money in 2008.

    4. IF

      Club med already gets free money via EU transfers. Sounds like they want more, but Germany, Holland and Denmark don’t want to be as generous.

  13. Carrick

    In a post yesterday you mentioned how outsourcing to Asia, particularly manufacturing, turns out to not pay off as well as a lot of companies hope. If you get the inclination to expand that I would love to read it.

  14. /L

    I don’t know how it is in China and Germany but here in Sweden the export industry is serious powerful, they call the shots on politics of economy entirely there is no alternative view at all. Export-import/GDP since 1993. Sweden is way beyond Germany on a per capita basis, China isn’t even close in dollar and cent per capita. We have a record high VAT of 25% to starve of “excessive” consumption that also is an indirect block on import. Our Central Bank have previously shadowed €uro rates, the curves of the crown vs dollar have gone parallel with €uro vs dollar. Our CB was “of course” as smart as ECB to peaking interest rates when the expected crisis exploded in mid 2008. When the number started to drop in on record decline in export last quarter of 2008 our CB reaction was to smash down interest’s rate below the usual relative to ECB and the crown did depreciate. Our finance minister is so happy that his putative stimulus of the economy (9,4% official unemployment) haven’t caused any spill over on import, we only have had continuing record high export surplus since 1993, round about 7,5% the last two years.

    I guess it’s pretty much similar in Germany, that the export industry have massive economic resources to propagate that they are the only thing that count in the economy.

    In modern advanced and developed economies/industry low labor cost is not necessary a major driver of competitiveness, there is an continuing decline in numbers of employees while the industry produce more and more. A few years ago GM did arrange a contest between its Saab factory in Sweden and Opel in Russelsheim German for a new line of cars, but it was a fake contest the production line was aimed for Russelsheim where they have a EU subsidized new factor and European design centre, it didn’t matter that gross labor cost at the German plant was 30% higher. I don’t know for sure but I guess that labor cost to put together a car is in the range of 10-20% of total cost.

    1. Kevin de Bruxelles

      I lived in Sweden for a few years in the early nineties (Lycksele and Saltsjöbaden – how’s that for some contrast!) and still go back often. There is no doubt that on the East Asian – Anglo-Saxon spectrum Sweden is much closer to Asia; despite their almost universal love of American culture. Consumers are so limited. Take food for example, there are almost no alternatives (just the occasional Saluhall) to the supermarkets. If I wanted a whole chicken to roast I had to really search all over the place to find one and even then it would be a soggy industrial one. And I won’t even mention trying to find a decent bottle of wine to drink for less than a day’s salary. :)

      But Sweden being small and on the periphery has gotten away with a lot of self-interested behaviour over the years despite their international image to the contrary. But their model of liberal capitalism tempered by social democracy has produced an amazingly stable society and a high standard of living and is my model of an ideal society.

      But the only long-term way Sweden can have a large surplus of trade in the current situation is by someone issuing free money to the debtor nations, which may in fact be Sweden this time if the defaults start occurring in the Baltic nations.

      1. /L

        I lived in Sweden for a few years in the early nineties (Lycksele and Saltsjöbaden – how’s that for some contrast!)

        I’m not so familiar with those northern barbaric parts of Sweden, down here in the south we still doesn’t really have come to terms with the Swedish Anschluss to Scania 1658. ;)

        Well it’s a stable society, more sinister people maybe would say a compliant population. The Greeks is out on the streets in anger that among other things that the EUrocrats demanding boosting VAT to 20%. Even the Germans go out protesting when the government tries to tighten the belt to hard, that would never happen here. The public pensions system could be “reformed” pretty much as the republicans want to “reform” Social Security in USA without much of serious alternative views protested it. The Swedes still in general is in the believe that whatever is done is done in their best interest.

        1. kevin de bruxelles

          Re: Anschluss. My mother-in-law is from Ängelholm and although she has lived in Stockholm for 50 plus years she still has those red and yellow Skåne flags all over the place in her house. And thanks to her influence I can sing along to way too many Edvard Persson songs!

          You are so right about the follow-the-leader instincts of Swedes. Nothing troubled me more during my time there (OK maybe the lack of sun during winter in Lappland was worse); but on the other hand it has worked for them so far….

  15. Hubert

    On Germanys currency reserves: What the private sector earned, the financial sector has squandered. Publicly owned banks have bad assets at around 800 bn Euros – let us say 300bn of it will be payed back (an optimisitc ssumption in my view) – then there are no surpluses left. In addition you have some rogue actors like Daimler mamagment buying Chrysler or Deutsche Post with DHL in US wasting resources.
    So Wolf misses the story. I am wondering how brilliant people like him can be so blind. Please – where are Germanys big FOREX reserves – or where are the big amounts of FDI, overseas assets? Chrysler ? Goldman Subprime Mortgage CDO 123 ? German CA surpluses hopefully will be a problem 5 years from now; the old ones have evaporated.

    On Greece: Not working and not paying taxes is a brilliant strategy for individuals, NOT nations. Culture does not change, at least not as quickly. Anything lent to Greece by stupid and/or irresponsible German institutions is lost already. Another 55 billion German surplus (plus what will show up in CDS exposure and who knows what else). You will not get it back short of military occupation (and that would not work either). Any Greek bailout should not be more than a rollover of debt financed by its proportional creditors without letting any Greek institution getting close to the register.

    IMF vs EMF – does not get IMF money seniority in any reorganisation? Remember Argentina? MIght this not be a bigger reason to keep them out compared to Sarkozy-Strauss Kahn antagonism ?

    1. Tortoise

      I agree with the thrust of your comments on Greece. In fact, the inhabitants of Greece have none to blame but themselves for the troubles they are in. The Germans will do Greece a favor by not bailing them out, and should not give a single euro! The Greeks at large do their best to avoid taxation, it is true. Public servants do not work much and are disorganized and corrupt (with notable exceptions). Life is chaotic and little “mafias” of worker and special-interests syndicates exercise more power locally than the central government.

      BUT the private sector of Greece is alive and quite vibrant. Greeks in the private sector work very hard and are exceptionally efficient and productive. For all you heard about early retirements, the true average retirement in Greece is about 61, which is roughly the same as in Germany or the USA. (Based on numbers that are a few years old, it is true but it takes time to collect and publish all these data. There is a huge difference between target retirement age and actual retirement age, plus you must consider the effect of early retirements of uniformed workers like military officers, pilots, firemen, etc.) “Official” salaries and pensions are rather low.

      The problems of Greece are disorganization and corruption in the public sector. The rest is for public consumption.

  16. Martin

    Actually this is a bit pessimistic. Daimler etc. is already incorporated in the NIIP. And it is not only that Germans make bad investment decisions elsewhere but as well the other way around.
    What has Walmart paid for its misadventure in Germany? And what about all those real estate funds buying up Condos in the assumption, that a market as cheap as the German one simply has to go up?

    And of course Daimler, Deutsche Bank etc. are more than 50% owned by foreigners anyhow. Landesbanken are an issue, but I doubt, that you are correct with the scale of the problem there. But even in that case foreigners would take a hit, because the Landesbanken have borrowed from private banks, which are partially owned by foreigners, and there is no way, that the Laender would bail out the Landesbanken with negative equity of 300 bn. That would be too big to rescue.

    1. Hubert

      Sorry, no, it is realistic.
      Over 200 bn Euro in US CDO´s which can be considered next to worthless. On Top of that all the Souvereign debt. So I stand by the numbers. They will even get bigger with time.
      Real estate Funds in Germany overpaid by maybe 20-30% for maybe 10 billion investments. Landesbanks overpaid bx 100% for over 200 bn. Numbers matter.

      Daimler at the time of the merger was still primarily owned by Germans. It paid in stock for Chrysler.

      Landesbanks are too politically connected to fail. The Bad Bank scheme is on. It is just a way to keep it off-balance sheet as they are supposed to pay back the Bund. Just how? It is too much money and the banks are too stupid to earn it. But they will still try with new liquidity. Somebody wrote somewhere that HRE has already invested some 5 bn new money from the State in Greek state bonds.

  17. kssong

    America did not lose jobs because others are more competitive,
    it is the (imported from the british )American money creation system whereby money created by the banksters out of thin air is the people’s debt.
    on top of this money created out of thin air, it is interest bearing.
    Worst still every now and then wars, market turmoil,fraud,etc are created by them so that the governments, the people, the corporations are in trouble financially and in need of funds.
    in this dire conditions created by the banksters others have no choice but at the mercy of the banksters only because the (corrupted) government give them the power to print can one be competitive with these parasites?
    This is the root cause.
    there are many countries that are in surplus and America have no problem with them.
    The banksters are quietly creating debts, money out of thin air and siphoning money from the system and the people are unaware of it.the amount may surprise everyone.

  18. i on the ball patriot

    Yves said;

    “Yves here. This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.”

    There is a collective inability to recognize that;

    • The domestic politics have wealthy ruling elite central bank fangs deeply embedded in them — all of them — and the people are powerless.

    • The current version of globalization IS “workable”, and quite peachy, for the wealthy ruling elite central bankers who are no longer focused on churning and turning for profit, but rather churning and turning for control.

    • They are bringing the current system to a slow and controlled, intentional “destruction”, to reduce resource consumption of the middle classes, which they perceive are at an unsustainable rate, and, at the same time, create a two tier ruler and ruled world with the ruled in a controlled decimation of intentionally created, ‘perpetual conflict’, overseen by an inexpensive to operate (relative to the middle class) law enforcement overseer class.

    Consider who it was that so selectively placed the credit candy in the children’s playground and who it was that circulated the fake derivative candy toys that have caused all of the discord. Consider also that the wealthy ruling elite have captured the media that not only serves to divide you, but serves to make you believe that profit is still a goal of finance and that governments are responsive to the people. That is the shit that you have to empty from your heads.

    You will not gain power until you recognize that you have none. Rooting out and neutering the wealthy ruling elite and their central banking minions is job one after regaining control of governments. This is class war number one — rich against the poor — the powerful against the powerless — and it is global.

    The more you fiddle fuck around impressing each other with your vast knowledge of diversionary decoy voodoo economics — that amounts to no more than meaningless time wasting shit — the more you allow yourselves to be exploited and ultimately eliminated.

    Deception is the strongest political force on the planet.

    1. psychohistorian

      I agree with you but haven’t seen much critical thinking on the part of the public so am doubtful that any good can come from protest until the current system dies of its own vileness. It is hard to stand by and watch knowing that so much adjustment is coming.

    2. jdmckay

      diversionary decoy voodoo economics

      hey dude, that hurts. :( Good thing we’re the “Greatest Country in the history of civilization”, not to mention de-facto global currency standard.

      Watch out below!!!

  19. Rickster

    “At particular times a great deal of stupid people have a great deal of stupid money…At intervals…the money of these people is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’.”

    – Walter Bagehot, ‘Essay on Edward Gibbon’, 1856

    It is sure interesting reading all the manichean moralism in the comments section of these blogs, with virtous, thrifty East Asians and Germans versus those grasshoppers, the free spending, lazy, Americans, English, and Irish. The underlying attitudes and emotions that underlie this kind of talk demonstrates how difficult it will be to resolve these issues short of disaster. This is especially so when many powerful interests in all of the principal countries would prefer to preserve the current form of globalization that has proven so lucrative to them individually in the short term.

    In years 1928-1932, Germany, the UK, the U.S., and France chose debt deflation, hairshirt, solution to the large imbalances at the time. The Germans at that time were the irresponsible spendthrifts and borrowers (responsible for the Great War to boot) and the French and British not much better. To prove otherwise, starting in Germany these countries faced declining wages in the face of large private and public debts, as the method for solving the global imbalances of the post WWI world. It meant first the UK, then Germany, this meant recession as the method of solving their current account deficits. However, their debt did not decline as their economic growth did. Eventually, Austria, then Germany, and finally the UK could no longer pay the debts by reducing their a trade deficits and and consumption by contracting GDP (and moving eventually to an autarchic economy with little in the way of exports and imports – the irony of “free trade”). For Germany, which put on the Fiscal hairshirt with a vengence, it meant mass unemployment of 25% of the work force. It was this, not the great inflation of ’21-’23, that took the Nazis from being a minor fringe party to being the largest in the Reichstag. In the UK deflation meant lower growth, an overvalued currency, and a currency crisis that made it obvious that the debt burden was unsustainable. Crisis that was resolved at the end of the run on Sterling in 1931 by going off gold, devaluing the currency, and repudiating its war debt to the U.S. And the result, along with the imperial preference tariffs, was that the U.K. recovered first from the Depression and had relatively lower unemployment in the ’30s. For the U.S., then the thrifty, hard working, enterprise creating, export champion with the current account surplus and the capital account deficit, had its financial system, already weakened by the 1929 crash, unhinged by the defaults on its overseas loans. As credit contracted, bank runs multiplied, U.S. suffered the famous and vicious debt/wage/price deflation spiral which for the most part is now beyond living memory. In this sense, the U.S., and to lesser extent France, were “stupid,” holding the world’s “stupid” money (as Bagehot said a “plethora,”), it went to Germany and its own stock market as speculation, where it was promptly “devoured.” As the U.S. banking system unhinged due to the default on the private bank loans it had made to Germany and to stock speculators, unemployment rose to 25%and private savings (which really are loans to banks) were wiped out as bank after bank closed and defaulted (remember, no deposit insurance in those days). Well, at least the “stupid” money problem got solved. Deflation in the end always ends in default. For secured creditors without debt, they at least end up with the underlying assets. For unsecured creditors, they end up with nothing. And for creditors who are aslo debtors, it is their turn to default. And regarding the Government to Government WWI debt made to Britain and France, the U.S. lost that as well and also got 25% unemployment. (The main economy joining the the U.S. agricultural economy in that state if immiseration, because of the adherence to the gold standard caused the prices of all other commodities to deflate, had been in depression throughout the twenties, now the manufacturing and service sector joined it). That these things occurred are facts, and despite much effort to obscure it, the primary causation of these facts is well established. Apparently, we are about to repeat history with China now in our role and Ben Bernanke, who has the requisite beard, playing the role of Montagu Norman.

    The accounting identities of international trade and capital flows are unforgiving. For the U.S. economy to grow while reducing its current account deficit, it means exporting relatively more and importing less and at the same time having increased business and infrastructure investment while consuming less and saving more. If other nations just want to solve this problem by consuming less, then the U.S. econony must shrink, and its standard of living decline to point that its imports from Asia and Europe fall to less or equals its exports. That could end up in an autarchic economy as Germany’s did in 1930-33 since 0=0.

    1. Hubert


      sounds like you just read “The Lords of Finance”. And yes it is a good read full with good information. But if you look at it fairly the situation was untenable with war debts and reparations as high and countries as antagonistic. Looking back, the wonder is how they could ride along until 1929. It would have been certainly (okay probably) better for the system to have broken 1919 or 1923 or 1926. The damage then would have been attributed more to the real reasons and maybe, the Second world war would have never happened.

    2. Tortoise

      Very good job! I spent some time in Germany in the seventies and heard stories of survivors. Although the popular memory is that hyperinflation (associated with the hard after ww1 years and the “hated” Weimar Republic) ruined Germany, the truth seems to be that the deflation that followed was at least as hard and perhaps harder on the average German. Now, it seems, the week and unloved Weimar Germany is for ever associated with hyperinflation, so some countries will choose deflation based on their reading of history. Good luck to all!

  20. sam hamster

    The hope that Chinese will become consumerist is no solution to this problem. The majority live in very small homes, or apartments; nothing like what we have in the U.S. There is just no room for a surplus of purchases.

  21. Attitude_Check

    The Importers and Exporters are Co-dependents. They jointly have manipulated their currencies up and down, because it was beneficial in the short-medium term. The long-term instabilities are now making themselves very visible.

    Bottom line is in order to return the system to balance, the under-consuming countries will need to consume more of what they produce. and then under producing countries will have to produce more of what they consume. Otherwise the system will “balance” by completely stopping and auto-restarting.

    We will either figure out how to do this jointly, or we will end up with trade wars to do it via legislation, to avoid the full-stop “solution”

  22. bb

    Munchau:”The real bullet in his proposal is that countries could leave the eurozone without leaving the European Union. This is not about helping countries in trouble. This is about helping them to get out.”

    this is the thinking of martin feldstein, it demonstrades profound lack of comprehension of the eurozone’s unique situation: the euro is not used in a single country. there is NO way out of the eurozone without full seizure of all people’s savings. no one can be forced to convert their euros into drahmas. cancellation of all greek issued banknotes will affect unwitting europeans outside of greece as well.

    so how could possibly a leave of the eurozone help greece when only future wages are depreciated, all debt is still in euro, the country has virtually all its savings drained to preserve their value, collapsed banking system, etc.? they would definitely be worse off.

    1. Walter

      I think you misunderstood what Wolf was saying… the “them” in “This is not about helping countries in trouble. This is about helping them to get out” is Germany by my reading.

      What he is saying, or at least my intrepretation, is that Germany isn’t trying to help Greece/Spain, Germany is trying to use the guise of helping to lay the groundwork to allow themselves a legal out from the EMU.

      1. bb

        i understand your interpretation, but i doubt this is what the mister in question meant. it is a general academic misconception that when a country runs into trouble, it depreciates its currency and the problem goes away with this.
        the euro is hugely beneficial to responsible countries. as i have mentioned many times, it eliminates the banking ‘tax’ of 4-5% exchange rate commission charged before, it brings price stability for producers and consumers, it does not force every business and the ordinary people to become currency speculators when they plan a trip or the purchase of foreign made goods. having a common currency was one of the main ideas behind the european union.
        another argument in my support is merkel’s statement from today that the eurozone should have an expulsion mechanism in place for fiscally irresponsible countries.

      2. Christian

        Yes. An exit by say Greece from EMU would mean a lot of trouble since no private citizen or corporation would want to exchange their euros for new drachmas.

        The case with Germany (or other surplus countries with a history of low inflation) is different. There, the people may expect this new currency to appreciate over time.

        For Greece, adopting a new currency and not converting their debt by force as well (ie default) is not much help. If Germany on the other hand introduced a new Deutsche Mark and kept their debts in euros, they may find that after some appreciation of the new DM, their old euro debts are a lot easier to finance.

        I very much agree that the “German model” of competitive wage deflation is not one that is sustainable in Germany, let alone for the entire eurozone.
        It’s idiotic anyway, what exactly did Germany gain from selling more exports than imports only to invest the surplus in toxic assets?

      3. /L

        Then they have to leave EU all together, the EMU/€uro is mandatory for EU members except UK and Denmark that have negotiated an exception. As soon as a member fulfill the requirement they have to adopt the €uro. Alas potential new members today shall fulfill something that only a few of the present €-members fulfill. But there is one loophole a new €-member have to participate in ERM for two years first, to participate is voluntarily. Sweden by some reason had a referendum on the €uro and we dud said no whit a margin. This is a bit odd since Sweden have no exception from the €uro in its treaty with EU. Sweden have since long fulfilled the requirements but have not joined the ERM.

        No our right wing politicians in the present government have touted the idea that it would be a good idea to renew the bid to join in the middle of present crisis.

        Recently in late December ECB launched a letter that discussed the issue of a member pulling out or exclusion of a member. A thinly veiled threat to Greece and the Piigs that they could be excluded if they didn’t behave the option of only leaving €uro didn’t exist. According to the letter it had been a close call when Ireland voted no to the Lisbon treaty.

  23. Siggy

    Autarky, an admirable goal; but, very unrealistic. The US does not have enough oil. Arabia does not have enough arable land. Country by country you will find unsatisfied needs. Compound that with differing political systems and you have the recipe for mercantilism and beggar thy neighbor polices that have the potential to lead to wars.

    I’m curious, has the US ever been repaid for the Marshall Plan? Also, what happened to the sovereign debts the US was owed at the end of WWII?

    There is considerable merit to the argument that theories are very nice; but, the reality of their occurance may well be very uncomfortable.

    The production function is all about the application of Capital (Money & Equipment), Required Resources, Labor and Entrepreneurship. In general, labor is the most costly component. Germany is the exception with respect to Labor in that German labor is relatively high cost because of their social security net system. Still they manage to be the leading exporter of Europe. And what do they sell, technology and high quality. It is also true that labor costs in Europe are heavily influenced by the costs of social security safety net systems and policies.

    So, we find that Germany has a trade surplus. Are we justified in demanding that Germany reduce this surplus by way of lower exports? I think not. Greece, for example, has a trade deficit. Are we justified in demanding that they reduce their imports? I think not.

    Should we look beyond the surplus/deficit money balances to the denominators of the money differentials? I believe so. I believe we will come to see that it is the purchasing power of reserve currencies that needs to be adjusted.

    The global price structure is polluted with fiat dollars. Therein lies the root of the problem. If we are to be the world’s economic hegemon, we need to fix our currency first. Then and only then will we be in a position to say to the world; adjust your labor costs.

    1. Farrar

      No one is demanding that Germany reduce its exports – rather that they increase their imports, which implies that they quit squeezing their laboring classes so hard so that they can consume a bit more.

  24. MarcoPolo

    A day ago or so in a different thread I was about to make a comment in defense of those of us who had been supporters of globalization.  I having been one of those in my own very small and insignficant way. Speaking perhaps only for myself I never foresaw the magnitude of imbalances.  Though I believe I was not alone to think that increasing wealth in the developing world would lead to better markets for the goods we would continue to produce.  It hasn’t happened.      

    From the perspective of just a decade ago when the entire China external market was a few hundred million dollars, who could conceive that just the surplus would become a few hundred billion?  What we didn’t understand was “forced savings”. And I still don’t understand why anyone in China ever thought that was a good idea or why they still do.  And Germany is only different by degree.  And I dont have the figures but I think Germany’s big market is … China.   

    Someplace above DownSouth makes the case that food production is an energy intensive business.  Not in China!  Let’s not forget that China has been able to feed herself quite well using a labor intensive production model developed during the Ming Dynasty. Think about planting rice by hand!  That’s got to be worse than hoeing sugar beets. You can just take my word for it; it’s not something that is too intellectually inspiring.  China has never needed to industrialize. Her doing so now, even if we could adjust for the financial differentials, can potentially undermine the basis of the industrial revolution – valuable labor. (industrial counter-revolution).  

    Now protectionism.  I have always thought that it didn’t matter where wealth was created so long as it was created and markets remained open everybody would benefit. So, let’s ask this question first, how is wealth created?  Pretty obviously not by a run of the helicopters.              

  25. Paul Tioxon

    There is a level of complexity, that has grown once again with the collapse of the communist containment policies of the cold war. In order for our theoretical models and practical experience to guide us successfully, we would have to understand what we are really trying to accomplish. I believe that there are no economic problems. The economic problems have been solved, by and large. We can feed, clothe and house ourselves and have a measure of leisure and health that has extended the lives of more and more people around the world.

    The small increases of productivity, 1% or 2% annually, since 1900 in the USA, has shown only one major reduction in the time allotted for work. The move to the 8 hour day and 5 day work week, seems so far in the past. But what I would propose is a new POLITICAL realignment, to a 3 day work week. There needs to be less time spent in economic activity, commensurate with gains in productivity, and technological advances obviating human labor in manufacture, agriculture and distribution and management. The need for taxes for, say education and public safety could see drastic cuts as people spend more time in family and social activity, with the young, the old, reducing the production of criminals, sickly people needing paid help and so forth. It seems to me that the increasing economic crisis produces a byzantine response that are similar to the ancient astronomy that put the earth at the center of the universe. With a false model of celestial mechanics holding sway in the minds of men, anomalies in the orbits of the planets and their moons were explained away by intellectually dishonest fabrications called epicycles. It wasn’t until an accurate assessment of the solar system, with the sun at the center, was there a clear understanding of the moving phenomena. Under false consciousness, the regular manufacturing of epicycles to make sense out of a geocentric universe had to be continually manufactured, to keep the lie going.

    How many of the economic fixes that are being produced today are a failure to let people have more freedom, meaning being less tied to the macro economic out put of GNP and more time for people to simply live on their own terms, without the forced obligation of a 5 day work week, when a 3 day week would produce as just much goods and services.

    Gains in productivity, resulting from investment in technology, the adoption of break through advancements, such as the internet need linkage with political metrics, like reduced time at work, the forced participation for survival. People work hard and save so they can retire, which is not having to work. Once retired, people usually find something to do, that may or may not make money, but it is decided through the personal agency of the retiree. People may in fact, return to work, by starting a new enterprise, for profit or non profit. The point is, right now, do most people really need to work 8 hours a day and 5 days a week to produce the goods and services that we want and need? How much for profit business is little more than make work nonsense that did not even exist in anyone’s imagination 10 or 20 or 50 years ago? But the notion was developed any way and makes money. For example, 10 cent comic books, that were usually read and disposed of now account for billions of dollars in movies. The old books spawn dozens if annual conventions attracting 10’s of thousands and prices in the last few weeks topped $1 million each for a Batman and Superman comic from the 1930’s.

    Is it possible to think that we do not have to work like our lives depend on it, like when we needed to chop wood and can food for the winter or perish. We can work a little less for those needs and put our time into other area guided by the invisible hand of personal choice.

      1. Sandwichman

        What is so threatening about the all too rare glimpse of lucidity that brings out the snarl and sneer in the RSDallasses of the world?

  26. MyLessThanPrimeBeef

    If China can run a currency peg, why can’t we also run a different currency peg?

    Keep printing and start buying RMB, Bernanke!

    Let’s see who wins.

    1. alex

      Good question. Dean Baker has suggested exactly that course of action. For some reason my gut response is that it’s radical, but I can’t think of a rational reason why that’s so.

      There may be problems like limited convertibility of the yuan, but I’m not that familiar with those issues. Anyone who is, please chime in.

  27. normansdog

    Just curious to know how Yves thinks that Germany will pay for this consumption? Germany is not running a budget surplus in case anyone had failed to notice, the population in not swimming in money, salaries have been falling for years (deflation remember) and every one is desperately trying to scrape enough money together to be able to retire without starving.
    Even if the government decided to go into more debt to build stuff, they would get Germany companies to build the stuff, s that is what Germans do, what on earth could germany buy from france or italy in amounts big enough to offset the trade deficit created by selling large numbers of porches BNW’s merc’s high tec printing presses machine tools etc etc. It would take a lot of red wine and salami (oh, and Germany has those things too).

    1. pdc

      Though I agree with you when you say that germans are not “swimming in money”, I cannot avoid to correct the exceedingly unsophisticated belief that French & Italian exports to Germany are “red wine and salami”.
      For example, italian exports to Germany (roughly 15% of all italian exports) consist mainly in the following (data from ISTAT-2009):

  28. Daniel de Paris

    “Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit.”

    An interesting lesson of Economics by economists from countries that are not even able to provide a decent percentage of their own markets.

    When an African, South-American or Asia country runs out of money, the very same economists call for drastic measures. And forget about the “deflationary” consequences.

    Yes being broke implies “deflation”, whatever you call it, or “monetary crash”. This is plain miserable argumentation.

  29. AP

    hmm, with the global derivatives markets @ ~ $600 trillion currently, and the global GDP/yr. @ ~$60 trillion…. whoda thunk it? i mean, who could have predicted that when a bank issues a loan (creating money out of thin air), there would eventually have to be a pullback?! granted, germany and china seem to be the bellwethers in a modern context.

  30. Bill in Providence

    I don’t know squat about economics. I’m trying to take in as much as possible, and this site has been a huge help. I really appreciate Yves Smith’s effort, as well as many of thoughtful responses from others. That said, I really wish people would show some respect to Yves for his yeoman’s work, cut him some slack, and tone down the vitriol against him. The fellow deserves only our thanks for the forum. If his observations bother you that much, go elsewhere.

    1. jdmckay

      show some respect to Yves for his yeoman’s work

      Yves is a she, dude. :)

      And, from what I’ve seen, there’s a lot of “yeoman’s work” underlying responsibility for “financial innovation” at the heart of current global financial mess.

  31. RSDallas


    Great debate! Good points on both sides. One thing I think you are discounting when it comes to deflation is that you assume it just continues on and on. The market will not allow it to continue on and on. This is evidenced in any business that has had to deflate their products prices to get them sold. They eventually sell. I suggest that the inflationary policy we have chosen since the 1930’s has finally hit a brick wall.

    I went to a local burger place with my wife & 2 kids last weekend. My son and I split a cheeseburger, my wife and daughter split a grilled chicken sandwich, the kids had a kid drink, my wife and I had iced tea and we had an order of cheese fries. Our bill was $32.00 before tip. $32.00!! Now, this meal should have been $18.00 Max. This slow drip inflationary monetary system we have followed is killing us. The market is telling us we can’t continue this. Listen to the market Yves.

    It also appears to me that we (The US) want our cake and to eat it too. Well, I’ll confess, so do I. Let’s break this thing down to a simple issue. The developed country became developed because the quality and standard of living increased over time. Wages and Salaries increased slightly faster than inflation. In other words the developed countries salaries and wages increased over time. Well unfortunately capitalisms’ main expense is what? Wages and salaries. So, the developed country can’t cost effectively continue to produce the products that the citizens want because their wages and salaries would increase the cost of their goods too much. So the developed country looks to an undeveloped country & says HA! Look no further; here is a citizen that will work for 75% less than the citizen in the developed country. Also my cost of “other” goods needed to make our product is also less. I’ll stop here.

    The US needs to deflate. We need substantial deflation. Now will this be painful? YES! Especially for those in debt. But it’s going to happen (already is happening) one way or the other. This time we have fooled ourselves into believing we could keep progressing up the ladder of “increasing the quality of life” through debt and not hard work and cash. Debt, if used for personal consumption is not productive and never will be. Seems to me that we need to get back to doing what got us here in the first place and that is making things and paying for them up front. Fear not, we will, as soon as we get back to reasonable price levels visa vie deflation. I can’t wait to for the time when I can get that burger for $18.00. Maybe I’ll order 1 for just myself!

    1. Siggy

      Dear Dear RSDallas. You have very good perception. The persistent errosion of the purchasing power of the Dollar is the force that motivates so much of the economic missallocation that we have before us.

      We are losing the middle class and we are distorting the global price structure with a grossly inflated supply of dollars. This persistent global loss of purchasing power has been driven by the fact of the Dollar’s reserve currency status.

      It’s time to fix the Dollar. It’s time to prosecute fraud.

  32. b.

    To call “deflation” on the DM->Euro conversion is preposterous. Regular people didn’t call it “Teuro” for nothing (teuer==expensive, inspired by a very perceptible price jump across the board).

  33. Vangel

    But we appear likely to test the current system to destruction rather than come up with less drastic ways out.

    I am sorry but I don’t see how the current system can avoid destruction. It is built on a weak foundation of fiat money and fractional reserve banking in which central banks have the ability to create purchasing power out of thin air. That does not work well in the real world and cannot last.

    1. jonboinAR

      What if we agree that the US has made mistakes, and that one of those mistakes has been to let China overrun in a predatory manner our manufacturing, yes, with a great deal of help from our own MNC’s. China has to create a consuming class who will buy our products or we cannot continue to do business. We need to tariff products from other countries to bring their effective wage at least into the same ballpark as ours. They can either pay us or pay their people (I think that ultimately they’ll pay their workers. Then, we can but from them and they can (will) buy from us. Everyone will be happy.) We have the leverage. Let’s do it.

  34. PJM

    I would like to notice something to all.

    How many chinese citizens won the economic nobel prize?

    How many japanese citizens won the economic nobel prize?

    How many german citizens won the economic nobel prize?

    And in contrast, how many american citizens won the nobel prize?

    Now looks to me that applies here the same old adage: blame your neighbour for your self mistake when it rains in your land.

    I remember the jokes about the famous euroesclerose. The americans mainstream economics opinion makers used the word euroesclerose to describe Europe. Now they blame others for the mistakes made by themselve.

    They blamed the famous PIGS for economic distress. Now they blame China and Germany. But never they look inside their core flawed economic model.

    I remember the arrogance by few telling jokes about european citizens. Or even chinese. I remember the arrogance of american opinion makers about the others. Others havent the “great american way of life” and the baby boomers lived as they owned the world. Or they owned the universe. But the baby boomers generation who made the “Revolutionaries” sixties leave a stange legacy to new american generations. Strange generation that one: baby boomers. Like new riches who chalenged the system in their youth now they are now decadent. They are worst than previous generation who fighted in their youth.

    Poor american society.

    Thats why I dont like to teach others about their mistakes. First I look to my mistakes and try to fix them, later I can teach others how they must to live.

    1. Constantcy


      look at nobel prize history. US winning streak is a postwar phenomena. Before 60’s US universities are relatively backward.

      Now look at any university graduate dept. They are all filled with chinese and Indians. (cheap slave labor yo’) Do you really think all these graduate students will stay in silicon valley or something? (where do you think Taiwan leading chip foundry lead coming from? They are result of reverse brain drain.)

      And china spending on high education/research centers only begun 5-6 years ago. Only recently they start trying to attract back leading scientists.

      15 years from now, they will start producing their nobel prize, because their corporate enterprise demand high technology and can afford paying for it.

      China is not some backward ass country like afghanistan, they lead global output 18 out of last 20 centuries. We only lead global output 0.8 centuries out of last 20. Not even a single whole century

  35. jonboinAR

    “Who says deflationary is not healthy? As far as I am concern, 100% of factory should be replaced by robots who will be taxed 100% and the state will redistribute these tax.

    (aka. japan inc.)

    Why should anybody care if a car is made 95% by robot, cost 30% less and 1000% more reliable compared to over priced manual labor?”

    I would say that the main mechanism we have for redistributing some of the value-added (is that the right term?) wealth from owners of manufacturing to non-owners is through wages for work performed. It would be fairly radical, no, to just tax a similar percentage, or more, and redistribute it? Talk about welfare state! (Not that I would mind, just don’t see it happening.)

  36. kulicuu

    What a great thread! It’s neat to see the critical appraisals of the Wolf/FT/Smith line, and then Yves’ responses, and so on.

  37. don

    No one has a legitimate complaint about German trade surpluses. They are not the result of artificial beggar-thy-neighbor government policies, but of private German tastes and natural market forces, which should allow for differences in desired savings and investment across countries. Stated simply, Germany is playing by all the free market, free trade rules (with minor exceptions, such as agricultural subsidies). China is not. Up to a point, I would say they can be forgiven, simply on grounds that they are poorer than we are. Krugman thinks that point has been passed, at least under current circumstances, and I tend to agree. I’m disappointed at your failure to grasp this basic point, Yves, as I have greatly enjoyed your insights on the workings of the U.S. financial markets. You call a spade a spade and I have been entertained and delighted by your ability to arouse justified anger, regardless of the effect on my blood pressure :-).

  38. KD

    Being Japanese, I’m curious about why Martin Wolf didn’t mention Japan in his article, though the attached graph in FT shows Japan’s measure. If Japan is included, it would be “Chapany” instead of “Chermany”. The reason that he didn’t do so is, I guess, that Japan’s economy is weakened awfully and its once-touted-and-frightened economic power has regressed next to none, though Japan is still the third largest current account surplus country after China and Germany. In essence, “Forget Jap”. Period.

    Recently, not only Japan but also Russia and South Korea have accumulated the current account surplus. What interests me is that those three countries, Japan, Russia, and South Korea, are among the top ten countries of suicide rates. My hunch is that those who live in the current account surplus countries tend to commit suicide due to the unbearable burden of frugality, while those who are in the current account deficit countries live a happier consumerist life without any consideration of debt burden. Is that correct?

  39. /L

    There is a difference between raw material producing countries that don’t have a developed industrial structure, but if they don’t have the productive capacity to also them self meet increased demands created by stimulus they will pretty soon find them self in dire straits and it will hamper their ability to climb up the ladder to have industrial capacity that can satisfy their own needs. To solely depend on raw material and export is a risky adventure your depend on the global markets volatile whim and it’s beyond any control, domestic markets a country can control and effect.

    For a developing nation the export led growth path can be a risk worth to take, but a mature well developed industrial nation don’t need to take that risk and eventually advantages is not necessary self-evident.

    Russia and much of former Soviet have gone true a industrial disaster after Soviets implosion, from the collapse to 2004 oil consumption in former Soviet decreased more the Chinas oil consumption increased and it wasn’t they had the gone green and sustainable.

    I don’t really find the logic in the pro surplus position, they both want to eat the cake and keep it. They want to be surplus champions but want deficit countries to be in balance. It doesn’t add up, even small children understand that level of mathematics that you can’t both keep the cake and eat it.

    1. jonboinAR

      The “balance your own finances” argument by the surplus countries is a red herring. They know we can’t do that and keep consuming if they refuse to consume themselves. They just don’t want us to start a trade war with them until they’ve completely stripped us of our manufacturing. They want us to stupidly keep quiet (which we’ve mainly done till now) while they take over.) China is systematically making us her prey (as we’ve done many times to others. So what? Just because we got away with it doesn’t mean we’re now intelligent if we let China get away with it.)

      It’s time to threaten trade war with China while conditions favor us. We can put it kindly: “Pay your workers, starting now. Encourage them to consume more… or else, pay US, in tariffs that make up the difference.”

      Do it now.

    2. jonboinAR

      Also, it you steal our intellectual content we will revoke your favored-nation status.

      We need to stop pussy-footing around WRT China. They don’t have our interests at heart (and why should they? They’re obligation is to their own interests, a fact they understand perfectly. It’s time we understood the same.)

  40. normansdog


    yes, italy does export machine tools to Germany, but far less than it did a few years ago and can not expand its market share because the german machine tool comapnies are just too damn good.

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