Jump to content
House Price Crash Forum
Sign in to follow this  
alexw

Germany Is Fighting With Europe. Can China Be Far Behind?

Recommended Posts

I've seen a few discussions on here about which of germany and the uk will suffer the most from the current global economic mess. So from http://mpettis.com/ for your edification.....

Germany is fighting with Europe. Can China be far behind?

December 17th, 2008 by Michael | 29 Comments | Filed in Balance of payments, Exports and imports, Trade protection

Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.” The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.” According to Krugman:

The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness.

Evans-Pritchard explains why a number of European countries, led by France and England, are so angry:

Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world’s top exporter and pivotal power of Europe’s monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs. No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.

Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief? Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.

The point he is making is that the imbalances were not created simply by “binge debtors in the Anglosphere” but also by those countries that subsidized directly or indirectly overproduction, which ultimately have had much to do with the very conditions that led to consumption binge. This includes not just Germany but any of the countries that created persistent and high trade surpluses. Evans Pritchard makes the comparison very explicit:

Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU’s implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder.

The downward spiral dragged everybody into depression. Germany and China are today’s violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

What does all this have to do with China? The reasons I bring this up is because it is, I think, a foretaste of the type of nasty battles that are likely to erupt between the trade-surplus and trade-deficit countries as global demand continues to contract. The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust. Furthermore, fiscal expansion aimed at generating employment in countries with large trade deficits will not be nearly as effective as they might be if they are not matched with programs in trade surplus countries (essentially demand boosting fiscal programs) that prevent domestic demand from bleeding out the trade account.

The French and the British (and much of the rest of Europe) are concerned that if their governments borrow to boost domestic demand and employment at home, they are also borrowing to boost demand and employment in Germany, which means that they bear the fiscal cost for the foreseeable future while Germany gets a substantial chunk of the benefit. This may be a great deal for Germany, but it is one hard for the rest of Europe to embrace.

In Europe it is clear to me that the economic debate is migrating rapidly towards consideration of the impact of trade, and it would be surprising if the debate does not quickly globalize. If Europeans, nominally members of one country (sort of), can get into such an acrimonious debate among themselves, what hope is there for a polite and statesmanlike discussion that involves countries less tied together? I believe that in the US there is a much stronger commitment to free trade and, in spite of Mr. Bush, multilateral cooperation on economic issues, then elsewhere, but politics is politics, and rising unemployment in the US will inevitably lead to the same confrontational attitudes as they seem to have in Europe.

By the way among the dozens of bankers, government officials, academics and businessmen I have met in the past few weeks to discuss trade issues, it seems to me that those of us who have spent the past several months warning about an imminent collapse in trade are getting more and more attention. This is undoubtedly going to become a hot issue next year.

It is not that China isn’t doing anything to address the problem. The slate of bad economic numbers this week and last (trade is down, we are racing towards deflation, investment and consumption growth is down, manufacturing output growth was only 5.4%, electricity consumption was down 8.6%) has confirmed what we all dreaded: things are slowing quickly. The government is trying to do all it can to boost the economy and, especially, employment, but I am afraid they still don’t understand their place in the global mayhem. They continue to see China as an innocent victim of the global crisis – not as one of the fundamental creators of the payments imbalance that led to the crisis – and much of their strategy seems to assume that China can adjust domestically without worrying about the impact on the global market.

For example two days ago I was part of a panel that included a prominent Chinese economist and think tanker who I know and like very much, and as we discussed what needed to be done I got the impression that he hasn’t considered global implications at all (although as we discussed them he acknowledged many of my arguments). For example, much of his currency focus was on how China can retain export competitiveness without encouraging hot money outflows. But that is not the right way to think about it. China needs to think not only about the domestic impact of its currency but also about the global impact of its currency policy, and how that affects the adjustment that trade deficit countries are undergoing. If it makes things worse for them, there is no reason to assume that they will remain indifferent to Chinese domestic policies, and there is even less reason that they will run policies that accommodate China’s needs.

China is making Herculean efforts to get out of this mess. It is doing everything it can to maintain growth and is clearly very worried about the pace of the slowdown. Bloomberg, for example, had this article today:

China’s government plans to lower taxes and reduce the lockup period for home sales to stem a decline in the nation’s property market. Home owners will be waived from paying a sales tax on properties sold after three years of purchase, compared with the previous term of five years, according to a statement today by the State Council, China’s cabinet. The tax will also be levied based on the profit from the sale, instead of the sale price, according to the announcement.

These are all good things because they are aimed at boosting domestic consumption, and to the extent they also affect production positively, they affect non-tradable goods. That is a start. But there must also be recognition that policies that do not bring the trade surplus down sharply are inevitably going to cause trade friction, and that is a game China cannot play. A collapse in trade would force a brutal adjustment here.

Just to get some sense of numbers, with a trade surplus equal to 10% of GDP, what would happen if external trade were to disappear? Even assuming that there are no transition difficulties, Chinese producers would suddenly be forced to deal with the fact that they are producing more than Chinese are consuming by an amount equal to 10% of GDP, and if domestic demand cannot be increased by that amount immediately, Chinese producers must fire enough workers to bring production down by that amount. Of course firing so many workers would also cause demand to contract further, so the country would race downwards and adjustment much worse than even these frightening figures imply.

Of course international trade will not disappear (or, more to the point, the trade account will not quickly balance), so this is not the scenario we need to worry about, but even a small move in that direction would be terrible for growth. Remember that Chinese overproduction today is roughly equal, in global GDP terms, to US overproduction in 1929, and the US had more than six times the share of global GDP then than China has today. This is a much bigger adjustment for China than that of the US in the 1930s.

It will be grim. In the last few weeks there have been lots of new numbers and stories about unemployment. Perhaps it is because I am a university professor but I find myself particularly worried by rising college unemployment. According to a story today in the South China Morning Post:

More than a million Chinese college graduates unable to find work could make coping with unemployment harder now than it was during the Asian crisis, the head of China’s largest vocational training organisation said

…“The employment situation may be worse than the 1990s … This time, college graduates are not finding work, and there are so many of them,” Mr Chen told Reuters. In the late 1990s, China’s government weathered mass unemployment as the Asian financial crisis and bankruptcies of state-owned enterprises slowed the economy to a crawl.

Many college graduates now lacked the skills needed to compete for jobs in a fast-changing economy and were unwilling to take less respected jobs, Mr Chen said. More than six million students will try to enter China’s workforce next year, half a million more than last year. Up to a quarter could have difficulty finding jobs, the Chinese Academy of Social Sciences said on Monday.

In another article today the same newspaper says:

Swarms of migrant workers driven back home by the economic downturn in eastern provinces are putting huge social and employment pressure on the governments in their hometowns. In Yunnan province authorities are not only facing the tough task of creating jobs for 510,000 returned workers, but are also struggling to secure enough food to feed the swelling population in some areas, according to the provincial government’s website.

“The hundreds of thousands of returned rural workers have increased grain consumption by the local population by 500,000 tonnes per day, and we are feeling the strain of preparing enough rice in the bowl,” Liu Guoquan, director of Zhaotong’s Rural Human Resources Development Office, told fellow officials at a provincial meeting to discuss the crisis.

Share this post


Link to post
Share on other sites

Once the dust has settled on the looming crash in asset prices this is going to be the issue of our time (nothing that has gone before mattered).

Pay attention folks and read. First we will see the failure of the overleveraged. Then we will see failure after failure in production as the net saving nations scramble to redeploy their excess productivity. There is no job too great and no margin too thin that these nations will not chase in their hunger for any remaining capital.

To restate for clarity - there is no producer in the net deficit nations who is not now at risk; even the well-run producers who trade on deeply proprietary intellectual properties are no match for nations as grimly determined as those with presently large export surplusses.

Lenders who deny this reality will suffer as the machine grinds inorexably on.

The economic reality of the net exporting nations is such that they should now tighten monetary policy and manufacture domestic capital scarcity (this is what is required to prevent the next part). The political reality is that this will not occur.

Because this will not occur the net importing nations will firstly suffer wholesale production failure and then further economic distress as truely investment grade lending goes sour (and the associated tax revenues disappear).

As this situation spirals - with exporters coring out what little savings and capital still remains in the deficit nations - the political sphere in those same nations will turn as ugly as can be. This will be boosted by a shift in the money markets as the capital we are bringing forward from our own futures now transitions from the hands of those who are presently hoarding it into the hands of these same investment grade borrowers but crucially after they have already been deeply discounted.

New money is being minted and being given first to capitalists and they in turn will give it first to pro-nationalist producers; the economic reality of the time will necessitate this.

We now have all the ingredients of a brave new decade of trade protectionism, powder-keg and lit fuse included. The new era will be dominated by commodities producers who will be sanctioned if they export to the present surplus nations and tarriffs, cartels, and protectionism which dominate the political sphere of the present deficit nations.

These political agendas will be enacted under a wave of pro-nationalist movements which in themselves turn highly populist (as economic conditions worsen).

The best and worst thing that Obama will be remembered for will be his mid-term enacting of trade barriers so eye-watering it makes one shrivel inside to consider them today. We each globally will either be inside or outside of those barriers and woe betide those who stand outside.

Drake has nothing on state-sanctioned, modern-day piracy.

This is the house that debt built.

I hope we all live to enjoy it.

Share this post


Link to post
Share on other sites
The best and worst thing that Obama will be remembered for will be his mid-term enacting of trade barriers so eye-watering it makes one shrivel inside to consider them today. We each globally will either be inside or outside of those barriers and woe betide those who stand outside.

The US did that before, but they were in a much stronger position before in terms of their real economy in large part because so many countries were persuing inefficient self destructive communist economics, this allowed the relativly free US economy to prosper because it was so much more efficient than the rest because its economic policies were comparitivly so much better.

Fast forward to today, and although the US has not changed that much, other parts of the world have abandoned communist economics and changed to having more sensible economic policies. They are as a consequence now more efficient than the US economy, or as efficient but with a lower cost base. The consequences will be an erosion of the USs market position over the longer term unless they are suddenly able to come up with an economic advantage as large as the previous one of having a having a capitalist economy vs having a communist economy. I cannot see them doing that.

The trajectory of the US policy at the moment seems to be towards more state control of the economy, as happened in the communist states, so that's not going to help. Also large parts of what the US economy has been doing in the last few years has been pretty much unrealistic fantasy with the various bubbles misdirecting people into economicly wasteful activities. The official economic figures count damaging economic activity related to bubbles etc the same as beneficial economic activity.

EDIT:

In relation to Germany, America and Britain have in the last while been encouraging Germany to follow various economic, political and military policies which have later turned out to be really bad ideas. It has got to the stage where if the US and British governments say to do something, then doing anything else but that, is probably the most sensible course of action.

Edited by Della

Share this post


Link to post
Share on other sites
They are as a consequence now more efficient than the US economy, or as efficient but with a lower cost base.

No other nation on this planet is capable of altering its GDP growth rate as quickly as the US as no other nation on this planet sacrifices both short- and long-term human welfare (note, not specifically that of its own citizens) at the alter of continuous productivity improvement to the degree America does (the exporting nations sacrifice it at the alter of continuous capital improvement instead which is what has created the outcome described above - which we are now committed to).

US GDP will as a result suffer extreme volatility - both decelerating and accelerating more quickly than any other single nation as we pass through the recessionary cycle to the hell which tomorrow will bring.

It is for this fact alone that the US will continue to drive global demand measures; relative disparity of GDP levels peak-to-trough simply do not matter. Efficiency does not in and of itself imbue demand delta - change in efficiency is required for this.

America's success is the brutality of her dream.

And no other nation burns quite as bright.

Edited by ParticleMan

Share this post


Link to post
Share on other sites
And no other nation burns quite as bright.

But the brightest star uses up all it's reserves the fastest.

The trouble is our economic models do not fit resource scarcity, until we start to address these we will forever lurch from one crisis to another.

The current economic system is full of paradoxes and anomalies.

Share this post


Link to post
Share on other sites
But the brightest star uses up all it's reserves the fastest.

... and they have burned so very, very brightly Roy.

The current economic system is full of paradoxes and anomalies.

Ask yourself - which nations are able to borrow against the expectation of increases to future tax revenues; then question why.

And then you will start to see what I can see.

Share this post


Link to post
Share on other sites
No other nation on this planet is capable of altering its GDP growth rate as quickly as the US as no other nation on this planet sacrifices both short- and long-term human welfare (note, not specifically that of its own citizens) at the alter of continuous productivity improvement to the degree America does (the exporting nations sacrifice it at the alter of continuous capital improvement instead which is what has created the outcome described above - which we are now committed to).

US GDP will as a result suffer extreme volatility - both decelerating and accelerating more quickly than any other single nation as we pass through the recessionary cycle to the hell which tomorrow will bring.

It is for this fact alone that the US will continue to drive global demand measures; relative disparity of GDP levels peak-to-trough simply do not matter. Efficiency does not in and of itself imbue demand delta - change in efficiency is required for this.

America's success is the brutality of her dream.

And no other nation burns quite as bright.

Good post.

So you must believe that for the forseeable future the US$ will remain the currency of choice?

Share this post


Link to post
Share on other sites
The US did that before, but they were in a much stronger position before in terms of their real economy in large part because so many countries were persuing inefficient self destructive communist economics, this allowed the relativly free US economy to prosper because it was so much more efficient than the rest because its economic policies were comparitivly so much better.

Fast forward to today, and although the US has not changed that much, other parts of the world have abandoned communist economics and changed to having more sensible economic policies. They are as a consequence now more efficient than the US economy, or as efficient but with a lower cost base. The consequences will be an erosion of the USs market position over the longer term unless they are suddenly able to come up with an economic advantage as large as the previous one of having a having a capitalist economy vs having a communist economy. I cannot see them doing that.

The trajectory of the US policy at the moment seems to be towards more state control of the economy, as happened in the communist states, so that's not going to help. Also large parts of what the US economy has been doing in the last few years has been pretty much unrealistic fantasy with the various bubbles misdirecting people into economicly wasteful activities. The official economic figures count damaging economic activity related to bubbles etc the same as beneficial economic activity.

EDIT:

In relation to Germany, America and Britain have in the last while been encouraging Germany to follow various economic, political and military policies which have later turned out to be really bad ideas. It has got to the stage where if the US and British governments say to do something, then doing anything else but that, is probably the most sensible course of action.

But with freely floating currencies efficiency doesn't matter. Currencies will always adjust for this until eventually a balance in terms of trade is restored. The problems we have relate to mechanisms and biases which prevent currency values adjusting to their "true" worth. However in the long run these mechanisms and biases are always overcome, so that the long term average is being neither a debtor or creditor nation but being balanced in terms of trade.

Share this post


Link to post
Share on other sites
No other nation on this planet is capable of altering its GDP growth rate as quickly as the US as no other nation on this planet sacrifices both short- and long-term human welfare (note, not specifically that of its own citizens) at the alter of continuous productivity improvement to the degree America does

Productivity is defined as the amount of money you get out in relation to the money you put in to some economic activity. The way I guess you are supposed improve the productivity figures is to improve the way you are doing things so that it is easier and less costly to produce the products you need to make, such as using a production line instead handcrafting evrything in situ. This kind of productivity improvement is a slow incremental process.

What has been happening instead is that they have followed various short term policies that have really improved productivity figures in the short term but will doom them in longer term such as moving the production offshore, reducing maintainence, borrowing lots without really taking into account that they have to pay it back, and getting involved in various bubbles.

Edited by Della

Share this post


Link to post
Share on other sites
For the first time in my life, I am starting to feel twinges of anti-German sentiment

Funnily enough, I feel the exact opposite.

... and they have burned so very, very brightly Roy.

they done.... questionable things.

Share this post


Link to post
Share on other sites
So you must believe that for the forseeable future the US$ will remain the currency of choice?

US$ will remain a proxy for the relative strength of demand for US$-denominated assets and consumables.

US GDP will undergo extreme volatility - falling, then rising far faster (note, not necessarily further - either peak-to-trough-to-peak, or, trough-to-peak-verses-something-else) than any other single economy.

Now is possibly the worst time in living history to own either USD or the promise of USD - unless you can source sufficient amphetamine to keep pace with the newsflow while this volatility makes an ass of the market (ie trade the shifting sands of sentiment), or, can adequately hedge such risks.

As with every other major currency - if this view is right the grinding failure of domestic production will ensure that these assets are repriced in domestic currencies at yields which will be viable after the wall goes up.

The only viable strategy I can see is aligning short cash with a long desire to own productive assets denonimated in that same currency and crucially none of this is specific to USD. If the goal is to own an interest in Sterling-denominated cashflows then given present volatility I would hold present-cash in Sterling itself until this scenario arose.

Trading currencies at present is a huge gamble.

Share this post


Link to post
Share on other sites
But with freely floating currencies efficiency doesn't matter. Currencies will always adjust for this until eventually a balance in terms of trade is restored. The problems we have relate to mechanisms and biases which prevent currency values adjusting to their "true" worth. However in the long run these mechanisms and biases are always overcome, so that the long term average is being neither a debtor or creditor nation but being balanced in terms of trade.

But isn't the point that the US, for constitutional and historical and geographical and demographical reasons, more than any other nation on earth, is best placed to survive turning inwards and relying on internal consumption and protectionist measures? What would kill most major economies could allow the US a time of retrenchment.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 285 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.