Saturday, February 23, 2008

The New Deutsch Mark

It looks like the German banking system is starting to unravel. Here is a link from Der Spiegel to the article. A hat tip to Patrick.net

The German government has had to bail out state-owned banks with taxpayers' money after their managements recklessly gambled away billions on sub-prime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy.

In England, Northern Rock just got nationalized by the government.

The two situations are drastically different. The English can print more money and solve the problem. The German banking crisis is in a catch 22. They are in the European Common Market using Euro dollars and have no fiscal control over their currency.

What is becoming evident here is that Germany may break out of the European Union. Many of these member countries want and need to solve their economic problems in a way different from all of the rest. Nationalism is on the rise (doesn't that have a familiar pre WW II ring to it?).

If the German banking system collapses, the logical option would be a new national currency. Airbus can’t compete against Boeing. The appreciation of the Euro against the dollar is killing German industry. Unemployment problems similar to the 1930’s seem to be reappearing. Many have suggested that Germany’s joining the EU, was the second signing of the Treaty of Versailles.

The new Deutsch Mark could have an unsettling effect on world markets. The Euro in time could fade away. Let's face it; the Euro dollar is financial socialism without government representation. It's a little like the milkman delivery jokes. The fun was his, the kids are yours.

Copyright 2008 All rights reserved

27 comments:

SACKERSON said...

The Germans have gold...

dearieme said...

Probably more than they admit to, Sacks, when you allow for the gold that's been in the lakes these last six decades.

Jim in San Marcos said...

Hi Sack & Dearieme

I think as far as the government is concerned gold is out of the equation. Linking the currency to gold keeps the politicians from printing money.

It does protect the average Joe from government inflation.

With everyone printing currency like crazy, you're going to see gold as a medium of exchange between countries.

You can build Airbuses with the dollar on par with the Euro and then have the Euro go to 1.5 dollars. The business model falls apart.

We've actually got a trade war going on using currencies

David A. Andelman said...

For a riveting look at the FIRST signing of Versailles, and its catastrophic consequences today, do have a look at my wonderful new book -- "A Shattered Peace: Versailles 1919 and the Price We Pay Today" [www.ashatteredpeace.com] just published by Wiley !
All the best,
David A. Andelman
david@ashatteredpeace.com

Jim in San Marcos said...

Welcome aboard Dave,

Best of luck to you on your book.

Take care

Jim

BlueStater said...

I'll be very surprised if the Germans leave the euro zone -- it's partly their invention, and from what I read the Bundesbank more or less runs the economic policy of the EU. The DM was overvalued, too, before the Euro came along. The real dreaded memory for them, I would guess, isn't the Versailles treaty but the runaway inflation of the early 1920s. They're terrified of that, and its memory has governed their economic policy ever since they regained their independence after WWII.

Anonymous said...

Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for all of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars. Transfered FROM US TO THEM. Over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They will never settle for a reasonable share of ANYTHING. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductable crumbs and call themselves ‘humanitarians’. IT CAN’T WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. Crime, poverty, and suicide will skyrocket. So don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductable contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah, Ellen, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. So don’t fall for their ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTABLE PR CRAP. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. EXTREME WEALTH HAS MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.

Jim in San Marcos said...

Hi Anon 2:20

I can't say you are at a loss for words, but one thing this massive economic bankruptcy will do is get rid of the rich. It should level the playing field. These are the people with most at risk in the coming fiasco.

Realize also that the top 13% pay 60 % of the taxes in this country. Once they are gone, we get to pay more income tax, and thats going to suck. The poor don't have any money so guess what happens, the government cuts services like fire and police.

Thanks for your post

Jim in San Marcos said...

Hi Bluestater

I don't dissagree with you. But things could be different this time.

Germany's unemployment rate is around 10%. Gas prices are dropping in Europe (33%). Rememeber oil is valued in U.S. dollars. Also German goods are 33% more expensive to us in the United States. They're not selling much.

A banking collapse has serious implications in Germany. In the United States and Great Britain the state is the lender of last resort. The government will step in to exert control and keep the financial situation fluid. The Euro dollar has no lender of last resort. If the banks in Germany fail, that's just too damn bad. That is why the German government has to step in.

The thing that makes sense to me is that Bernanke is dropping rates here in a stalling attempt. If the foreign banks fold first, there would be less for the Fed to cover as a lender of last resort with US banks. I could be wrong on this, Bernanke has studied the Great Depression, so some of his moves seem to have an alterer motive. I don't think he's stupid.

Germany can't just switch to the Deutschmark, to do it smoothly would take about 3 to 6 months preparation in advance.

Consider this as an announcement of what is about to happen. Don't tell anyone :>)

Thanks for your comments

SACKERSON said...

The government has to work out how to pay for all the poor-quality goodies it gives us (after seeing themselves all right). The poor have nothing, the rich do pay quite a lot of tax but can pack their bags and leave if taxation gets too rapacious, so it's likely to be the middle class that shoulders the increasing burden.

In the UK years ago, we had a Chancellor with a supposedly first-class brain (Denis Healey), who boasted to the Labour Party that "We'll tax the rich until the pips squeak." The rich emigrated, and many who have since returned (such as the Rolling Stones) have been careful to keep their wealth wrapped up in offshore trusts - Dutch ones, in the case of Jagger and co., I understand.

raptor said...

Jim I just want to say that I like the blog you are writing, very informative... and especially like the remarks at the end ;))

keep them coming ...

Jim in San Marcos said...

Hi Raptor

Thanks for the compliments. There's usually more in the comments sometimes, because I cut each article down to one page before I publish. Sometimes that's a lot of cutting.

I see you are starting your own blog--I think you'll enjoy it. You might want to put in an email address in your profile and a site counter. Scroll down to the bottom of mine to see the site meter. Click on it for stats.

Happy blogging

Jim in San Marcos said...

Hi Sack

In addition, don't you have "Free" health insurance in Great Britain? That ought to be a real drain on the average taxpayer.

SACKERSON said...

Yes, and as with any other case where you take over functions for people, you get secondary problems - inefficiency, altered agendas, increasing dependency of the client, unlimited demand.

BlueStater said...

Good reply, jiminsanmarcos. You obviously know a lot more about this stuff than I do, and your reply was persuasive. The most interesting part was your speculation that Bernanke and Co. might be waiting for a foreign bank to fail, making that much less of a mess for the Fed to clean up. It occurred to me, too, reading your post, that the Wiener Kreditanstalt, the collapse of which was followed by the depression in Europe (leading in turn to the Nazis), wasn't exactly Made in the USA (it was Austrian, I believe).

I would be worried about a rise in political extremism in Germany if indeed there were major economic difficulty there. Probably not as threatening a possibility as it was 75 years ago, because Germany doesn't amount to as much in the scale of things now as it did then. Still, we live in scary times.

Jim in San Marcos said...

Hi Bluestater

It looks like history is about to repeat itself.

The Credit-Anstalt, Austria's largest bank at the time, collapsed May 11, 1931. It was probably about that point in time that people around the world knew they were really in a depression that’s a couple of years past the 1929 date associated with the Great Depression.

I've studied The Great Depression at great length, and the conclusions you get is that the psychology of the masses set it in motion. Economic theory was pretty much useless trying to stop it; explain it, yes. It becomes more a game of poker, bluff if you have nothing to lose. There has to be some logic behind Bernanke's actions.

East Germany presently has 16% unemployment. A banking collapse in Germany would be a catastrophe for middle class. The key to Deutschland’s survival is the emergence of a government lender of last resort. If that were to happen, it could imply the dissolution of the EU.

I could be wrong, just ask my wife ;>)

Thank you for your comments.

Jim in San Marcos said...

Hi Sack

"Unlimited Demand"--isn't that where you sign the check and let someone else fill in the amount??

In our country they are running for election on the idea of "Free Health Care" for everyone.

It's probably the same plan. Ours only sounds better only because its still in the planning stages.

Anonymous said...

Jim. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the tax revenue. They are held down in many ways because of greed. Wages remain stagnant because the executives are paid millions. They outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which means more money for the upper class who own a giant share of the market. My problem really isn't with the upper class. But as more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid. Not to mention the spike in crime because of it. There is a dominoe effect to consider. So when you forgive the rich for all of the above and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. If these filthy pigs want to be over-paid, then they should be over-taxed as well. Remember: They STILL own 1/2 of all United States wealth EVEN AFTER taxes. There is nothing you can say to justify that. Anyway, there is usually a higher state and local burden on the middle class. Again, because of the OBSCENE distribution of bottom line wealth in this country. I can not accept your theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. As a nation, we were in much better shape. Lower crime rate, more widespread prosperity, stable job market, free and clear assets, lower deficit, ect. Bottom line: Top heavy economies always destabilize and eventually collapse. Middle heavy economies remain stable and propsperous indefinately. WITHOUT LOANS FROM CHINA.

Jim in San Marcos said...

Hi Anon 8:54

I don't fault the rich; it's the American dream to get rich.

The rich have the most to lose in a depression. A millionaire could lose 90 percent of his wealth in the coming blood bath. A dope dealer without a dime in the bank wouldn't lose anything. This would certainly level the playing field.

There is quite a difference between someone who is rich (doesn't have to work) and someone who makes a lot of money at his job. The Government taxes wage earners. I personally would like to see everyone over the age of 18 and younger than 60 be forced into one months labor as their fair share of yearly taxes or pay a cash equivalent. Everyone from the dope dealer to the rich guy would get nailed. No free ride for anyone. At the same time the guy who works two jobs would get a break, and not be penalized.

Both of us differ in our opinions. There is no right or wrong argument here. Our two different views might just be the ground work for a solution in the future.

Thank you for your comments.

Strategic Investor said...

Jim - Great Blog!

I understand your point, which is that the German government would have to find income from taxes to cover the losses from a nationlized bank, but I don't think that Germany is leaving the Euro (even if it is unpopular here).

Germany's banking situation is not under real imminent threat.

1. Germany has relatively few banks - fewer than 350, actually, compared to about 60,000 in the US. This means fewer small banks with questionable management.

Most of them are strong and well capitalized and, so far at least, we have seen that the government has been able to merge the weaker ones into the larger ones (LBBW acquired SachsenLB last fall) and they are still working on selling IKB, which is insolvent due to overinvestment in SIVs.

2. Several are indeed state-owned (many by the federal states, the Bundesländer - e.g. Bavaria, Baden-Württemburg) which don't have any sengiorage under any circumstances; the states, not the Federal government would be on the hook.

3. Printing more money is not the only solution. The key for the government would be the ability to raise enough money at sufficiently low rates of interest to prop up the balance sheets of the banks through repos. This can be done by floating debt. Germany, actually has the most solid government finances in the EU on this point. Surplus in 2007, and a much lower debt-to-GDP ratio than France, the UK or of course, Italy.

Other macro factors are also positive - unemployment has been falling, if slowly (it remains obscenely high in the East, but even this is beginning to improve), and overall is now down around 8%.

The country maintains a strong current account which also helps it obtain financing if necessary.

Above all, and this I think critical - Germany has relatively conservative consumers. There isn't much downside risk of reduced consumption, since the country has just gone through a major reduction in labor rates. Consumption is already low, and savings are high.

Thus, Germany is unlikely to face the problem of over-leveraged uncreditworthy borrowers faced by the US and the UK. It also means that there are plenty of sources of cheap capital to finance those government bonds.

Overall, the Euro has been a bit net positive for Germeany. People complain about prices here compared to the DMark, but actually, prices of many commodities are quite stable. It makes doing business far more easy and has led to a strong increase in economic activity throughout the continent.

But I promise you that if there is a change - I will give you a major "honorable mention" on my blog.

Strategic Investor said...

Anon - I don't see how "the rich" are causing this.

Rather, I suspect that the rich are the ones investing in the productivity enhancing tools that make everyone's living standards rise.

I don't see people getting poorer - though they may FEEL relatively poorer. But your argument seems like the traditional Marxist-Leninist view that if everyone had the same standard of living we'd all be "better off" because we wouldn't feel the need to keep up with the Jonses.

Psychologically that *might* be true for many, but I'm not sure it would be. I do know that generally in economies where mandates rather than prices rule economic decision making, lots and lots of useless stuff gets produced.

Besides, if we want to look at who is "getting the money" we have to look at the $1.6trillion being transferred from hard-working young people to indigent old people every year. That's whose getting "our" money.

Jim in San Marcos said...

Hi Strategic Investor

Thank you for the complement

The thing that is being overlooked is that the Euro Dollar buys more in the "underdeveloped" parts of Europe. Germans will tend to consume the cheaper products from the rest of Europe and also invest in those areas. That leave the unemployment rate in Germany no place to go but up. Couple that with the drop in the dollar, German exports will drop drastically and imports will increase. It's the rise in unemployment that will force them off of the Euro. At the present the Germans are subsidizing the EU.

A realistic new currency would improve their future unemployment problem.

A new currency would solve their banking mess with some good old inflation and at the same time decrease their actual labor costs of production.

On the other hand you could be right, you are certainly closer to the situation than I am. I've just been reading between the lines.

Thanks for your comments

Strategic Investor said...

You're welcome.

I see now what you are arguing. Certainly, it has been the case that lots of fixed investment has gone to eastern europe, because after 1990 the entire industrial base dried up and incomes declined precipitously.

The situation you describe, though is what Germany has been muddling through for the past several years. It's actually coming full circle as more jobs are being returned from near-shoring in the Czech Republic or Slovakia to Eastern Germany and Southern Germany.

The issue about exports is a fair one, with qualifications. The euro of course, is essentially neutral toward things like commodities, since even as the prices increase in USD, they remain essentially unchanged in Euroland, which means that the primary driver of export cost is actually labor for final assembly - and this is exactly what has been under attack for the past 20 years. Labor costs in the last five have been reduced sharply, which is why Germany's exports have risen in spite of the rising euro.

There are two big offsets to the higher labor costs as well - the first is dramatically lower taxes on business income and investment. This has had much to do with the onshoring activity - turns out an East German is still more productive than an Czech, if you can neutralize the (former) tax advantages.

The second is the consumer, who in Germany is hardly overstreched. He has barely any leverage at all and plenty of savings. Given that high euro prices make many goods relatively cheaper, there is plenty of money to be made fulfilling the needs of the German consumer.

Jim in San Marcos said...

Hi Strategic Investor

You've got me sold on your view. I have one unanswered question. How is the EU going to handle the dollar drop?

Don't their exports to us have to decrease? Haven't Germany's investments in the US hurt them?

What it looks like to me is that Bernanke has devalued the dollar. Is the rest of the world going to let him get away with it?

Strategic Investor said...

I'm not a big believer that currency is the primary driver of imports and exports. I think that yes, exports may decrease but domestic consumption may increase, and domestic consumption represents a bigger share of economic activity, even in The Fatherland.

I have never been a believer in the weak currency => high exports => national wealth. If this were the solution, then we should all be looking to devalue our currency (i.e. encourage hyperinflation). This is a theory that has been tried many, many times - because its politically easier than the alternatives. But we know that doesn't work, so there has to be another approach.

The thing to realize is that when the dollar drops, Americans are getting poorer. When politicians call for strengthening of other currencies (like the yuan), the flipside is that the dollar must get weaker, so its really a system that says "the way to get rich is by cutting the national income".

What they really mean is that Americans are paid too much to do certain jobs (like build cars in Detroit - though this doesn't seem to be a problem in Alabama and South Carolina), and so real wages have to decline (or productivity has to be increased).

One option would be to cut nominal wages in those sectors until costs came in line with output. But since that is difficult - most people (I include myself) don't like having their paycheck cut - its easier to devalue and reduce real wages through currency manipulation. This allows people to keep the same nominal wage, it just buys less. The "victims" are everyone but it means that the burden is shared and people don't feel the stigma of a lower wage, they just complain about the price of gas.

Europe was notorious for this, and getting used to the fact that you cannot simply devalue your way out of high labor costs has taken some time (and led to high unemployment).

It is still possible that they could adopt a devaluation route, but I am cautiously optimistic that they will not do so and will continue to adjust tax and labor laws instead. Though, if Kurt Beck becomes Chancellor, I'll probably be having to give you that endoresment I promised.

Strategic Investor said...

Jim,

I found a video you might be interested in.

http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=697245262&fromSearch=n

It shows that the Ifo index of German manufacturers has been rising since 2003, even as the Euro has been falling.

This is very surprising, given the fact that the Euro has been rising providing a relative [labor] cost disadvantage.

One possibility is that the execs are nuts - but I think it has to do with the overall competitiveness of the German economy and the ability to obtain raw materials at reasonable prices - particularly if you are able to sell to other Europeans.

Jim in San Marcos said...

Hi Stragetic Investor

I enjoyed his views here is a link to it.

Thanks for your imput.