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Germany Defies Keynesian Stimulus And Recovers!
From The Daily Capitalist
Back in August 2009 I made a bet that Germany would recover before the US because they were doing far less stimulus than were we. In fact Germany's Chancellor Angela Merkel said:
“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”
[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”
In that article I noted:
According to the IMF Germany’s stimulus amounted to 1.5% of GDP and France’s .07% of GDP. The article claimed that the U.S.’s stimulus amounted to 2% of our GDP but that is quite inaccurate. If you look at total commitments to spend, the U.S. pledged about $11.6 trillion (about equal to GDP) and had committed about $3.8 trillion at the time of the G20 meeting. So, if my math is correct, and assuming our GDP will be in the $13 trillion range in 2009, our stimulus was about 25% to 29% of GDP.
I may have been off on our stimulus commitments, but it is far more than 2%. The numbers are still coming in. But the cool thing about Merkel's comments is that they were in response to the March 2009 G20 conference when Treasury Secretary Tim Geithner and Presidential Economic Advisor Larry Summers admonished the Europeans to engage in much larger fiscal stimulus efforts like the U.S. to synchronize a worldwide recovery. She was under a lot of pressure from the Social Democrats at home to do more stimulus.
In October 2009, Merkel's party, the Christian Democratic Union (CDU), a center-right party, with its political ally, the Free Democratic Party (FDP) and another Bavarian party, won the Bundestag (lower house) elections. The FDP are my kind of people, and they came in on a platform of lower taxes and cutting government spending.
With regard to the election, I wrote:
Germany is my lab experiment for the failure of Keynesian fiscal policies. If Germany recovers first as I think it will, then I suggest we fire Larry Summers and Tim Geithner and hire Mr. Solms to implement the German model instead of following Japan down the drain.
She suggested that the prevailing economic theory on stimulus—that increased deficit spending promotes growth— doesn’t apply in Germany.
In the June G20 meeting this summer, Merkel was again pressured by President Obama to not withdraw stimulus for fear that things would continue to sink worldwide. Merkel was unimpressed:
Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”
Germany is the world’s fourth largest economy, they are successful manufacturers and exporters, and their government’s deficit as a percentage of GDP in 2010 is expected to be about 5.5% versus about 10.1% in the U.S. Their fiscal stimulus was largely in the form of tax cuts rather than government spending.
Read it and weep all you Keynesians (from today's WSJ):
Germany's economy is set to grow 3.4% this year as its recovery continues across almost all sectors, the government said Thursday in its updated forecast for this year. The growth forecast for 2011 is a more modest 1.8%.
The government's previous forecast in April predicted 1.4% growth this year, before Europe's largest economy posted a blistering 9% annualized rate of growth in the second quarter and other indicators, such as unemployment rates and business confidence, continued to suggest a more rapid rate of recovery.
"After a period in the on-ramp, our economy is now driving in the fast lane," Economics Minister Rainer Brüderle said. ...
Mr. Brüderle said the recovery is being led by demand for German products abroad—particularly from China and India—as well as more recent signs of improved domestic demand. "The recovery has reached nearly all sectors of the economy and is gaining force," Mr. Brüderle said. He added that Germany will likely grow at around 2% annually over the next five years. ...
Unemployment, in turn, is dropping. The government projects that 3.2 million Germans will be out of work at the end of this year, with the total falling to 2.9 million next year. Mr. Brüderle said the total could fall below three million by the end of 2010.
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+ 10.
I can't undertsand that they are claiming no stimulus. There has been massive stimulus at great cost to Germany. It may not be directly on thier books but the german tax payer will be paying for it for years. In fact through the IMF on top of that the US tax payer is footing a substantail part of the bill of all the bail outs of soveriegn debt to stop the german banks from going bust. Yes there is an industrial recovery but at a huge price and the EU region should now fiscally be looked at as one. The Germans are still hiding thier losses and ultimately pushed the soverign debt up in other countires (or should we say regions of the EU) just to keep everything looking rosy. A short term fix I am afraid.
With pleasure!
You are welcome.
Which acording to keynesians should not be possible since wages are sticky.
The real problem with keynesian theory is that its impossible to apply, and its just a elaborate academic justification for government spending and money printing. For keynesianism to be able to be applied correctly (and even in that case it would not work) politicians would have to be angels (which they are certainly not). Keynesianism was not meant to be applied, it was just a intellectual justification for crooks. The sooner you realize the better.
You are not making a lot of sense, I am afraid, but I suggest you re-read what I posted.
In short, germany has "recovered", in a very temporary way, because wages were lowered, benefits were cut and the Euro plunged.
This is not a long-term recovery - not even a medium-term recovery, it's probably more of a "dead cat bounce" before the inevitable "Euro double dip".
Does this arrogance comes with the keynesian indoctrination education? You guys always feel like you are the kings of the world just because you learned some ultra-simplistic theories. I dont get it. Why are you all so elitist and arrogant?
I am starting to think that while becoming a keynesian they make you feel all important so you dont think rationally, and go around the world thinking that you know economics, when you only know keynesianism.
Yes, please, just attack me personally instead of responding to the information and to the points I am making. And what makes you think I am a "Keynesian", pray tell? Can you even define it and explain rationally why this is such a bad thing, instead of using invectives?
I have stated unambiguously - way up there in my first post - that I think Keynesian policies are the wrong ones to pursue right now, because most western governments - even Germany - are broke and cannot afford the costs of Keynesian policies. How can you reconcile this with being a "Keynesian" - whatever the term means for you. Go ahead, re-read what I posted.
So: not only you are not making any sense, it seems you cannot even read beyond the first three lines of a post: as soon as you read the work "Keynes", it seems your brain shuts down, except for the small part required to type an incoherent, non-sense retort.
With this, my good sir, I bid you "adieu". You have richly proved yourself to be a complete nincompoomp, but I am getting used to this on ZH.
His fleecing by the "Big Education racket" has to be justified somehow. Even if it is in his own mind.
"and a ban on any and all speculative activities" - u mean I as a private investor could not buy and sell Company A stock on the same day ?
What weak Euro?...It costs $1.38 to buy a Euro. I'd bet that Germany sells more cars to the US than any other country and the USD is weak versus the Euro....The top 2% don't care about the USD/Euro....They buy what they want.
Euro went back up recently, but it did go down pretty low - I remember a lot of net-pundits here on ZH calling for EUR/USD parity.
And, yes, that low Euro is certainly a valid explanation for the (temporary) improvement in the German economy.
What about the fact that Germany is enjoying a weak Euro to profit from exports that would not be possible without the cost of the PIIGS?
And I remember when the Euro was worth $0.82 about ten years ago. Germany was in quite a recession at that time. So much for that theory.
So what?
There are plenty of other countries in the world with cheap currency that is in a recession in a fiat system. The point is that the German Mark would undoubtedly be one of the very obvious place to park cash in today's environment if it existed, which would definitely affect their economy.
Compare the amount of listed exporters in Japan and Germany complaining about the FX rate on their IR reports.
Then, compare the amount of Germany's export to GDP ratio with China, Japan, Korea, etc.
The positive impact it has on their economy should be more than obvious.
Germany recovered because they make the finest cars in the world (BMW, Benz, Porsche), which don't compete on price and are bought by the top 2% in the USA who have all the money.....Are you really surprised Germany recovered already?
You are somewhat misguided. Mercedes Benz cut a lot of people back to Kurzarbeit (limited hours) due to the world-wide drop in demand for their autos. Germany exports a lot more than autos.
What you do note in wandering around the country is a lot less pointless excess. While you do see a lot more SUVs these days despite gas prices that work out to EUR 5 ($7.40) per gallon, you don't see McMansions; Real Estate remains stuck roughly where it was 10 years ago because it was already at a relatively high level to start with, so that was one bubble that was avoided. It was also avoided because lending standards were not debased ... the average German borrower is still expected to put down at least 30% on a house, and a lot put down much more.
Credit cards exist, but many have the full balance debited from your bank account every month rather than revolving and building up balances and interest payments. So you lack the boost to the velocity of money in the system, but you also don't have the significant drag of finance charges.
Though you see a lot more debit cards nowadays, a lot of people still use cash for most of their purchases, which has a strong dampening effect on impulse purchases of big-ticket items. Nevertheless, electronic outlets are still packed on the weekends with people buying flat-screens, etc.
At the universities there have been protests about charging tuition at anything above 0, but fees have gone up to something like €500 per semester at many universities. What you don't have is a Big Education racket like the US, where universities have used easy access to federally subsidised credit to fleece families of years of savings in order to fatten the pockets of otherwise marginally employable liberals.
All of this is underpinned with roughly 30% to 45% of income taxes at the middle income level, plus another 20% or so in social security and healthcare taxes. Oddly enough, the total taxes I paid in Germany on the whole turned out to be lower than the total take from me when I lived in New York, and the services were much better.
What you get in Germany for all of this relative stability is perhaps, in comparison to the US, a bit more security with a tradeoff of the prospect for social-mobility and wealth accumulation. But from what I have seen lately, the US government is doing its best to level the playing field on the last two points without doing anything to correct a number of glaring weaknesses noted in the earlier paragraphs.
What an excellent, excellent post. One of the best contributions I've seen on ZH in a few weeks.
+1
Thanks for the post!
" What you don't have is a Big Education racket like the US, where universities have used easy access to federally subsidised credit to fleece families of years of savings in order to fatten the pockets of otherwise marginally employable liberals. ".......... ain't that the truth !!! thanks for saying it ! ....... this BIG EDUCATION racket put on a charge card is what got one of my children in ever-lasting debt. my "adult child" never consulted me on this matter (which, of course, is what the lenders like) & signed without my knowledge. I'm livid, not at my child, but, at the predatory lending companies that have literally got their claws in our ill-informed & naive young people.
Perhaps some economic education would have been in order before the acquisition of a credit card? And don't say that was the responsibility of someone else.
The thought just struck me, but maybe one should have to pass a test before they can get a credit card. 1) What is the time value of money 2) Demonstrate compounding 3) Demonstrate discounting 4) What is inflation 5) What is deflation. Etc.
Simple. You're certified to borrow. Recertify every five years ... The higher score on your test, mixed with your payment history, the better credit rating ...
Would it be elitist to ask people to understand that their credit card is more dangerous than a gun for the most part?
A woman I know was told about the evil of credit cards, but it was just so easy and so tempting. She knew better, her dad taught her... but it was right there. She was young, she fell for it. Of course her dad still doesn't know that she ended up with a five-figure balance and had to trash her FICO to get out of the mess. She's almost 30, works very hard at a good job and the guilt of the debt still haunts her. We've discussed it.
Bankers are vampires. Not the sparkly kind, neither. Real, bloodsucking, bastard vampires.
You know, Rocky, once them kids leave home it don't take long for them to be assimilated. Especially in school, they are litterally brain washed in 2 or 3 years time. Try as you might, sometimes you just lose control, and it wasn't because you were a bad parent.
I agree. Teens/young adults stand absolutely NO chance unless their parenting is "extreme" in the discipline/rewards/consequences etc. department prior to them being cut loose.
They are brain-washed from birth by constant stimulus from corporations, advertising companies, government etc. As much as they "should" get blamed, their infant mind has been attacked hour after hour from birth, from every possible angle.
Until we become very, very conscious and aware of our day to day activities, actions, thoughts, feelings, reactions etc. all we are at the end of the day is "robots". "Free will" is the greatest illusion there is, as it feels so damn "real"! But it's not. We have to make it so, because it is stripped from us the minute we are born.
Good luck to all.
SteveNYC,
1. "Teens/young adults stand absolutely NO chance unless their parenting is "extreme" in the discipline/rewards/consequences etc. department prior to them being cut loose."
Amen and Amen. Only what was standard procedure for every who was anybody during my growing up would be considered "extreme' today.
Spanking was acceptable under certain circumstances and physical work (child labor was useful during, and for a few years after, WWII.
2. "They are brain-washed from birth by constant stimulus from corporations, advertising companies, government etc. As much as they "should" get blamed, their infant mind has been attacked hour after hour from birth, from every possible angle."
The principal change in my time and my favorate weapon of mind destruction is the boob tube. Fantasy as an entertainment or reward in a fantasy location (movie, theme park, ect. is recreational stimulation. But, a steady diet of boob tube, day after day, is detrimental to child development. This isn't just my opinion but the lasting effect on attention span has been discussed by researchers reporting at least on NPR.
And for a child (as I both remember and observe grandchildren) doing things physically, testing yourself in the real world is fun and a preferred entertainment. Acting out a fantasy is more entertaining than seeing fantasy played out by someone else. Direct personal experiance with the things that work or don't work are a key source of learning. Fantasy entertainment may be pleasant but a steady diet will leave the young child crippled.
Kudos on you post.
If that was the reason, then they never would have been in economic trouble to begin with.
Yeah, sure, THAT'S the reason.
I hate to tell you, but rich people have been hit by the recession too. They aren't spending much on new luxury cars.
Germany is recovering because they didn't interfere in their markets. Looking for a simplistic start to finish answer beyond that is fruitless. Germany makes a LOT more than just cars. They also have the world's largest chemical manufacturers, among numerous other industries, all of which benefited from not having the government's fat fingers prodding them all over the place.
Hooray for "Mom"!
Yes, it is about time that academia, and most specifically English-speaking university starts to rebuild their views of the twentieth century economic history.
What has been delivered to the recent generations of MBAs is especially appalling. You just cannot read current events without the supposedly disproved intellectual support of classical economists (why not Bastiat!), the politically-and-banking-incorrect Austrian school of thinking and great forgotten thinkers such as our parochial Jacques Rueff or the German Wilhem Roepke.
The latest belong the great post-WWII German economic thinking. Can anyone spell his name, or Ludwig Erhard, correctly by the way?
Can anyone remember what the latest has brought to this country during the second part of the XXth century. It still permeates political and business circles in Germany. And it shows!
A rehabilitation of economists with a decent track-record (why not the ones above), work, savings, monetary and credit and banking honesty IS MORE THAN REQUIRED... Management of "inflation expectations" is not a joke. Even a good one. Just a swindle.
IMF economists, Bernanke intellectual stance... I'm getting more desperate by the day.
Right on. Whoever junked you is an idiot.
Timmy no doubt junked him.
TIMMAH!!!!