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I read an article recently that paints Germany as a currency manipulator and a serial imbalancer.
The currency manipulator idea goes like this:
Germany has used the euro zone’s common currency system as a subsidy for its export-dependent economy.
The serial imbalancer idea goes like this:
Germany has used the recent credit crunch and sovereign debt crises as a way to glean greater influence over the euro zone and keep the export subsidy-friendly system intact.
In other words: Germany has forced painful adjustments on deficit nations of the euro zone’s periphery, while it has sought to sustain a system that’s generated imbalances favorable to itself. The Wall Street Journal had the following chart in an article recently — notice the hiccup in Germany’s current account surplus circa 2009 when rebalancing talk dominated global headlines:
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Now Germany’s imbalance — its lofty current account surplus — is growing again.
What’s interesting is that the U.S. Treasury has taken enough notice to start pointing fingers. Apparently the U.S. thinks Germany should be doing more to unwind the euro zone’s imbalances.
Of course! After all, the U.S. government loves interfering with the financial marketplace. And it doesn’t like that Germany’s actions have created “a deflationary bias for the euro area as well as for the world economy.”
Pointing the finger at Germany is sure to divert attention from the fact the U.S. government and monetary authorities have helped to perpetuate a global system that keeps imbalances alive. And what better time to play the blame game than when the U.S. economy looks relatively strong?
If you think Germany, until now, has been trying to keep a bad situation from getting worse, from trying to keep itself from sliding into the cesspool that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) created, then think again.
Of course Germany should not just blindly give money to the PIIGS without asking those countries to clean up their corrupt, wasteful ways. Germany should stop bailing out the PIIGS altogether. Germany should let the market work.
If you think that is stupid and reckless, consider the consequences of perpetuating bailouts, bail-ins, stimulus and monetary accommodation. The markets must clear eventually. The more the market process is resisted, the worse the washout will be.
Sure, you heard that last line several times before. But I bring it up because the environment is getting a bit touchy. The politics in Europe is slowly taking on an anti-euro tone. China is faced with an unprecedented task of implementing reforms. And the U.S. is constantly bickering about the best path for its own political economy. The playing field is ripe for growing discontent among policymakers of major economies.
A strong uptrend, decent economic data and Fed accommodation expectations do, however, suggest the markets don’t have much to worry about. But that’s a dangerous idea. From a contrarian perspective, it actually suggests the markets are quite vulnerable. If you’re an active investor, be careful.
Best,
JR
