U.S. fights fire, Germans fear flood

March 23, 2009

Paul Taylor Great Debate— Paul Taylor is a Reuters columnist. The opinions expressed are his own —

The United States is fighting a fire in the world economy, but Germany and some other European countries fear a flood of inflation as a result.

That clash of cultures is at the heart of transatlantic debate over whether Europe should spend more and ease monetary policy to revive growth, with a deep economic contraction certain this year and an end to the recession not yet in sight.

The perception gap could cause lingering resentment among Americans and Germans on the way out of the crisis.

World Bank President Robert Zoellick sees concern on both sides of the Atlantic, not just in Europe, at the risk of inflation down the road from the massive additional liquidity created by the U.S. Federal Reserve and soaring public debt.

The current gush of liquidity made the glut after the bursting of the Internet bubble in 2001 look like a desert, he told the weekend Brussels Forum, a conference of North American and European policymakers, business and opinion leaders.

The dollar’s sharp fall and the jump in the price of gold after the Fed’s announcement of a giant purchase of long Treasury bonds reflected fears that the United States will try to inflate its way out of the crisis.

“What some political leaders say when you bring this up is: “Well gee, when we’re putting out the fire, can you really worry about the water damage?” In a way, you really do have to worry about both,” Zoellick said, advocating a timely pathway back to fiscal and monetary discipline.

The European Central Bank has provided unlimited liquidity for banks to unfreeze credit markets and is weighing following the Fed into unconventional measures such as buying bonds to provide an extra monetary stimulus. But Germans are especially wary due to their traumatic history of hyperinflation in the 1920s, something that contributed to the rise of Hitler.

“I can promise you the European response to this crisis will not be inflationary. That’s why guys like me exist,” German Bundesbank President Axel Weber, a member of the ECB’s Governing Council, told the Brussels Forum. “I can promise you once it starts looking inflationary we will tidy up the mess.”

European Union leaders agreed at a summit last week they had taken enough fiscal stimulus measures for now and rejected pressure from the Obama administration to do more.

German leaders were particularly dismissive of calls to throw more money at the crisis when two stimulus packages adopted in the last five months are still being implemented.

European Commission President Jose Manuel Barroso made clear EU countries would review their stimulus efforts if the economy continues to deteriorate. European Economic and Monetary Affairs Commissioner Joaquin Almunia said the high debt levels of many states before the crisis were a constraint on further deficit spending.

“We are concerned by countries whose public debt is increasing very, very fast,” Almunia told the forum. “We cannot afford to spend the next two decades absorbing the debt we have created to tackle this very deep recession.”

The dispute about how to fight the crisis may have longer term negative consequences on both sides of the Atlantic — fuelling pressure in the United States for trade protectionism and stoking opposition in Germany to helping European partners.

Germans feel they made tough choices in the good times to balance their budget and cut unit labor costs to improve their competitiveness. Now many feel they are being expected to pay for the fiscal recklessness of other European countries.

Americans are raging at the greed and irresponsibility of bankers and corporate moguls. But if Main Street resents bailing out Wall Street, it will be even more resistant to paying to revive European or emerging economies through imports.

Lord Mark Malloch-Brown, the British minister in charge of preparing next week’s London crisis summit of G20 nations, said there was a big risk if Americans felt other countries were not pulling their weight in reviving the global economy.

“The most dangerous idea out there is that the world is somehow going to expect the American consumer to ride to he rescue,” the former senior U.N. official said. “If that idea is left out there, it’s going to lead to protectionism in America.”


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Germany has done a lot. Germany has absorbed hundreds of thousand immigrants and political refugees from the recent turmoils of the world. When the two Germanys reunited the chancellor said ‘we will not have Germans with full rights and some with tentative rights’, even though some economic advisers said that there should be some kind of interim economic status for the former East Germans. The next day all of those East Germans took the worthless East Marks out of their mattresses and exchanged them one for one for D-Marks. How much do you think that cost?
Germany is the big economic engine that pulls the rest of Europe with it.
Germany does a lot in the world. Germany trains the Afghan police. Germany provides immediate emergency technical help when disasters occur around the world, and especially in Europe and Turkey. Germany has health care for all it’s people (and no, it’s not ‘socialized medicine’-if you don’t like the doctor you have you go find another one), Germany sends injured, overweight, and stressed out people to ‘cures’, a holistic health care method of dealing with illness that involves fresh air, social interaction, healthy food, and a health maintenance approach-not just drugs and more drugs.
You see I am an admirer of Germany.
What Germans are afraid of is a currency reform. We have never had a currency reform in the United States. The Germans Grandparents lived through two of these. One day you have the money you worked for all your life, the next day you have nothing, not because of a stock market crash, but because the ‘old’ money is now worthless. The Germans are afraid that this is where the financial crisis and current situation is heading.

Posted by QueZen | Report as abusive

The United States is a united county with a unified language and culture and a time tested government of over 200 years. For the United States the current crisis will be a challenge, but it will come through in one piece. The same cannot be said for Europe. Europe does not have the financial or political infrastructure to weather severe internal financial turbulence the likes of which it will soon be facing.

European countries with their various histories, cultures, languages and financial/industrial particulars are poorly prepared to weather extreme political and financial catastrophes. Germany will not, and even more to the point cannot, save Europe on its own. Germany will barracade itself when extreme political and economic crisis reaches its borders. The Germans hardly feel kinship with the former East Germans, let alone the French and Italians. They feel quite a lot less kinship with the Hungarians, Romanians, and Bulgarians. They will not pay a heavy price for Europe without a common government. Again, Europe is not a country. It is a federated common market.

In the end the disintegration of the European “Union” as it now stands is a real possibility. Facism is on the rise in Germany and across the continent. According to a recent article in Der Spiegel magazine, the German government is alarmed at the rate of far right wing support among its own school children: over 20% of children support the far right wing.

Posted by Elvis Shrempp | Report as abusive

Different history, different fears…
It is imprinted in American collective memory that the terms “deflation” and “Great Depression” are joined at the hip. Watching “the lost decade” of Japan only reinforced that psychological connection.
On the other hand, Germans will never forget the hyperinflation that devastated the country and ultimately paved the road to power for Hitler.
For now, inflation seems the lesser evil, at least on this side of the Atlantic. Deflation has arrived, even though the statistics may say otherwise. But statistics can be tweaked to produce any result one may desire. The so-called core inflation is counted excluding food, energy, housing, etc. etc. The list of exclusions goes on and on and on, depending on what number you need to arrive at. But the houses are the cheapest in years – that’s deflation in my books. You can buy with the same amount of dollars more stocks than you could in years – that’s deflation in my books. Car dealerships are trying to beat each other with incentives, testing how low the price can go – that’s deflation in my books. Mailboxes are full of ads screaming of super-extra-hyper discount sales on… – well, on everything. Whatever you look at – it’s the best buying opportunity in years, only too bad that consumers either have no money to take advantage of it, or fear they soon may be in that position. The fear results in less spendings, which results in another drop in economical activities, which result in another price drop, but also in more fear – the classic vicious circle. It’s that fear that the Fed is trying to counter with the flood of money. But the fear is an irrational thing, and it will take a lot more effort to alleviate it than the underlying economic issues warrant. Unfortunately as long as the fear exists, nothing will change. So, as soon as the fear finally is defeated, welcome to the new inflationary world – all the trillions pumped into the financial system can’t evaporate overnight, so the prices would have to go up to restore equilibrium.
But the alternative to inflation is worse. It took WW2, and then some, to recover from Great Depression. DJ came back to its 1929 high only in 1954. Waiting decades for the economy to recover is not an option, and even less so is WW3.

Posted by Anonymous | Report as abusive

@ Anonymous: WW2 was not caused by the great depression. It was started by germany – ie. Hyperinflation

Posted by Albert Einstein | Report as abusive

It’s hard for me to digest talk of inflation when another article on Reuters talks about the public buying up toxic debt, which presumably reduces the cash the public has to spend on clothes, cars and houses. On one article we have people who intentionally want to cause inflation but on another article we have folks – apparently the Germans – afraid of inflation. I thought the Iraq War was a collosal bold-faced lie. But it is peanuts compared to the misinformation being slung around these days. To me it seems like a hoard of suits trying to scam a homeless man for cash.

Posted by Don | Report as abusive

5pm bbc world news’ katty kay summed up the european statements for the american public accurate recently:
they don’t feel the need to “buoy” up the american fiasco as they already have built in social safety aids (govt sponsored, health care and education funding). whereas the west has to overcompensate for dwindling college funds in the stock market, loss of jobs and unemployment/cobra benefits, etc, when one compares that with various countries in europe (france, germany, uk, denmark, sweden etc), they have already had built in protection nets.
the europeans have every right to “march to their own drummer” and wait it out until the west levels the playing field with commensurate support of their public.

Posted by jk | Report as abusive

Elvis, the U.S. is not immune to the risks that hyperinflation presents to a society. The U.S. is in a precarious position. We are a continent nation highly dependent upon private transportation. This was a fundamental change that began in the 1950s. The social upheaval this nation will face if it finds no alternative to petroleum cannot be overstated. Inflation and diminishing world crude production levels are unavoidable for the U.S. at some point in the next decade. Little if any action at all is being taken currently to mitigate future demands for energy.

The U.S. is perceived to be coming out of it’s right wing posture. I believe a more accurate observation would be that our society is in a state of flux. There remains bitter division between left and right in this nation and some would argue the divide is widening. There is a perception that the taxpayer is subsidizing wealthy elite individuals who through their own greed have caused a world economic collapse. At the same time people who are working taxpayers are helpless as they or family members loose their jobs, pensions and their homes. Half of U.S. children now live in poverty and the teenage pregnancy rate is the highest in the world further exacerbating child poverty. Desperation has fallen upon many millions. So has anger.

I believe that the United States has as much of a chance of breaking up into smaller nations as does the EU of breaking up. We have vastly different needs based on geography and climate. Little consensus can be reached on government spending or fiscal restraint. There is a mentality of west coast problems aren’t my problems here in the mid west. We seem to no longer understand the concept of unity.

Consumer demand has taken an about face in the States. Nations that built excess production for export to the U.S. will have to abandon that strategy. More than likely nations will choose to become more self sufficient economically if they can. Not all will fare well. It is clear to me we are in uncharted territory. As always with economic collapses, war is a foreboding possibility if not a probability.

Posted by Anubis | Report as abusive

The world should remember 1923. It was far worse than 1929 in the U.S. The hyperinflation was not an accident. Alvin Toffler in his book Eco-spasm said it was created by industrialists trying to fight socialism. It led to the rise of Hitler and WW II.

Posted by stevador39 | Report as abusive

My understanding is that the Germans were forced to pay for the damage they caused during WWI. Their currency was devalued and became nearly worthless. The rise of the Third Reich was in response to a perceived global banking conspiracy. The Germans decided to systematically eradicate the threat. Hitler received widespread support primarily because there was such great suffering. Not just Germans but many nations and especially intellectuals jumped on the bandwagon. I am surprised that people cannot see the same thing happening again – that the cycle might be repeating. It started with the World Trade Center, but it is spreading to the UK and France. Germans are not exactly like everybody else. They know it.

Posted by Don | Report as abusive

Albert Einstien, Germany’s hyperinflation was a government response to the impoverished conditions of it’s people. The Peace Treaty of Versaille left Germany in abject poverty. The continuation of the British naval blockade of Germany (in violation of that treaty) prevented much needed food from being imported to a nation that could not produce enough food to feed itself. The black market flourished.

It is easy to blame a single economic policy for disaster. As always policies are a response to some circumstance. When it comes to war and economic collapses I find this analogy useful “which came first the chicken or the egg?”
Maybe it is time for humans to find a new way to provide for each other what we need.

Posted by A | Report as abusive

Americans are raging at the greed and irresponsibility of bankers and corporate moguls. But if Main Street resents bailing out Wall Street, it will be even more resistant to paying to revive European or emerging economies through imports.

And how are Americans going to buy all this stuff with ‘confetti’ (the dollar) as so much is imported? A free lunch cannot go on forever. Germany has the right attitude in that spending has to be earned by productive means and not just by printing ‘paper’. Anybody with half a brain should see the plan to inflate or hyper inflate and move their debt burden (losses) to the rest of the world.

Posted by James | Report as abusive

Ethnic Germans were not in charge of the Weimar republic. So I don’t understand why they are worried about inflation. Don’t they know their own history?

Posted by Sam | Report as abusive

Anubis, you understand more than most here, that’s clear. We have the real crisis coming when a recovery begins (lack of energy: insufficient oil in particular). maybe I’m mistaken understanding your comment below but the US plan for outside slave producers was planned by corporations for maximum profit. If the dollar collapses in the next few years many products will disappear from the US altogether as you no longer have the capacity or skills to produce them.

Consumer demand has taken an about face in the States. Nations that built excess production for export to the U.S. will have to abandon that strategy.

Posted by James | Report as abusive

Again, the U.S. will need to lead the way out of this crisis while Europe sits and ponders…

Posted by Raymond | Report as abusive

March 23rd, 2009 11:46 am GMT – Posted by Albert Einstein

@ Anonymous: WW2 was not caused by the great depression. It was started by germany – ie. Hyperinflation

It doesn’t take a genius like Albert Einstein to figure that out, though it wasn’t as simple as that. GB, France, Poland, USSR – all had their hand in it, don’t even start me on that.
Even though the USA were the least complicit in the events that started WW2 (or, at least, the European part thereof) comparing to all the aforementioned countries, it happened to be a godsend to US economy. Without the war effort and all related industrial developments, and the following reconstruction of Europe, the economy would have never been the postwar powerhouse the history knew. It would rather be chugging along as it did during the most of 1930es – not quite in depression, not quite out.

Posted by Anonymous | Report as abusive

Spot on! The US has, for quite a while now, gotten out of economic problems by printing dollars. The only reason it works is because petroleum, -the only product that US imports (60%) and without the US will go back to the stone-age, is priced in dollars. To put in simple terms, when we devalue the dollar, the oil producers take a hit, and absorb it because most of their rulers (Nigeria, Saudi-Arabia, Kuwait), rely on our protection anyway. But times are changing. As you may have noticed, as soon as the Fed orders the Treasury to print more dollars, Oil price goes up! It will only get worse as Germany/Europe gets stronger (with the help of Russia), and US loses control over its colonies (Saudi Arabia, Kuwait, Canada?), and they insist on pricing Oil in Euros! So, this probably the last time this trick will work, -but barely. Expect Oil to be $80-90 by summer :) You just can’t give every sub-prime borrower a free house (which is what Obama is doing with a trillion dollar of my tax money) and expect it not to show up somewhere else in the form of inflation. Empires rise and fall, for surprisingly predictable reasons. The US empire is on the wane, -this is just the beginning. Sanoran Triamesh

Posted by Sanoran Triamesh | Report as abusive

There is substantial difference between the US and Europe: They are always players worldwide interested to finance the US governement debt. Not of EU countries as the debt in some countries as Italy is over 100% of GNP… In the EU, the money were spent in last decades on inefficient social protection systems, public heath care etc. I have fear that the only result of Mr. Obama’s agressive democratic policy will be that US would become as inefficient as Europe – with a potential possibility that markets will stop to believe that the US government would be able to pay its debt in a long term – THIS WOULD BE THE REAL GLOBAL CRASH – God save us.

Posted by Vojta Harok | Report as abusive

Why are the Europeans so reluctant. Most countries in the world are spending yet Europe sits on the sidelines. It is VERY frustrating. It feels as though they want to ride the coat tails of everyone else’s efforts. Inflation is a problem for the future BUT deflation is a problem for now. Get spending Europe!

Posted by kk | Report as abusive

Albert, the underlying causes of World War II are many and weighty subject material. Some have argued that if Wilson had kept his campaign promise to stay out of European affairs and the imminent war, there would have been no clear victor ergo no Peace Treaty of Versaille.

The Treaty of Versaille visited abject poverty upon the German Republic. War debts had no numerical denomination or specificity. The French and British took whatever they wanted whenever they chose. The British continued the naval blockade of Germany after the armistice in direct violation of the Treaty of Versaille. As in the War this prevented much needed food from entering Germany as she could not produce enough food to feed her people. No one in the League of Nations spoke out against this tyranny as hundreds of thousands of children and over a million died from malnutrition.

Such desperation of the German people played some part in Hitlers rise to power. The Weimar Republics policy of printing money to foil French plans to operate and profit from seized German industry played a part as well. The tremendous cost of prosecuting World War I has only marginally been taken into account as a contributing factor to the world economic decline leading up to the Great Depression. Wilson’s desire to enforce the United States superior moral judgment and leadership upon the world, I think speaks for itself. All of this and more exacerbated the terrible conditions throughout post WW I Europe. Let us not forget the rise of Fascist Italy and Spain.

World affairs are always complicated and veiled in secrecy.
The more we understand all of the history surrounding WW I, WW II and 20th century, the better our ability to not repeat the same mistakes in the 21st.

Posted by Anubis | Report as abusive

clearly the lesson of the 1970s and 1930s that stagflation will result as a consequence of this – the value of money depends on the amount of moeny in circulation – and the lessons of the 1970s britain so very clearly that pump priming not done to increase the capacity of an economy will lead to inflation and then we will be in even a worse mess

while governments need to spend during a recession – they also need to save during a boom ow the value of their currency and the value of their money within their own economy declines

once inflation starts it can be very difficult to stop

so spending should only be done on infrastructure which reduce inflationary type blockages in an economy

Posted by Tim Armstrong | Report as abusive

Germany is just trying to make a REASONABLE fiscal policy -runing on huge deficits was not normal before Hitler and Roosvelt. It has been proven that the New deal made the 30s crisis longer, not shorter. A new Ronald Reagan for president is what we are missing now. He had perfect insticts and common sense. In Russia and China, the US – it’s a joke. As seen from Europe, Mr. Obama is doing exactly what Russia, China and Iran want. It is frustrating.

Posted by Vojta Harok | Report as abusive

Let me just make the last comment. The actual crisis was caused by a bubble that comes from US governement efforts to push banks to give mortages (own living) to everybody (so nice goal!). Now, the policy is to create another buble = put gas into fire = print more dollars. This is agains a common sense – and EU central bankers are against. If Fed would have had the same policy as EU central bank, the crisis would never happen!

Posted by Vojta Harok | Report as abusive

so i want someone to answer the question, who is right and who is wrong, america who want to spend big money to get out of the crisis so fast, or europe who choose to take it easy and go step by step

Posted by mody | Report as abusive

The discussion on hyperinflation in the past is pathetic. The conditions prior german hyperinflation in the 30’s was characterised by massive / unsustainable reperation payments, the reorganisation of large parts of the popoulation and the impact of the global economy (which some economists say was way more integrated than now!). The german business system is much more stable as its anglo-saxon counterparts, and the versatility of Euro countries should positively affect inflation / deflation figures.

Both commentators and politicians who say spend money to get yourself out of the recession (and if you don’t have the money just print the staff anyway). History and theory shows this to be the least attractive option. How about instead focusing on the redistribution of capital via philantrophy as A. Smith proposed 250 years ago?

Posted by Daniel Tischer | Report as abusive

The US may well be trying to inflate its way out of trouble but a plunging Dollar is going to rattle countries like China with its huge Dollar holdings. At some point they’ll stop buying T-bills and head to other currencies. That point may well also signal the end of Dollar hegemony, which would be a disaster for Pax Americana.

Posted by Paul | Report as abusive

Hi Yanks,
I am German, and your understanding of the world and others is just shocking. Real solutions are only found when the core of the problems are understood and accepted; … and you are still in denial mode. No good sign for the future. You seem to have past your zenith. It is time to realize that and act accordingly.
Win back the trust and respect through humility and living within your means, or face protracted decline with the satisfaction of taking a good part of the world with you. At the moment, you are your worst enemy.

Posted by Hans | Report as abusive

Wow, everybody seems to miss the entire point: The banks are like bottles of water, who is willing to drink from them? The “poison” (debt) has to be removed first. No banks lending money, nothing will work. What happened to “short-term” loans for manufacturing companies, no loans to produce, no production. The companies that are no longer producing are told to hold their breaths, for how long? And when it all starts to work again, what ever happen to “just-on-time” as the warehouses are on the road are they not? Think about it? And as long as the warehouses are full with little demand, low prices. Warehouse stocks run low, rising prices. The banks (body)is not lending as they should, the body has no blood in its vein’s so to say. What happens to a body with no blood? Economics 101

Posted by Jerry Sumner | Report as abusive

Soory for my poor enghlish,
as european I am intersted about what is the world conjunture that hit us in the past two years and is still hitting us.
printing new money is a sovereign right of a state, controlling the flux of new bills in the finantial system states controle the inflaction and also can lead effectively the System in accordance with the ideological bias of a particular government.
What happened in USA, UK and Ireland, taking in account my relative lay vision, is that banks and the finance took the place of states creating money.
That money, of course, was fake money, because not supported by a state but by a financial concept.
now all the world has to pay in real money that Barbie coins…

Posted by oldmum | Report as abusive

Many of you fear inflation yet you acknowledge the credit markets are frozen! Fearing inflation when credit is tight is truly a mark of the insane right now. As long as credit is frozen (or at least not as fluid as it recently was) you should fear deflation. The German political establishment is misplacing its concerns right now and seems to fear its own shadow. Once credit has eased then they can worry about inflation. Demand-led growth through fiscal spending on short term projects (infrastructure and the like) can be stopped/slowed once economic/employment growth is restored. In this case America & Britain are proceeding in the correct manner while Germany ought to do the same. Germany shouldn’t act as if the is identical to the 1920s & 1930s. They have more tools and options today to control the situation than they had back then. The idea that America created this mess alone is also stunningly ignorant. For every borrower there must be a willing lender. The lender nations (Japan, China, Germany, etc) have all pursued mercantilist/protectionist trade policies that necessitate lending to America. Now those nations fear America will essentially devalue its currency to get out of that debt. What did those countries think as their trade surplus bubbles inflated? The answer is, just like the borrowers, they weren’t thinking. Now their productive infrastructure is scaled and leveraged for a market that is choking on their production. We in America are simply not spending as much and are saving more – just as many Europeans are preaching to us to do. The manufacturing capacity of China, Germany, Japan will have to painfully shrink/restructure downward to survive. What should Germany do to make this transition? Should Germany just sit it out and let their industry crumble? Or should they spend on restructuring?

Posted by John | Report as abusive