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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Germany takes the world down, take 3?

Posted by WARREN MOSLER on November 21st, 2011

Looks like for the third time in the last 100 years the world fiddles while Germany torches it?

Germany now stands pretty much alone in objecting to the ECB writing the check on the grounds that it’s inflationary, when it’s clearly not.

But, unfortunately, the rest of the world’s political and economic leadership doesn’t have what it takes to get through to them.

And the economic destruction this is causing far exceeds the destruction caused by all the shooting wars in history, as the death toll from the consequent global unrest mounts as well.

On Mon, Nov 21, 2011 at 7:05 AM, wrote:

Subject: BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE

(BBK = Germany’s Bundesbank)

BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE
BBK: RISING CONFLICT POTENTIAL WITH STABILITY-ORIENTED MON POL
BBK SEES GERMANY’S DEFICIT AROUND 1% OF GDP IN 2011, 2012
BBK: GERMANY’S GDP GROWTH TO SLOW TO 0.5-1.0% IN 2012
BBK: DEBT CRISIS IS JEOPARDIZING RECOVERY IN EUROPE
BBK: GERMANY’S INDUSTRY ADJUSTING FOR MILD DOWNTURN
BBK SEES GERMANY’S DEBT DOWN TO 81.1% OF GDP IN 2011

26 Responses to “Germany takes the world down, take 3?”

  1. roger erickson Says:

    the 1st iteration was actually carried out by the Brits, trying to permanently destroy the German economy AFTER WWI;
    as detailed in Keynes’ “Economic Consequences of the Peace”

    You can actually lay the 2nd as just a ripple response from that initial economic destruction – constrained in the end only by the Marshall Plan.

    Even this time, the Bundesbank is not alone. GORBS (Greenspan/Geithner/Orszag/Rubin/Bernanke/Summers) have all done their part. And Cameron’s no friend to Aggregate Demand either. Nor, for that matter, is the ECB itself. With friends & relatives like these, who needs enemies?

    The deeper fear should be what’s likely if we again enrage whole populations to the point of revolution – and this time not just the Germans.

    We need the Auerback Plan to ward off the need for a Marshall Plan. :)
    Jokes aside, we’re really playing with fire now.

    Reply

    Zaid Reply:

    @roger erickson,

    The French were just as much to blame for sticking to their demands for reparations for even longer than the Brits. In the midst of the Great Depression, Britain eventually turned its attention on internal issues and gave up on getting Germany to adhere to the terms of Versailles Treaty. Also the Brits had other powers to worry about, specifically Russia.

    Reply

    Gary Reply:

    @Zaid,

    According to what I read in Michael Hudson’s book – it was actually American requirement to pay back war loans to the Britain, France and other Allies – that forced them in return to continually require reparation payments from Germany.
    Americans wanted Allies to stop asking Germany to pay reparations to them, but still wanted war loans repaid to themselves. However, Allies only agreed to drop reparations if Americans dropped war loans repayment requirement.
    So it leads back to America.
    American banks were lending dollars to Germany, which Germans used to pay reparations to Allies, which Allies used to pay war loans to the USA.

    Reply

    beowulf Reply:

    @Gary,
    Tsy is sitting on (with accrued interest) $50 billion in “Sixty-two year 3 -3 1/2 per cent Gold Bonds” in its vaults that the United Kingdom stopped paying on in 1931 but has never repudiated.
    http://books.google.com/books?id=yc8WAAAAYAAJ&pg=PA403&lpg=PA403&dq=#v

    Hey Warren, you should call Tsy and ask them how much they want for them. :o)

    At the end of the First World War the United Kingdom debt to the United States amounted to around £850 million. Repayments of the debt were made between 1923 and 1931. In 1931, President Hoover of the United States proposed a one-year moratorium on all War debts, which allowed extensive international discussions on the general problems of debt repayment to be held. However, no satisfactory agreement was reached. In the absence of such an agreement no payments have been made to, or received from, other nations since 1934.
    http://www.theyworkforyou.com/wrans/?id=2002-02-28.38424.h

    Paul Reply:

    @Gary,
    Where can I find more information on this topic? Is there a good book on it? Never heard about this beofre and I would like to read more about it.

    Thanks,

    Gary Reply:

    @Paul,

    It is in Michael Hudson’s book. I just don’t remember which one. I read parts of 3 of his books:
    “Trade, Development and Foreign Debt”
    “Super Imperialism – New Edition: The Origin and Fundamentals of U.S. World Dominance”
    “Global Fracture: The New International Economic Order”

    I am pretty sure it was in:
    “Super Imperialism – New Edition: The Origin and Fundamentals of U.S. World Dominance”

    beowulf Reply:

    @Paul,
    You should read Lords of Finance (after finishing that, I dug up the US-UK war debt agreement linked above — yeah google finds everything).
    http://en.wikipedia.org/wiki/Lords_of_Finance

    Incidentally, the British govt is talking out of its hat with “President Hoover of the United States proposed a one-year moratorium on all War debts… no agreement was reached.”
    Actually, there was an agreement; as a condition of Hoover’s 1 year moratorium, the UK agreed to pay back the unpaid amount at 4% interest beginning in 1933. Hmm, perhaps I lowballed the accrued interest total. Warren you should doublecheck the numbers before you tender an offer. :o)
    http://books.google.com/books?id=yc8WAAAAYAAJ&pg=PA492&lpg=PA492&dq#v

    Gary Reply:

    @beowulf,

    “Beginning in 1917, the U.S. began to extend cash and supplies to its European allies, expending more than $7 billion in government funds by the time of the armistice in November 1918. Following that, an additional $3 billion was directed to relief and reconstruction efforts of both the Allies and new European nations that grew out of the Paris peace negotiations. The sum of $10 billion (see table) was often described as a “war debt,” but a portion of that total was incurred after the war was over.

    Even before peace had formally been concluded, various Allied nations began to press the United States to scale back or cancel entirely these obligations. Indeed, there was some justification for reconsidering the entire debt issue:

    Most of the borrowed money had been spent in the United States for supplies and war matériel, and had provided a tremendous stimulus for the American economy, which was then the envy of the world. Many Europeans believed that the U.S. had already been repaid.

    Some of the debtor nations argued that the war had been a common cause and that one victorious power should not profit at the expense of others. Further, the U.S., insulated by wide oceans, had entered the war late and allowed the European allies to do most of the fighting and dying.

    Practical economic realities also seemed to dictate a rethinking of the debt issue. It was unlikely that the Europeans would be able to repay their obligations in gold, as the U.S. wanted, because that commodity was needed to back up their faltering currencies. The other payment alternative would have been to send European goods to America and build a trade surplus, but U.S. protective trade policies made this nearly impossible. ”

    http://www.u-s-history.com/pages/h1359.html

    beowulf Reply:

    @Gary,
    Most of the borrowed money had been spent in the United States for supplies and war matériel, and had provided a tremendous stimulus for the American economy, which was then the envy of the world. Many Europeans believed that the U.S. had already been repaid.
    Some of the debtor nations argued that the war had been a common cause and that one victorious power should not profit at the expense of others…

    Of course, we should have written off the debts, but it was such an incredibly stupid war compounded by the incredibly stupid peace treaty, I can’t blame the American politicians of the 1920s who demanded that every penny be repaid, and arguments like the above (“the U.S. has already been repaid”)
    understandably drove them up the wall.
    What’s the saying… “the value of a service declines exponentially after performance”. They certainly didn’t make those points while the war was going.

    Zaid Reply:

    @Gary,

    Since everyone these days likes to quote from this one, here’s one from Carroll Quigley’s Tragedy & Hope:

    When Secretary of the Treasury Mellon, who was in Europe, reported to President Hoover that unless relief was given to Germany immediately on her public obligations, the whole financial system of the country would collapse with very great loss to holders of private claims against Germany, the President suggested a moratorium on inter-governmental debts for one year. Specifically, America offered to postpone all payments owed to it for the year following July 1, 1931, if its debtors would extend the same privilege to their debtors. Acceptance of this plan by the many nations concerned was delayed until the middle of July by French efforts to protect the payments on commercialized reparations and to secure political concessions in return for accepting the moratorium. It sought a renunciation of the Austro-German customs union, suspension of building on the second pocket battleship, acceptance by Germany of her eastern frontiers, and restrictions on training of “private” military organizations in Germany. These demands were rejected by the United States, Britain, and Germany, but during the delay the German crisis became more acute. The Reichsbank had its worst run on July 7th; on the following day the North German Wool Company failed with a loss of 200 million marks; this pulled down the Schröder Bank (with a loss of 24 million marks to the city of Bremen where its office was) and the Darmstädter Bank (one of Germany’s “Big Four Banks”) which lost 20million in the Wool Company. Except for a credit of 400 million marks from the Bank for International Settlements and a “standstill agreement” to renew all short-term debts as they came due, Germany obtained little assistance. Several committees of international bankers discussed the problem, but the crisis became worse, and spread to London.

    But Gary is right to say that the problem started earlier when the crash of 1929 abruptly ended the American loans to Germany.

    beowulf Reply:

    @roger erickson,
    I say we merge them into a single Marshall-Marshall Plan.
    :o)

    Reply

    roger erickson Reply:

    @beowulf, Roger Roger! :)
    And it would work, if our electorate weren’t terrified of Kenyan economics. :(

    Reply

  2. Gary Says:

    Germans built their export industry by making German wages “competitive” and thus less able to buy imports. So Germans feel that they suffered and exercised the “discipline” in order to achieve their status. Now letting the “lazy spenders” like Greeks and others be just saved by ECB would be an insult to Germans. That is why Merkel cannot find it in herself to do it.
    She cannot subvert what she and other Germans feel is a winning formula.

    Reply

    Gary Reply:

    in other words: Germans feel that they sacrificed to achieve their “success” – so why others cannot do the same? They feel that rewarding others for not sacrificing would eventually hurt everybody.
    It will be difficult to overcome this.

    Reply

    WARREN MOSLER Reply:

    allowing greece to default is rewarding them.

    Reply

    Gary Reply:

    @WARREN MOSLER,

    Yes, but that is not how Germans see it.
    German politicians and corporations must have invested a lot in explaining to German workers about the benefits of more “competitive” wages, less social spending, thrift etc.
    Also, Germans see it that they are not going bankrupt, that their bonds are OK – and they must feel proud and say to themselves that their sacrifice was not in wain.
    Now they cannot turn on a dime and just say: “we were stupid, we must have spent more, taxed less, there is enough money for buying everybody’s bonds, there is no danger of inflation”.
    I mean – what they are doing is their national narrative (no more hyperinflation, more discipline, saving), and from their perspective – they see all evidence that they were justified in what they did (saved, suffered smaller wages, etc). Moreover, if feels intuitive to them (state = big household).

    Chaz Reply:

    @Gary,

    The way I like to put this is that Germany held its own workers’ wages down for ten years. German workers suffered stagnant incomes while other EU economies’ productive capacity got hollowed out. I don’t see how this is virtuous.

    The Germans think that doing this kept employment up, but they could have achieved that better by increasing the deficit (kind of like Greece did!). The only winners from the German/Japanese approach are the local industrial conglomerates.

    Reply

    MamMoTh Reply:

    @Chaz,

    I don’t see how this is virtuous.

    Well German workers have a pretty good standard of life. Spanish and Greeks don’t.

    Reply

    Gary Reply:

    @Chaz,

    I agree. But the question is that of perception. Germans must be reading all these news articles daily and feel really good about themselves that they are not going bankrupt. Also, since their wages were squeezed – they don’t feel that they can contribute more to save other countries. They do not understand that “saving” of other countries will not be done with their money. Also – they do not understand that austerity is true punishment, and that ECB buying Greek bonds is not only helping Greece, but Germans themselves.
    It is all about perception.

    Reply

    roger erickson Reply:

    @Chaz, this is simply a fallacy of scale;

    what works in a sub-context doesn’t automatically & simultaneously hold context-wide

    Germans are smart enough to know that.
    And Hungary perennially puts out the best mathematicians in the world.
    People will do anything in their power to avoid thinking?

    Reply

  3. paul Says:

    It’ll take more than ECB being the lender of last resort. They’ll need the power to tax. And that requires all EZ nations to give up a measure of sovereignty.

    If Greek bonds can be given 50% haircuts, why not Italy? The genie is out of the bottle and I don’t see how “lender of last resort” does anything but buy time.

    Reply

    WARREN MOSLER Reply:

    the ecb doesn’t need the power to tax.

    Reply

  4. Franck Says:

    Actually, can’t the world simply save itself from the Germans by saving the Euro of its own accord? What about this plan:

    1. The Fed/BOE/BOJ announce a joint program that they will buy eurozone sovereign bonds (with euros bought using printed dollar/yens/pounds) in unlimited quantities whenever the rate goes above x% for a sustainable value of x. The policy is to be maintained until the world is growing sustainably (or unemployment in the US/UK/JP goes down).

    That’s it. Problem sorted. They probably won’t have to buy anything, and even if they do, they may end up with some duds on their balance sheet, but that doesn’t hurt a central bank much, and that’s much preferable to a world recession.

    Reply

    WARREN MOSLER Reply:

    bit of moral hazard with the fed buying all they euro member bonds they want to issue?

    Reply

    Franck Reply:

    @WARREN MOSLER, well yes, in principle there is moral hazard, and that is precisely the ECB mindset/institutional setup. In practice it’s a bit like inflation which is possible in the model but is furiously unlikely in practice in the current conditions I think:

    First, there’s a fair chance it would push Europeans to fix the institutional setup pretty quick, because it would be so humiliating from a sovereignty/pride viewpoint to have foreigners save us unilaterally; and if it’s not enough, the upwards pressure on the euro xrate (if the C3 indeed have to buy a lot of euros) would probably trigger the ECB to act even on their narrow price stability mandate, to fight nominal euro deflation coming via FX pressure.

    If that doesn’t happen, I still don’t see eurozone countries going out of the austerity mindset and starting borrowing massively (compare that with the orthodox inflationistas’ argument that any QE is mechanically money-multiplied into bank lending to people buying stuff on the street).

    Finally, even if they do borrow and spend like there’s no tomorrow, this will surely leak, directly or indirectly, into buying rest-of-the-world stuff which would kickstart global growth and thus trigger the exit condition before it gets completely out of hand.

    You could compare it to the Marschall plan: help others to help yourself.

    And finally, you can always (threaten to) use all this Pentagon kit you have to turn us into slaves if we really party too much with your money.

    Reply

    roger erickson Reply:

    @Franck, Sure, if euro-members want to follow the Puerto Rico model – but this time with colonialism reversed & shared with Japan. Repartition Europe using a Capital Curtain instead of an Iron Curtain?

    Complication would be the EEU members who aren’t in the EMU, and friction between the US-owned segment, Congress & the EEU Parliament.

    They may as well ask UK/US/Japan to hold the gun as Europe plays Russian Roulette.

    If they’re stupid enough to do that? Would our Congress/Fed be steady enough to aim well? ["Their head, or our foot???"] What collateral would we demand of Germany if we ever wanted to suddenly raise all their bond rates [to meet our debt ceiling :( ]? Brandenburg PLUS their Acropolis residuals?

    Reply

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