Friday, 19 December 2008

German "Crass Keynesianism" Lesson

"All this will do is raise Britain's debt to a level that will take a whole generation to work off ... The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking ... When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades ... Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"
Peer Steinbruck, German Finance Minister

It is very rare that economic sense is spoke in the mainstream media. All too often 'experts' are paraded in front of the media circus to explain what needs to be done to amend the current financial crisis. Sloppy Journalism has become all too common, with many of the main newspapers and television companies rarely exposing the truth. Peer Steinbrucks recent comments were a breath of fresh air and comments that expose how many governments of the world are now proceeding to make the crisis worse. Comments like these expose the policies for what they are, short term political popularity contests that have no benefit in the medium to the long term. The particular attack on Britain was fully justified and words that our leaders should take great alarm to. The markets have also begun shorting the UK, as McDonalds debt has become cheaper to insure against default. Peer Steinbruck is not the first German to expose the weaknesses of the UK economy. Back in October of last year, when the Credit Crunch was still in its infancy, a team of German Economists warned that the UK economic miracle was nothing more than a mirage, built on debt and short term consumption. At the time I remember a lot of the 'experts' deriding this report as nonsense, with the politicians ignoring these warning signs, but here we are 12 months down the line the Germans are spot on again. The UK is in dire shape, with Brown and Darling still with their fingers in their ears. Well I suppose Brown apparently saved the World recently.

Gordon Brown's popularity in the polls has perversely gone up recently, and he has begun capturing ground against the Conservatives. Could he be trying to call a Summer election in 2009, before the economy implodes in 2010 and beyond? Brown was originally going to call an election in 2007, as he knew the economy was about to nose dive off a cliff. He backed down in the end and decided to ride out the storm as he didn't want to loose his life's long ambition, of being Prime Minister. Of course these fiscal paternalistic policies are just more smoke and mirrors, eco-matrix policies to confuse the public. Peer Steinbruck views are a minority. Legitimacy is gained when Paul Krugman, a Nobel prize winning economist, praises the central banks and the fiscal polices of governments, stating that we can not repeat the mistakes of the past. A Nobel Prize winning economist who came out saying that during the Great Depression they didn't cut interest rates like we have now - it makes you wonder what history books he reads. These neo-Keynesian economists just know one thing, and that is too inflate, so its no surprise that governments galvanise these economists. Recently, unbelievably the media have begun mentioning the 'helicopter drops' of money, ones that Ben Bernanke remarked about in 2002, just as this bubble was being inflated. Yet no one from what I have seen has come out and said how stupid these ideas are. Printing money has never worked and never will. It has become so bad that for once I am actually worried what our leaders are doing along with the complicity the media and mainstream economists seem to be showing towards such dangerous actions. No currency seems safe these days, with everyone trying to inflate. Yet economics editors, people that you hope have been educated in finance, seem to think this is a good thing.

"It is not inconceivable that banks could start charging customers to hold their money – after all, their business model is predicated on positive interest rates"

Statements like these sum up the delusional state the UK has found itself in. What savings? Do you think the banks are going to start charging people for their money, when they are insolvent? Do you think members of the public will pay banks to store their money, when we get double digit inflation? There still seems to be a propaganda mission among some, that we are are entering a deflationary spiral that will last for years. However once this sell off period has ceased, inventories and stock have been sold off, production has been cut back and the government has printed up more money, can you really see deflation taking hold? The goods and services in the real economy will decrease, capital is running scared therefore there are no productive investments being made, yet the amount of paper money will increase - this is classic stagflation, the phenomenon that smashed Keynesian economics apart during the seventies.

We've been here before of course. Back in 1973-74 the world was in a similar situation we find ourselves in now. There was a commodity bull market, oil price spikes, an expensive war, recently Iraq, back then Vietnam and a serious bust that was occurring during this time. Yet at the time there was no unified economic response to the above as the seventies credit crunch hit. Rates of inflation varied greatly in Europe through 1973-79, the years after the crunch, with the UK, Ireland, Spain and Italy averaging around 16% during this period while West Germany, Holland and the Swiss averaged around 5%. Yet history seems to be repeating. West Germany back then pioneered the monetarist approach and shyed away from reflation, opting instead to control government spending and the money supply, allowing the deflationary forces to amend the market during 1973-74. Meanwhile the UK chose reflation, by implementing the opposite polices to the above. It joined the other Western European basket economies at the time, by experiencing some of the worst inflation in the euro zone. Once again the Bundesbank are stating the principles they undertook in the past, but these policies are not populist polices politicians like to hear. Once again, the interpretations of history they use are inaccurate, thus they fail to see the causes of the Great Depression and the stagflationary seventies. Government intervention and inflationist policies caused the above, not the market, as what is commonly mis-perceived.

If we compare the current German economy to the UK, we see a stark contrast. Germany has a trade surplus, managed to balance the budget (thanks to Peer Steinbruck) before the downturn occurred, has much less personal debt and has savings of around 10% of income. The UK has none of the above and all its macroeconomic indicators are in bad shape. So essentially Germany is a producer nation, while the UK is the unsustainable consumer maxing out every credit card in sight. I'm not saying Germany won't be effected by the current downturn, there are very few economies in the world today who practice autarky in the globalised economy we live in. But the German economy has far better fundamentals than the UK. Don't be fooled by our governments spurious claims that we have 40% GDP public sector debt. It will soon be 50% then 60%, and keep rising further. With off book debts this figure is more like 200%, as just looking at pension liabilities with a conservative estimate, this would be around 100% of GDP alone, not mentioning other liabilities. Yet the UK economy will contract further - thus increasing these percentages. With the pounds recent slump, the worst since it experienced a run and was consequentially removed from its Gold backing back in 1931, external debt has in effect become more expensive (well at least until other currencies fall against the pound as will no doubt occur). To illustrate how bad this is the graph below indicates how exposed the UK is compared with the other G7 nations. This is public and private debt the UK owes to the rest of the world as a proportion of the economy. With the pounds devaluation recently, this has just got a whole lot more expensive to service, as quite substantial amounts are borrowed in other currencies.

Since Otto Von Bismark managed to unify Prussia with the other German states to form what we now know as Germany, Europe and indeed the World has always looked suspiciously at her. Victory in wars against Austria and then France, during the later part of the nineteenth century displayed early remnants of the economic powerhouse, that would become one of the main European powers. France and Britain today still cling to their old superpower status that has long gone, and will not accept Germany as the current European superpower. Germany took in huge numbers of Yugoslav refugees during the ethnic 'cleansing', much more than the UK, but as soon as they tighten their boarders we brand them as Fascists, showing our Deutschtum phobia. It seems that the UK along with other nations are unwilling to listen to the Germans. They ignore this advice at their own peril.

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