As you would expect from an editorial room containing Martin Wolf, the Financial Times knows about the need to address trade imbalances   There is a ‘fallacy of composition’ around the idea that if a country needs to save, then every country saving is a good idea*. Instead, demand falls, prices fall, you get recession.

Today’s top leader is beautifully titled: “The Burden of German Thrift”, and the point is summarised in one sentence:

if Europe were only to become better at stopping debtor nations from spending excessively and no defter at encouraging parsimonious peoples to consume, the future would be bleak.

They go on to point out that Keynes realised this in 1941.  In summary, ‘A scrimping Germany will be a greater burden for the eurozone than spendthrift Greece’. Stephanie Flanders has similarly noticed the flaw in the thinking behind the EMF, the fund that would deal with the problems of Eurozone deficit-sinners:

The biggest problem is that there would be no symmetrical obligations on surplus countries to do their bit for achieving more balanced European growth. Without that kind of symmetry, any such institution could well exacerbate the economic problem it was intended to fix, by putting an even more impossible burden on the periphery without any correspondent obligations on Germany – either to change policy, or to cough up for Club Med.

Paul Krugman recently made a similar observation, callingthe attempt by everyone to be the saver-who-exports ‘competitive devaluation’.  He quotes another writer who says:

Latvia’s model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It’s impossible that the whole of the Eurozone will drop wages to increase export income.

Buttonwood this week made a similar point: currencies can’t all depreciate at once (so it seems everyone is taking it in terms).   But he notes how we are NOT getting the same reaction to this behavior as in the 1970s.  There is no sign of soaring inflation.  (Except if you are Simon Ward of Henderson, who is determined to see it happening first.  If he is right a lot of people, me included, will have an ostrich-egg-sized pile of yolk on our faces).

The UK seems a long way from dealing with its own imbalances. The pound is down again today. While   Lombard Street Research** initially attribute this to weak housing figures from RICS, I wonder if the terrible trade figures are a bigger part of it.   Unlike the eurozone, we have the weak currency to help us grow, and so the continual disappointment here must be a worry, particularly for the Conservatives who may be relying more upon exports than the other less cut-happy parties.

As Jeremy Warner says, “just how low does sterling have to go to boost exports?”

Like these bond market experts I don’t think sterling weakness is about nerves about a hung parliament. If so, why is this graph pointing this way?

In fact, if I were a large holder of gilts, my worries would be split between the fiscal incontinence displayed by Brown on occasion, and the Tories’ determination that macro-economic consequences play little part in the timing of cuts.  Either of those two being in sole command of the economy could be lousy news …. bring on the hung parliament.

*not many believe Say’s law – that supply always creates demand, so there can’t be the sort of failure of demand that seems to characterise this and many other recessions.  Steven Kates at the IEA does, however.

**The stuff from Jamie Dannhauser may cost me more than my FT subscription, but it’s worth it.


4 thoughts on “Counterintuitive lessons part XXVIb: savers have obligations too

  1. The problem is because they are in a single currency union, Germany does not believe that their intra-EU trade should count as a current account surplus. They take the view that the eurozone members deficits and surpluses should be aggregated as a eurozone current account with the rest of the of the world. If you do that the eurozone current account is approximately balanced. The problem is the eurozone itself not Germany.

    The trade figures are a puzzle. However, considering how much they are usually revised it’s probably too early to form an opinion on the January figures. Although even ignoring January there is precious little evidence that UK firms have as yet won market share through a weak currency. In a currency depreciation firms often initially boost their margins before gaining market share. The healthy export orders books could signal this as a future development. Moreover, the currency depreciation is not as pronounced as people imagine from the often quoted 25%. They are quoting the depreciation from peaks when sterling was grossly overvalued. Take the average from 1970-2006 for the sterling effective exchange rate and it is less than 10% below average.

    The move in the two-year note over the last couple of weeks is an indication that the market agrees with Simon Ward, and the Bank will be forced to increase rates before the macro economy would justify an increase. I don’t think the Bank increasing rates would necessarily achieve what Simon Ward says ‘ stem the flow of funds from bank deposits’. The commercial banks are likely to use the first move to improve their net interest margins, which have been under pressure for the last year so savers might receive no benefit.

    I agree with the ‘ bond vigilantes ‘ that there is nothing to fear from a hung parliament. I can think of lots of ways why it could actually help in reducing the deficit in a manner that commands parliamentary legitimacy. Although I must admit it is a minority view and the dominant narrative is the scare theme. Needless to say the consensus is usually wrong.

    1. Very interesting comment. HopiSen and David Smith agree re the oneoffness of the trade figs. And I should keep that 2 year note in front of my eyes more often

  2. This is the same problem that Bretton Woods had, and for that matter that the 80s IMF settlement had – imbalances in the world currency system can only be the problem of the deficit side. (Honestly, officer – how could I possibly know Argentina might struggle to pay off this gigantic loan?) So over time, there was a net tendency for surplus states to suck liquidity out of the system. Come to think of it, that happened with the gold standard as well.

    Keynes, of course, wanted to build a fix for that into BW but the Americans found it far too useful to give up.

    Perhaps there’s an analogy with the distribution effects in the Keynesian circular flow. If the rich have a high enough marginal propensity to save/the Germans tend to run a high enough current account surplus, and their share of total income is high enough, you get the 1929 (or 2007) scenario – the oversaving of the rich/the German or Chinese surplus gets recycled through the banking sector into an asset price bubble. Then sudden stop. Everyone except the surplus sector is now credit-rationed, and the banks are explaining to the surplus sector that they just lost all their money – now, the surpluses are being used to recapitalise the banks and therefore are a net withdrawal.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s