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German Industrialist: Insolvency Procrastination And How To Confront The Coming Inflation
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
It was a blatant act of fear mongering just before the EU Summit: if Greece were allowed to default and exit the Eurozone, it could trigger the exits of Portugal, Spain, and Italy, which, in a worst-case scenario, could cost the world economy €17.2 trillion in economic growth. “Hence it is incumbent upon the community of nations to prevent Greece from a sovereign default as well as leaving the euro, and the domino effect that this event could induce,” the study urged.
The study was commissioned by the politically powerful Bertlesmann Foundation, which owns 77.6% of Bertelsmann SE & Co., a multinational media company based in Germany. The foundation is known for its agenda—now including the doctrine that taxpayers must always bail out certain bondholders in order to prop up confidence in the financial markets.
“Insolvency procrastination” is how a quintessential German industrialist responded. And if after Greece’s exit, the whole Eurozone dissolved? “To throw good money after bad is something that normally only over-indebted businesspeople do,” he said. “It’s irresponsible.”
Tough words for the EU Summit crowd. Heinrich Weiss, Chairman and CEO of SMS Holding GmbH, didn’t mince words as he laid out his euro pessimism in an interview with Manager Magazin.
SMS is, in a sense, a microcosm of the German export economy. The family-owned company has about 10,500 employees. Its subsidiaries excel in mechanical engineering, machine tools, and plant construction for processing steel, aluminum, and nonferrous metals. Some of the items it manufactures are so heavy that getting them to the port can be a headache, given Germany’s aging bridges and infrastructure constraints. And it exports: 57% of its orders came from Asia, 28% from Europe and Russia, 14% from the US, and 1% from Africa.
During the financial crisis, its order intake collapsed by 55%, from €5.3 billion in 2008 to €2.3 billion in 2009. Then orders recovered, reaching €3.4 billion in 2011 (annual report). During bad times, the company lives off its order backlog. It was €6.3 billion in 2008. In 2009, SMS ate up 26% of its order backlog, and in 2010 reduced it further to €4.5 billion. In 2011, it recovered a bit. Due to the order cushion in 2008, sales actually increased during the worst part of the financial crisis, from €3.6 billion in 2008 to €3.9 billion in 2009—but then, the order drop-off caused sales to plummet to just over €3 billion in 2010 and 2011.
The business is cyclical, with ups and downs every two or three years, Weiss explained. After the few good years recently, a downturn would be expected. “But I’m afraid that this one will be deeper and longer than we have become used to,” he said.
Since over 80% of the company’s revenues came from outside the Eurozone, he expected that SMS would be able to ride out the debt crisis unscathed. But over the summer, their customers worldwide became “more reticent”—and postponed projects. The debt crisis had begun to impact the rest of the world [also read.... The Noose Tightens On Germany’s “Success Recipe”].
The bond-buying program by the ECB and the establishment of the ESM bailout fund may have calmed the waters, but “as citizen and family entrepreneur,” he was convinced the calm would be temporary, and things would get worse. Why? The “inflation trap,” he said, there being nothing more “anti-social” than inflation.
Consumers would be in a tough spot. Due to the existing “Transfer Union,” it’s “certain today that the standard of living in Germany cannot be maintained.” When citizens feel the loss of wealth due to these transfers to Germany’s neighbors and due to rising inflation, domestic demand for consumer goods would “shrivel over the medium term.” But stimulus programs with borrowed money would be “the last thing we can afford,” he said, calling it a “scandal” that Germany hasn’t been able to reduce its debt despite “record tax revenues.”
To get through the crisis, SMS would do three things, he said: remain “at the top of its sector,” maintain a financially conservative approach to be able to live off its reserves, and.... “prepare for inflation.” His strategy: invest a big part of their free liquidity “in industrial substance.” All inflationary times have proven that those who invested in substance, for example in well-run companies, had “fewer losses,” he said. So they’re looking for acquisitions.
And the next 12 months? SMS was currently using overtime to keep up, he said, but with orders for 2012 dropping to €3 billion, capacity utilization will fade, and the company might have to shift to part-time work (Kurzarbeit) next year. He couldn’t give a forecast; the situation was “too uncertain,” he said, but for 2013, “we’re pessimistic.”
Two thermometers into corporate brains plunged to depth not seen since the trough of the financial crisis when the US was losing hundreds of thousands of jobs a month. One was based on responses from CEOs of America’s largest corporations; the other was based on responses from analysts and their industry contacts. Just before Lehman, these people had exactly zero predictive capabilities. So, could they now have ulterior motives? Read.... Fear of Impending Economic Collapse Or Just Manipulation?
And here is an insightful read by energy expert, Marin Katusa: Will Iran’s Runaway Inflation Spark an Oil Bull Market?
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The Second Great Depression will be coming "live"into your living room courtsey of the Fed-ECB-BofE-BofJ and who ever is running the PBOC after the Chinese have a change of leadership.
if Greece were allowed to default and exit the Eurozone, it could trigger the exits of Portugal, Spain, and Italy, which, in a worst-case scenario, could cost the world economy €17.2 trillion in economic growth.
They got some great jokes at the EU.
How much of the public media companies do the big banks own/control?
I need a definition of "industrial substance." If it's what I think it is - BAD idea!
http://www.usagold.com/germannightmare.html
I'd suggest that anyone who is not already VERY familiar with the full German Hyper-inflation read the above piece.
Does the UK as the only sov entity in Europe need to increase taxes on external & large cars so as to force the Germans to spend on internal capital formation and reduce its own oil consumption ?
Also redirecting its now surplus resourses to rebuild the damage Beeching did to the UK in the 1960s ?
It will need to pull out of the EU I guess.
Top selling cars (Jan - Sep )
4. Volkswagen Golf : 50,142
7. BMW 3 : 34,340
8. Volks polo : 33,987
9 .Merc C class :29,772
10 .Fiat 500 (Poland) :26,480
Vauxhall of Ellesmere port makes enough Astras for a reduced domestic demand (5) . 47,125.
It is now on a reduced 4 day week.
However it cannot afford to subsidise this absurd vehicle now made in Tyne on wear and a great "success" in (2) Ireland and the UK
en.wikipedia.org/wiki/Nissan_Qashqai
Jan to sep car sales.
UK : (6) 35,865
Ireland : (2) 3,256
The UK & Ireland needs to become a land of Astras , (BMW) Minis & Trains.
Useful report from SMMT last month.
www.youtube.com/watch?v=4zYOJ7MV5_M
BMW and Mercedes is doing well in the UK & Ireland.
Is this a good use of scarce resourses ?
The Merc CEO was claiming he has not got enough capacity !!! - thats bullshit but there must be a element of truth in a story for the bullshit to be effective.
There is a major rational capital allocation problem in Europe and the car industry is at the heart of this.
In the 70s the supply chain of the car industry was national.......i.e the distances were shorter between car part plants.......now ellesmere for example must import parts from plants in Poland.
Their wage arbitrage systems are coming back to bite them via higher transport costs.
This is all very 1914ish
I am rereading “The first world war vol 1? by Hew Strachan – the “financing the war section” – a must read.
The Germans & French held much of the above ground gold not unlike China(hostile Germany?) & Japan (France ?) $ treasuary holdings today ?
The UK could “print” more Gold as the Empire had control over most of the below ground stuff in Canada & South Africa.
While India gave it a favourable balance of trade ( I think Europe of today functions as the modern India)
OK there was a run on the BoE………in my opinion because the US became both China & Saudi Arabia in one monster package.
The Bank act was suspended and the clearing banks expected the Gold standard to finish as the BoE would need to issue more notes , but HMT issued the notes (legal tender in Scotland & Ireland)
Keynes hammered home 2 points – the first was the difference between the internal demand for gold and the external.
1. The first was the internal vs external demand for Gold – the 10shilling notes (paying 5% interest) were for the former.
By easing the domestic calls for Gold the Bank had more gold available for exchange purposes.
2. He reiterated throughout the war that it was useless to accumulate gold reserves in times of peace unless it was intended to utilise them in time of danger.
This is the MMT full employment meme in its ancient form.
By maintaining purchasing power Britian could SUSTAIN ITS PURCHASING POWER IN INTERNATIONAL MARKETS AND WOULD RETAIN FOREGIN CONFIDENCE & THEREFORE FOREGIN BALANCES IN LONDON.
But if HMT just issued raw notes into the economic medium – what would have happened ?
Would we have had the Great War to end all wars ?
One of the problems (and there are many) I have with the Anglos is that they think something will turn up in the physical world that will both sustain full employment in the UK & US and also sustain your external purchasing power.
The Larry Summers of the world was not screaming that we need a French scale nuclear & Rail programme to reduce these trade imbalances but just give us some time.
He and others of his vast bulk just want to consume and not produce – fascist corporate forces in Germany and China are happy with this very unsatisfactory arrangement
What tripe, allow me to summarize; "when goods and services stop crossing boarders, troops will."
Stupid fucking sheep.
"If you can't see what is coming it is best to duck."
The interesting thing is that everyone is telling me what is coming, yet it never gets here.
DOW 3,000 is coming. DOW 30,000 is coming. duck into the DOW, duck out of the DOW?
Buy gold, money is going to zero. The government confiscated gold 79 years ago and can do it again.
duck into gold, duck out of gold?
On a long enough time line we are all dead ducks.
What happens to the price of PM's in a global super deflation?
They hold relative value with other durable goods like shotguns, ammo, generators, farm land, etc.
Exchange is another issue. If you actually need to buy something in stressful, relatively lawless times, silver coins probably work better than gold or platinum bars. What always happened in the past is that barter grows up around scarce, valuable, portable items, like cigarettes, or panty-hose. Happy shopping.
What happens to the price of PM's in a global super deflation?
Thoughtful piece. Some volk are working too hard at this.
Greater Germany is half of Europe and borders matter less all the time.
The whole world is going tribal. There are many reasons for that, but take an honest look at just two.
1- The worldwide failure of governments to enforce laws and deal with spending.
2- The success of those groups who have abused tribalism the most: Jews, Blacks, Casino Indians, urban ward healers, etc.
If tribalism is good for some, it's good for all. The results won't be pretty. It's time to honest about the forces involved. -
Just look at the population trends projected for the USA : Demographics In America In 2050 - Business Insider
These are the signs of the coming times, and for this to work the melting pot has to do its job! Not renounce on its historic role!
Now lets talk of tribalism. The ONLY tribalism I see is that which has been CONCOCTED by first world itself, in its deadly wars of "divide and rule". Like the tribes of Pak/Aghan or of ME wasteland, or Vietnam or African hinterland of RM wealth, or Mexico/Colombia drug lands. Its first world decadence and power play that has created this trend, nothing else. If Pax Americana had been benevolent we would never have this dire situation wherever its presence has left an imprint.
If you take the victims of this mayhem as the instigators of the mayhem itself and of their own victimisation, you have a stange view of cause and effect. Like the despotic king who blinded his subjects because they crticised his cruel ways and then mocked them afterwards for being blind to events as they unfolded! But I'm repeating...
Falak
As usual you are wrong.I spent years living in Afghanistan and the tribal areas of Pakistan back
in early eighties.Also time in the middle east.Tribalism is a mighty strong instinctive human reality.Sure its been
exploited by empires since the year dot,but it has to exist to be exploited.
1° In 1970 there was no Taliban movement in PAkistan. Pakistan was secular during Jinnah period to Ayyub Khan.
2° The man who ran the PAshtun Movement in Peshawar area was Khan Abdul Ghaffar Khan a pinko, just like the royals of Afhgan who leaned heavily on secular Ataturk type culture. So Afghan was tribalism like since 2000 years but not Rabid muslim, truly secular at partition; aka 1947-1975.
3° The CIA in the wake of Soviet invasion used the ISI to implant Taliban Madrassa culture to recruit young fanatics paid by Saud and rubber stamped by President ZIA.
You better learn your history to understand how the peaceful, pinko, secular Pashtun culture became what it is under CIA/Saud ideological madness.
Those thugs that they created, drug lords and Talibans like Hekmatyar, even ended up killing the only genuine non Pashtoon freedom fighter who didn't toe the US line : Commander Masud of Tajik descent.
It, the tribalism, does not HAVE to be exploited like blatant crypto fascist, militarist colonialism; that's my point and it was worldwide. Even the Brits never got involved with religious indoctrination inspite of their callous colonial rule, to rob the riches of the land.
There are many tribes in the area.
Different tribes of the same religous sect will glady kill each other on sight.
Blood feuds run very deep,they make Sicilians look like choirboys.
Your generalities are simplistic.
"Yeah yeah yeah, hey when do we bomb the brown people on TV? I'm all settled in with my bag of cheeto's and a cold can of sudz." - territorial vocalisation of Pax Americanus
I won't defend America as it is, because... DC = the enemy.
America as it was, largely specialized in getting out of places we conquered like Japan, Germany, Mexico, Cuba, France (twice)..., we even made Kuwait safe for the Emir and his 48 wives, and then left. Stupid, but we did.
A melting pot is NOT the answer. Look at Jamaica, Brazil, Argentina, any place it has been tried. Far more racism and class distinction than in Europe or the US, and the lighter the skin, the higher the status, guaranteed.
nostalgia is a lovely thing.
Whereas Wolf decries the Bertlemans EUro meltdown assessment as fear mongering he does not provide an indication why based on substantiated counter arguments.
Euro land has to do what it has to do to move away from Pax Americana dictat to become its own master; and that will be a long painful haul; as the dichotomy of being part of that current construct and moving away from it thru dire necessity is going to become more and more evident to the whole world.
Just as a parallel; as the age of AMerican Renaissance which began in 1950 is now coming to an end, it will be followed by dire times worldwide, as we are seeing the premises in current recession looking like becoming mega depression in economic and debt tsunami gridlock.
To carry the historical analogy further, the treaty of Cateau-Cambrésis in 1559 heralded the end of the Wars in Italy and ALSO the end of the Renaissance. That thus led to a power hiatus which transformed itself into a hundred year religious/ideological war in EUrope, which only ended around 1715, with the end of Hapburg EMpire in Spain and the decline of French Power in Europe.
We may be entering an age of Euro continent transformation, (end of NAto and US economic hegemony), a period of global conflicts heralding the end of Pax Americana and thus of instability; where our "religious/ideological wars" will be about the sociopolitical economic (regional?) models that allow fair access to RMs and basic food and water...Tipping times in first world bigtime. We don't know how to get there; so it'll be a true punch up; lets hope it stays non nuclear (big wishful thinking).
Sure, Greece is on its way to break away from Pan Americana and become its own master... And so are Portugal and other countries that have found untold wealth in this new Euro-centric approach!
What a bunch of bollocks.
Nothing will change for the average Joe as long as "thinkers" muse in terms of countries and not individuals.
give me a jingle when the corporate world thinks of "individual's" interests truly, as the statist world of old never did.
In fact, only when its election time or in a commercial!
Its always fun to rewrite history; as long as you know how to make it pregnant!!
And that is not given to the average individual but to game changers; they who ALL are/end up power players of either Oligarchy or State tradition.
"Thinkers" as you say ARE the game changers. The PIIgs are the chaff left from the field of oligarchy and statist stand-offs.
Falak agree. Alot of people are going to die. As long as the USA is the 800lb gorilla in the room with its military not alot is going to change. I think someone will release a nuke myself. Strategically speaking it levels the field against the military might.
I hope and pray this does not happen but too many war mongers out there right now.
So there are some wealthy industrialists that are not Rothschild zionists...maybe there is still some hope.
I've said it before: don't be fooled by the brand recognition, Germany is an export addict just like China or any of the "Asian tigers", and another worldwide slump will give them the scissor just like everyone else.
It's also quite hilarious that the Germans were thrilled with all those EZ orders when shit was good, but now that the Eurozone is circling the bowl, it's suddenly everybody else's fault (for buying too many Germany exports), despite Germany's patent inability to stick to the Maastricht limits. They're spending outside their means, they've just not deviated as far as the PIIGS from the treaty (yet).
YouTube - 'Difference between me and the Terrorists? They can't blame Bush!' says President Obama
Deflation is spreading around the world despite the efforts of the central bankers by trying to avoid it by printing currency. Inflation is caused when the sum of credit outstanding and currency in circulation increases in comparison to the goods and services available and deflation is vice versa.
The credit outstanding worldwide is shrinking at a much faster rate than the rate at which the central bankers are printing money. The money being printed is just being used to roll over previous debts and is not contributing to job or small business creation which can actually cause inflation by giving a large portion of the population an increased purchasing power.
Moreover deflation is a natural process and is a result of increased productivity which ultimately benefits the majority of population by bringing down their cost of living.
http://www.marketoracle.co.uk/Article35345.html
Please don't confuse deflation with financial repression or you may be in for a surprise in the next couple of years.
Don't tell any central bankers about a "natural" economic process; they're sure to order it taken out and shot immediately.
If you can't see what is coming it is best to duck.
Do interest rates represent fundemental anymore, or are the just a dialed in edict from central planning?
Like the Air France Airbus that crashed off Brazil. Is the display true, and the pilots argue. And we, the passangers wonder to put our trays up or just scream.
Germany excels in precision engineering as well as in large-scale highly engineered products, about as "capital goods" as they come.
I can tell you for a FACT that Germany's bearing manufacturer Schaeffler has a tight and cooperative relationship with their Korean branch KBC (which Schaeffler got when it bought Germany's FAG). They make complex machines for each other, secret enough that I was allowed no details nor allowed to take photos when I went to Korea to visit KBC.
Germany, like all the advanced economies, will have its own set of problems as night draws near for the world economy. My guess would be that Germany and the USA will sink at about the same time.
Great article! Keep them coming.
Germany has a very strong segment of so called "Mittelstand" - mid-size companies that dominate a variety of very narrow technology-driven business niches globally. A major difference between Germany and US is that there has been a very concerted collaboration between Government, Business and Labor to keep production based in Germany and to buffer the effects of the business cycle. It has been fairly successful thus far. So Germany will suffer from a decline in capital spending globally but may in fact outlast the US in the race to the bottom.
this is this Mittelstand phenomena that made Germany immune to the Euro zone slow down of the last few years and thus despite an anemic internal growth rate.
We all know that German growth came from exports to Asia. that would be fine if German politicians would recognize the fact that other European countries' economies are not running on the same engine.
Pressing them to reform fast and kill their internal growth was a big mistake. Unfortunatly Merkel &Al are still pushing hard.
Soon enough, non German countries will witness with delight the German's fall from Grace, when exports collpase and internal growth is...... nowehere to be found. Panic will spread fast among German politicians.
Soon enough deflation will wipe them out.
+ 1
Yes, their Mittelstand is something we do not see much of here in the USA, and is a treasured German asset. I have seen used German metal-working machines (Gildemeister) used in a Spanish bearing plant. That was a long time ago, however (those were not CNC machines). But, my guess would be that at least some of these "middle sized companies" are still there, making their precision machinery and contributing to Germany's strength.
Historically it is an axiom that plunging interest rates are a precursor to a major bank run and a DEFLATION. I think to think otherwise is crazy. The problem in Europe is one of mass social unrest not irrational "fears of inflation" that outside of petrol will never materialize.
hyper inflation arrives when money injection intended to power real economic growth only powers runaway prices as the faith in fiat disappears; we could be there anytime economic actors lose faith in their money, and have no refuge areas of consequence.
You have to fall into the deflationary abyss before TPTB will turn the print knob up to 11 and unleash hyperinflation. And they will try to control the inflation monster with various regulatory and manipulative schemes that have a short shelf life. Then all hell breaks loose.