Germany’s beef with QE

By Felix Salmon
November 9, 2010
Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble.

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Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble. Two quotes in particular from Schäuble stand out. Here’s the first:

“They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless.”

And here’s the second:

“[Our] successes are not the result of some sort of currency manipulation … The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily.”

Essentially what Schäuble is saying here is that we can’t hope to cure America’s deep-seated economic problems with monetary policy. The arguments over QE versus old-fashioned interest-rate cuts are beside the point: both of them try to boost the economy by lowering interest rates and increasing the supply of credit. But we’ve already gone far too far in that direction: America has too much debt, especially in housing. Adding to that pile of debt is only going to make matters worse, and the primary beneficiary is going to be our bloated and overgrown financial sector.

Germany, I think it’s fair to say, has never thought of its central bank as an institution which can or should provide a boost for the economy when times are hard. Yes, if a recession means lower inflation, then interest rates can and should fall, but the job of the central bank is just to make sure that inflation remains low: there’s no secondary mandate to maximize GDP growth or employment.

The result is an economy which has been built, over decades, on tight monetary policy and a strong Deutschmark (and now euro). Growth in such an economy doesn’t come from low interest rates causing a boom in credit and a weakening currency: it comes from creating goods and services which are higher quality than those found anywhere else in the world, and selling them at high prices.

The difference with the U.S. is stark. The Fed, of course, does have that explicit secondary mandate, and what’s more it’s clear from Ben Bernanke’s public statements that he considers himself forced into acting aggressively by the gridlock in Washington and Congress’s failure to provide the fiscal stimulus which is clearly warranted. On top of that, the U.S. is simply too big to carve out a niche as a provider of high-priced, high-quality, manufactured products: its greatest successes have been in the mass market.

Al of this is a recipe for fractiousness at the G20 meeting this week in Seoul. The unity we saw at the London summit in 2009 is a distant memory: no one, now, can even agree on what internationally coordinated action should look like, let alone actually get their respective parliaments to implement it. Which in turn means that G20 national economic policies are increasingly likely to work against each other than constructively with each other. It might well take another full-blown crisis before Germany and the U.S. are on the same page again.


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The German export success is not due to German f/x manipulation. It is due to the Bundesbank, oops I meant the ECB, holding interest rates artificially low, creating a boom in the peripheral states, resulting in their importing lots of stuff from Germany with money borrowed from Germany.

That’s not unsustainable, oh no. Ireland can run a deficit of 30% of GDP indefinitely. Wolfgang Schauble has a firm grasp on the economic situation in the Eurozone.

Posted by johnhhaskell | Report as abusive

Essentially what Schäuble is saying here is that Germany was doing very well with exports and he doesn’t want to see any devaluation of the dollar that threatens Germany’s exports.

Germany’s central bank may not have a secondary mandate to maximize employment, but Germany has much stronger worker protection laws than the US.

What Schäuble is doing here is sometimes called concern trolling – suggesting we do things that help Germany under the guise of being helpful to the US.

Posted by 3oosion | Report as abusive

Perhaps Herr Heuchler would care to explain how it is possible for Germany to run a current account surplus without an equal and opposite net deficit in the rest of the world. Germany is completely dependent on others who “live on borrowed money” in order to fund its exports. Germany needs Greece and Ireland a lot more than they need Germany.

Furthermore, the use of a common currency without common fiscal authority does constitute de facto FX manipulation by Germany. Do you not think that if eurozone countries were on independent currencies, that of Germany would be rising compared to the rest? It follows that the euro is priced too low for Germany and too high for everyone else. This subsidizes Germany by artificially reducing the price of its goods while artificially raising the price of those produced by its eurozone competitors.

Posted by Greycap | Report as abusive

I think the great success of national economies, one by one, as they broke ranks and left the gold standard during the Great Depression is strong evidence that devaluation can help.

Ok lets do this comparison with Germany, shall we?

Americans (those with jobs) earn much more than Germans and yet produce less export. Their take home pay is also higher because taxes for middle income people in America are very low. I was just in Munich, where they make some of the finest cars in the world. Our cars on the street are actually nicer than theirs on average. We have far more living space and bigger houses. Everything is cheaper for us. With the reserve currency, our priviledge is indeed exhorbitant.

Devaluation would reverse some of these imbalances. The big problem with unemployment is wage stickiness. Employers could hire more and fire less if they could reduce the pay of their existing people by some amount. But pay cuts are very hard to do. A devaluation would achieve this implicitly and smoothly.

Posted by DanHess | Report as abusive

Most nations are okay with the concept of devaluing the currency of other countries that spend way too much, but the U.S. is different – our currency is the standard for the world. Other countries, like Germany and China, hold their reserves in dollars, and many products are priced in dollars, so nobody is happy when the dollar is devalued. And since the renminbi is tied to the dollar, the euro, and all products produced in countries that use the euro, becomes more expensive. It should be no surprise that the rest of the world would prefer that the U.S. get its economic house in order, rather than resorting to devaluation and inflation to service our debt.

Rather than whine about the devalued dollar, which should happen since we are no longer the economic powerhouse we used to be, the complaining countries should insist on getting paid in their native currencies. That will protect them from US inflation, but it also might cost them some business. They want to have their cake and eat it too – they want to continue to sell lots of stuff to us and they don’t want a devalued dollar. The only way that can happen is if they buy more things from us, and that seems unlikely, since the dollar is over-priced, and what is it we make anyway, besides movies, airplanes, and military hardware? Will they pay us to shuffle their paper assets around? That’s where a big percentage of US profits are realized.

Posted by OnTheTimes | Report as abusive

I am amazed at the Germany-bashing I encounter in this comments section. I wonder if they would be the same for other successful economies.
Germans on average simply worked hard, accepted real wage erosion over the last 10 years, did not overspend/consume unlike many of their Anglo-Saxon counterparts, and saved for possibly uncertain times ahead. House prices broadly stayed flat over that period. All very prudent. To speak of f/x manipulation by Germany is laughable – the ECB, currently “run” by a Frenchman, is more independent that any other central bank in the world, and the Euro is now 20% higher vs. the dollar than when it was introduced, and European conversion rates fixed. Is it too demeaning for Americans to accept that perhaps they could learn a thing or two from Germany?

Posted by Abulili | Report as abusive

How dare you question the word of a Fiance Minister of the Reichsbank?

Posted by maynardGkeynes | Report as abusive

The nations with chronic current account deficits are like the lenders who subsidized the real estate bubble.

Germany and China buy the bonds of fiscally irresponsible governments like Greece and the US in order to recycle dollars so that the bankrupt US and Greece can continue to import Chinese and German goods. The behaviour is similar to the banks that loaned more and more money to individuals who could never repay their debts.

The US has to inflate it’s way out of debt and the Greeks, and Irish have to default on theirs. China and Germany will realize that expanding demand by loaning money to bad credits is a bad idea. The US and Greeks will figure out that borrowing money to consume isn’t exactly sound economic policy, nor definitely feasible.

What will happen is inflation in the US, and more internal consumption in China and Germany. The US will ultimately have to reestablish its manufacturing base and make what it consumes as China and Germany will no longer be willing to ship us “stuff” for dollar bills printed by the Fed.

Posted by DiegoForever | Report as abusive

I don’t understand where the idea that the German government has somehow been more fiscally prudent than the U.S. comes from.

German public debt as % of GDP = 72.10
US public debt as % of GPD = 52.90 ntries_by_public_debt

German external debt as % of GDP = 155
US external debt as % of GDP = 94 ntries_by_external_debt

Posted by afuzilla | Report as abusive

Right, but let’s look at the fact that Germany has faced a recession followed by stagnation for the last decade and is only just coming out of it.
The US faced a decade of rapid growth, yet failed to pay any debt down. Now, in the face of a recession, the US is attempting to spend its way out by adding almost $10 trillion in debt over the next 10 years:  /mar/26/cbos-2020-vision-debt-will-rise -to-90-of-gdp/

Posted by zeeble | Report as abusive

And just to add, I’m not sure why you think that the level of external debt would be a good measure of fiscal responsibility.

Posted by zeeble | Report as abusive

Really, the fact that the two biggest surplus countries see things from the surplus country’s perspective should come as no surprise.

Mr Lawson (like his father, the Conservative UK finance minister in Mrs Thatcher’s government) is an ideological cutter of public spending.

We may not be sure of the outcome of QE, but the outcome of the policy advocated by Mr Lawson is clear. Look at Japan’s lost decade.

Should the deficit countries go down that path, there will be no surplus available to Germany and China. That will not be so pretty for them, either.

Posted by Dafydd | Report as abusive

Felix could you clarify what you meant by “the U.S. is simply too big to carve out a niche as a provider of high-priced, high-quality, manufactured products: its greatest successes have been in the mass market.”

I’m thinking about the large us export catagories and other than agg commodities… it seems to me the ONLY things we export are high priced high qualtiy manufactured products. (DE, CAT, BA, LMT)

Posted by y2kurtus | Report as abusive

Salmon wrote: “the U.S. is simply too big to carve out a niche as a provider of high-priced, high-quality, manufactured products”

The USA used to be known for manufacturing machine tools for the world; companies like Cincinnati Milacron come to mind. We somehow came to the bizarre conclusion that putting all of our money in an industry that creates absolutely nothing, except for enormous profits for its owners, was a better use of resources; obviously I am talking about Wall Street. A side effect of this is that there is no money left for investment in infrastructure and industry.

Germany is the world’s second largest exporter, having been recently passed by China. Germany’s unemployment rate is currently the lowest it has been since 1992. This is largely due to Germany being a country which makes all sorts of high-quality products, and not just niche ones. Our top exports are dominated by Boeing airplanes and parts, the Intel crowd’s chips, and agricultural products. The first category will evaporate in 2016 when China releases its 190-seat airliner, the C919. And the third category is not responsible for many good-paying jobs.

We should be trying to emulate Germany, not drag it down into the mud with us. The only jobs we are generating are in restaurants and liquor stores.

Posted by saucymugwump | Report as abusive

“And just to add, I’m not sure why you think that the level of external debt would be a good measure of fiscal responsibility.”

I don’t personally think that, but the German finance minister seems to think that generic “debt” is a huge problem in the states, but not in Germany. Which makes no sense when you look at the data.

Posted by afuzilla | Report as abusive