January 9, 2012

Germans and Aliens

Paul Krugman puts the lie to Germany’s call for broad economic austerity:

“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 pointing out that Germany’s experience can only be generalized if we find some space aliens to trade with, fast.”

John Mauldin details why:

“Not Everyone Can Run a Surplus

The desire of every country is to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself. But let’s look at yet another equation to show why that might not be possible this time. It is yet another case of people wanting to believe six impossible things before breakfast.

Let’s divide a country’s economy into three sections: private, government, and exports. If you play with the variables a little bit you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong.

Domestic Private Sector Financial Balance + Governmental Fiscal Balance - the Current Account Balance (or Trade Deficit/Surplus) = 0

By Domestic Private Sector Financial Balance we mean the net balance of businesses and consumers. Are they borrowing money or paying down debt? Government Fiscal Balance is the same: is the government borrowing or paying down debt? And the Current Account Balance is the trade deficit or surplus.

The implications are simple. The three items have to add up to zero. That means you cannot have surpluses in both the private and government sectors and run a trade deficit. You have to have a trade surplus.

[emphasis mine.]

The currently struggling European periphery (Greece, Ireland, Portugal, Spain and Italy) are currently running huge trade deficits, to Germany, mainly. They’re also deeply in debt.

Germany calls on the periphery to run surpluses in their public and private financial balances by practicing austerity, but as Mauldin points out that can only happen if those countries can also run a trade surplus (as Germany did). Trouble is, there are no other countries with which to run such a surplus.

Every seller needs a buyer in order to make a sale, and therefore create a surplus. As Krugman notes, Germany’s push for austerity will also require new counter-parties in order to work. There are none of those left on Earth today.

You can see the economic disaster that is southern Europe coming a mile away.