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Then, with hardly a pause, he breathlessly began to explain why. His answer went something like this...
"Why?! Let me tell you why, people..." [turns head to the left] "As I look over here, I see and Audi and a BMW..." [turns head to the right] "...and as I look over there, I see a Mercedes and a Volkswagen!" [turns to camera--big light bulb flashing over his head] "Greece is an extremely important export market for Germany!"
Well, as the following diagram shows, this certainly does appear to be the case (source):
So as far as I can gather, what the fellow is trying to tell us is this. The Germans should forgive Greeks their debts because, well, how else will the Greeks continue to afford importing German-made cars? After all, it is the Greek consumer that is selflessly keeping the German autoworker employed. Moreover, it has been a fine recipe for keeping German unemployment low, and growing German wealth. Yes, that's right...wealth in the form of...well, you know...grade A assets, like Greek government bonds.
Now where on earth might a fellow get an idea so bizarre as this? Well, how about here: Germans and Aliens (Paul Krugman):
But the Germans believe that their own experience shows that austerity works: they went through some tough times a decade ago, but they tightened their belts, and all was well in the end. Not that it will do any good, but it's worth emphasizing that Germany's experience can only be generalized if we find some space aliens to trade with, fast. Why? Because the key to German economic affairs this past decade has been a truly massive shift from current account deficit to surplus.
Now, other countries within Europe could emulate Germany's past if Germany herself were willing to let its current account surplus vanish. But it isn't, of course. So the German demand is that everyone run a current account surplus, just like they do -- something that would only be possible if we can find someone or something else to buy our exports. It remains remarkable to see with how little wisdom the world is governed.Now, I'm not sure whether any German really has made an explicit demand for all countries to run current account surpluses. But if anyone did, it would clearly be silly. The current accounts of all countries must necessarily sum to zero; at least, in the absence intergalactic trade.
But then, that sort of gave me an idea. Why not a world current account surplus? What is an account, anyway? It's just a book-entry object. Let's give the account owner a proper name. And what's in a name? May as well call the account holder "Space Alien," with a "local" delivery address, say, the Pacific Ocean.
Next step. Contract some agency to print up Space Alien bonds, rate them AAA, then use them to acquire goods from all over the world, including ocean vessels. That should lower world unemployment. Then load the vessels with the newly purchased cargo, sail them out to their delivery point (the mid Pacific, say), and sink them all. (This last step is absolutely necessary, as sending the goods to any country on earth will mean job-killing imports for that country, jeopardizing their current account surplus). Alas, the Space Aliens will ultimately have to default on its debt but, you know, who really cares? Just means more work is needed to replenish our lost wealth.
Now, if you think this sounds a little loopy, let me direct you to this: Fake Alien Invasion Would End Economic Slump.
Of course, this is all just a variation of the old Keynesian prescription of employing people to dig up holes and fill them up again. And, contrary to what you may be thinking, the purpose of this post is not to argue against the ability of such a program to increase net employment. What I want to question instead is why running a current account surplus is necessary for all this hocus pocus to work?
Here's an idea. Instead of exporting vehicles to Greece, why don't German car manufacturers ship their cars to domestic German residents instead? The domestic purchasers could pay for the cars by issuing fake paper, just like their foreign counterparts. And when the time comes to default, well, at least all the BMWs, Audis, Mercedes, and Volkswagens will be residing on German soil.
Very much like Keynes' idea of burying paper money in old mines and letting companies dig it up. And it would work.
ReplyDeleteAll that's needed to get the U.S. and European economies moving again is to print money and get it into the real world. The U.S. FED has printed plenty of money, but it's all stuck in the banks because the banks don't see good lending opportunities. Your proposal would be one way to get it out into the real world.
Of course, the sensible way to do this remains for the government to borrow the money and use it to do useful things. That, too, would get the money out of the banks into the real economy.
Thanks for a laugh :)
ReplyDeletePerhaps it's easier to just issue eurobonds and give the money to Greece to restore it's economy
How's that Twitter integration going?
I'm unclear on what part of your 'silly' prescriptions you think would actually not work, if any. Germany selling German cars to domestic market instead of exporting them would, of course, reduce the current account surplus (including to Greece); selling them for (domestic) 'fake' paper ultimately doesn't sound that much different than selling them for e.g. Greek government paper. Either way, Germany sounds like a great big vendor finance scheme.
ReplyDeleteIn a more serious proposal, what about having the IMF buy up stockpiles of key commodities and goods, allowing all countries to run current account surpluses? This would stabilize commodity prices and get the eurozone out of this fiscal mess (either by buying commodities from them or buying commodities from other countries who turn around and buy eurozone goods).
ReplyDeleteOr you know, we could stop the insanity and create a eurozone wide fiscal system.
"Here's an idea. Instead of exporting vehicles to Greece, why don't German car manufacturers ship their cars to domestic German residents instead? "
ReplyDeleteThat's the heart of the problem isn't it? Germans don't like to spend, hence they won't buy their own cars and they prefer to put their money on their savings accounts. And then as German banks have too much money they buy... Greek bonds!
But that's really been the big issue since 2008 - we need someone, anyone, to spend to relaunch the economy, and nobody is spending. Hence the crazy Keynesian idea of getting the government to step in and do it...
Germany is a merchantilist country. Its main objective in economy policy is ro mantain an external surplus.
ReplyDeleteSo, it is a Pre ADAM SMITH ECONOMY
You don't seem to get the point Krugman and others are making.
ReplyDeleteSo here's the short takedown:
1. Germany says everybody should implement harsh austerity.
2. This implies contraction in the internal economies.
3. Hence growth must come from current account surpluses.
4. However, not everybody can have current account surpluses, because the export has to go somewhere, and everybody contracts.
5. So we need space aliens to export to.
Sure, internal growth without account surpluses is indeed preferable, and I am sure Krugman agrees. But the whole point is that as a starting point Germany says that's not going to happen. And what Krugman and others say is a critique on that call for austerity. As you concur, that's silly, but it is indeed what Germany is trying to impose on all of Europe.
"Germany says everybody should implement harsh austerity."
DeleteNonsense! Germany says that everybody must live within their means eventually or collapse. The Greeks (and other PIGS) can't keep spending money they don't have to prop up transfers.
That reality seems harsh compared to the rock'n'roll fantasy that there is money for nothing and chicks for free without consequence.
"... it is indeed what Germany is trying to impose on all of Europe."
I think Europe is at Germany's doorstep with beggar cup in hand asking Germany to lead them out of the crisis. The UK was wise enough to opt out. If the rest of Europe doesn't like the modest conditions Germany requires to write yet another big check for the deadbeats then let Germany opt out, too. Then the rest of Europe can spend without regard to the consequences for a short time and then face collapse as the lenders wise up.
Paul Friesen,
ReplyDeleteVery much like Keynes' idea of burying paper money in old mines and letting companies dig it up. And it would work.
Why tinker in this manner? Just nationalize the inert companies and let the government direct their operations?
CL, You're welcome :)
I recall you mentioning something about Twitter, but honestly, I am a techno-boob. How should I do it?
Anonymous, Why you ragging on the poor Germans? They work hard and ship their goods around the world. Then nobody wants to pay them back.
Nathan Tankus, Sure. But what is the IMF supposed to do with the stockpiles it acquires? A Eurozone "fiscal system" might work in principle, but...I mean, we're talking about a region that fought the two greatest civil wars in the history of mankind!
Anonymous, I don't think it's right to say things like "Germans don't want to spend." I assure you, I could find Germans willing to purchase vehicles if they were permitted to pay for them with "fake" paper (loans that they did not intend to fully repay).
Luis Arroyo, so the Mercantile prescription is to become a slave to the rest of the world? Work hard, produce goods, ship them abroad, accumulate paper/gold. Sounds boneheaded.
Anonymous, (why don't you people adopt handles??)
I do not follow the logic of (3). Why can growth not come internally? There are domestic residents willing to purchase, if granted the purchasing power. Who cares what nationality they belong to? Or what am I missing?
I'm not sure you're aware of this, but for many decades the u.s (and other countries) stockpiled key commodities to stabilize their price thereby creating a buffer stock system. When prices were low they would buy up commodities and when prices were high they could sell them. allowing the IMF or another international organization would recreate that price stabilizing system and allow all countries to run current account surpluses.
DeleteDavid,
ReplyDeleteThey don't adopt handles because you keep replying to them.
DNFTT.
Prof J, you think so? You may be right!
ReplyDelete"Anonymous, I don't think it's right to say things like "Germans don't want to spend." I assure you, I could find Germans willing to purchase vehicles if they were permitted to pay for them with "fake" paper (loans that they did not intend to fully repay)."
ReplyDeleteSure but then car makers would refuse to sell: they don't want fake money!
The current system works better: the car maker sells a car to a Greek, who borrows from his own bank to pay for the car; his bank borrows from a German bank because it doesn't have enough deposits to pay for all the lending; the German bank uses the savings of the employees of the German car maker to lend.
The German saver is convinced that he'll get his money back because his deposits are guaranteed; the German bank lends because it hopes that the Greek bank is well-managed and anyway even if it isn't it knows that the Greek bank is implicitly guaranteed by the Greek government, which is itself implicitly backed by other EU governments, including Germany.
So at the end of the day, you could say that this is a masked fiscal stimulus by the German government, who ends up paying for it all!
But if the government announced directly that it would do a fiscal stimulus and buy cars for random Germans I'm pretty sure that the population would be against it, so you need this convoluted system to make it work. And when it stops working you can blame it all on the Greeks and the Germans will believe you as they have no understanding of the way current accounts work...
So at the end of the day, you could say that this is a masked fiscal stimulus by the German government, who ends up paying for it all!
DeleteBut, per the great trio, fiscal stimulus doesn't work, so David, tell us again why we should have fiscal stimulus, now?
Current account surpluses at-all-costs sounds like a version of the broken window fallacy.
ReplyDeleteI think handles are good etiquette. I give anon comments about 40% the attention I give a commenter with a handle.
1) You still haven't answered my open question about the Ricardian Equivalence?
ReplyDelete2) This attempt at humor is, frankly, pathetic. We are starting to read stories of storages of medical supplies or of orphans abandoned and on the streets in Athens. Who knows the truth.
3) What is clear is that you lack the judgment and insights to suggest anything plausible about what either Greece or Germany should do. The present is unacceptable. The choices or options, as framed, are unacceptable. Instead of showing every your an AH, why didn't you make some serious attempt to shed some light?
John D is a real a-hole, here and elsewhere. Banhammer him, Dave.
ReplyDeleteHi, very interesting and provocative post, I will make sure to add you to my rss feed!
ReplyDeleteBesides compliments, your last point is what we non German Europeans are asking to Germans. Boost that "bip" domestic demand!! For you, and for your trading partners! Fiscal consolidation in peripheral countries would certainly be less painful and more effective if it happened in a context of stong(er) growth.
What I fear, or maybe hope, (did not make my mind yet) is that when the EZ double dip will bite on Germany's growth, some sanity will be restored.
Last point, I actually heard 2 respected treasury economists make the point that Germany's export-led growth model needed to be generalized.
Not optimist at all...
Francesco
Excess domestic car production in exchange for bad debt (free) - unlike the JMK dig and fill solution - produces excess domestic private goods and utility and devalues the previous produced goods. Every year the US does produce and sell a portion of its vehicles in exchange for bad debt. Your idea has been tried, we did this in the US from 1998-2008, GM lost 2.5B on leases in 2008 alone, about the production cost of 120,000+ vehicles. Add in the other automakers and it was a lot of cars. But that's a post in it's own. This is different than dig and fill. Dig and fill only produces labor income and has no domestic or imported content and produces no utility, it doesn't crowd out any inputs or outputs, assuming underemployment. Excess car production crowds out inputs and outputs. unless the cars are just left to rust which in that case it would work like dig and fill net of any imported content and crowding out of resources. What about the bad debt?, the debt will be the automakers and they will suffer, like GM. unless the German government buys the cars instead of it's residents. If the government buys the cars and destroys the cars it could work (inefficiently) to create demand. But if the government buys the cars than the debt will not be worthless because it can be used to pay German taxes. Selling cars to Greece for bad debt(free), is the same except the good and it's utility is exported to Greece, keeping the utility (not the inputs) from crowding out the domestic economy.
ReplyDeleteWell then an even better solution is to simply burn random cars on the street. Not only would this provide work to under utilized firebugs, but also increases the marginal utility of each new car produced. Dig and fill is inefficient because it keeps the marginal utility of cars constant. /endsarcasm
DeleteI don't always understand the logic of stimulus, but it is hard for me to get my head around a world where 1 hole and 1 car is better than 2 cars. But hey, what do I know?
As someone who was directed here by the Economist's Free Exchange, I feel compelled to mention that we are already in such a glorious era as to be exporting to those very aliens who will inevitably default on their debt:
ReplyDeletehttp://www.economist.com/node/21538100
DA: I've always had the point of view that Keynes' ideas have led us down a dead end road because only half of them have been implemented. His notions of government spending to soften recessions were, in his mind at least, to be offset in boom times with a deliberate government surplus to restrain the boom. How many "Keynesian"-guided countries have ever run a surplus when things were rosy? The net of government deficit and surplus over the course of a business cycle was intended to be zero in Keynes universe. But of course we never quite got around to that second part, save in the 1950's for awhile, and the late 1990's. And that late 1990's bit was the result of totally unexpected receipts from the Tech Boom, not purposeful federal fiscal policy (Gingrich and Clinton claims be damned.) So the idea of a zero sum current accounts reality is very good sense, provides self-correcting labor and pricing feedback to all players, if and only if you are running both ends of Keynes' fiscal policy too, that is, net zero deficits over the business cycle. Lacking the fiscal policy, just borrowing endlessly, the current accounts debate is as you say, just "hocus pocus".
ReplyDeleteCato The Eldest
I, for one, welcome our new alien overlords.
ReplyDeleteThe big question is: Can they teach us anything about economics?
German negative yields as harbinger of deflation
ReplyDeletehttp://ftalphaville.ft.com/blog/2012/01/10/825611/german-negative-yields-as-harbinger-of-deflation/
slight knowledge gap here on this blog
also, one might first attempt to understand why there are problems in Greece, Italy, etc., about which Martin Jacomb has the best take
Greece cannot earn its way out of this mess. Its adoption of the euro made it uncompetitive and, so long as the euro remains its currency, this state of affairs will go on
http://www.ft.com/intl/cms/s/0/17223564-a64f-11e0-8eef-00144feabdc0.html#axzz1jLLWgg1q
"So at the end of the day, you could say that this is a masked fiscal stimulus by the German government, who ends up paying for it all!"
ReplyDeleteI largely agree but "all" could AFAIK only be correct if the ECB ceases to exist.
"The current system works better: the car maker sells a car to a Greek, who borrows from his own bank to pay for the car; his bank borrows from a German bank because it doesn't have enough deposits to pay for all the lending; the German bank uses the savings of the employees of the German car maker to lend.
The German saver is convinced that he'll get his money back because his deposits are guaranteed; the German bank lends because it hopes that the Greek bank is well-managed and anyway even if it isn't it knows that the Greek bank is implicitly guaranteed by the Greek government, which is itself implicitly backed by other EU governments, including Germany.
So at the end of the day, you could say that this is a masked fiscal stimulus by the German government, who ends up paying for it all!"
According to Sinn (ifo) lot of transactions of German exports were realized via the TARGET2 system, where the periphery can even use BBB- junk to generate virtual euro. (Even a 0-percent 9999 years credit was already used to generate euro.)
Additionally, this means that between Greek banks and German banks there is the almighty ECB:
Greek central bank - ECB - Bundesbank
According to Sinn more than 50 percent of the German net international investment position are Bundesbank claims via Target2.
If the Greek BBB- junk will implode all Euro countries will have to pay. IIRC, Germany will only lose 27% in this case.
But if the ECB will cease to exist there is no rule so far what will happen with the Bundesbank claims.
It is almost amusing to see an economist able to publish with such a lack of understanding of basic macro such as you. Then it gets depressing.
ReplyDeletePlease elaborate.
DeleteIt must be worse for you, since you can't publish and also display a lack of understanding.
DeleteAnonymous @8:55, what is depressing is somebody insulting other people anonymously. Wait, depressing is the wrong word. The word I was looking for is coward...
DeleteI, for one, welcome the heroic troll (Anon 8:55 and 10:13) to the conversation.
ReplyDeleteAnd I believe that his enigmatic comment reflects the difficulty of communicating his very deep thoughts, rather than indicating a lack of knowledge or substance.
It seems to me the whole world's financial system is one big Ponzi scheme, your scenario now makes it inter-galactic, problem is the Aliens won't bite...been there done that...yada yada yada...cheers
ReplyDeleteHi David,
ReplyDeletelove the post. I could not agree more with your statements about Germany should consider bailing out Greece. I don't know if you have been following the debate in Germany, it's ridiculous. Merkel will only agree to finally create big enough bail out with a gun to her head. I think she's putting the Euro, Europe and also the german economy up for jeopardy, all with the claim of wanting to do the best for Germany.....
The Parthenon was in the background, communist banners were draped about, and small smokey fires burning here and there. buy from china
ReplyDelete