February 10, 2012

Germany -- Fortunate?

Very nice piece on Germany below indirectly tells us a lot about the seeming economic success of Germany.

Germany, see, is heavily dependent on exports, as its own citizens are not willing to spend freely enough to consume as much as they produce.

(In part this is maintained by keeping foreign goods artificially more expensive relative to wages in Germany than a free market would set them due to the German efforts to lower wages by preventing natural raises in wages for years -- Germany created a low wage rate, then locked this artificially low wage rate in place via the Euro (common currency);  this is effectively a currency peg, similar to China's export subsidy/import-controlled market via Chinese currency controls/peg.)

The result of regions in an economy consuming much less than they produce (Germany, China in the global economy) is that other regions (nations) must then consume (and/or receive in foreign investment) correspondingly more than they produce. 

The sum total of the export surpluses of trade surplus nations must exactly equal the sum total of the export deficits of trade deficit nations plus capital flows (investments in foreign nations).


Capital flows are only the outcome of the trade imbalances, just the result.  For instance, if China has a trade surplus of $100 billion over a period of months, during that same time it must save or invest that surplus in some manner -- some combination of  accumulating cash (savings) in foreign currencies or purchasing foreign assets or investing abroad.

So, trade surpluses depend entirely on trade deficits somewhere else.

The export "success" nations are entirely, fully dependent on the "profligate", the trade deficit nations.

Just so. They are two sides of the same coin.

I explain the why, how, and the consequences of global savings in excess of consumption/sound-investment most clearly here in a short story: The Savings Conundrum. (Also, a recent update: The Savings Conundrum Writ Large -- hitting on a global scale.)

The seemingly fortunate son (of the moment):

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