rickettyrabbit wrote:All is, well . . . ?

According to the China Securities Journal, China's electricity consumption in January fell by 7.5%. We estimate this may be the first decline since 2002 (excluding the financial crisis period in 2008-09), indicating industrial production may have slowed sharply in January.

tihZ_hO wrote:Speaking about Germany...A German mate of mine is rather certain Germany will pull out of the EU this year and its a definite if Greece defaults, he sites Germany does all the work and everyone else just gets by.

From what I hear on this side, if Greece defaults (everyone says will not if) the EU will be in the poop and the backlash will hit China rather hard, the One, Two, TKO for China growth which stalls and drops lower than 8% and China slips into a technical recession.

Wabbit?

rickettyrabbit wrote:Yikes! I'll have to think about that one . . . What I've been reading says Germany may pull out but shouldn't since a lot of its prosperity over the past decade has been because of the EU. Hmmmmmm.

highlander wrote:^^^^True but I think Germany can survive a much higher currency () if it was gradually risen but now that it might be a sudden rise in costs (and sudden lowing of costs in some other European countries) there will be much chaos in the economy. Sort of like the saying about slowly boiling a frog over a stove which happened to the US Dollar (Down) and Japanese Yen (UP) over extended period of time.

tihZ_hO wrote:

highlander wrote:^^^^True but I think Germany can survive a much higher currency () if it was gradually risen but now that it might be a sudden rise in costs (and sudden lowing of costs in some other European countries) there will be much chaos in the economy. Sort of like the saying about slowly boiling a frog over a stove which happened to the US Dollar (Down) and Japanese Yen (UP) over extended period of time.

Germany could do with the Deutschmark what China is currently doing with the RMB

Europe Has A Much Bigger Problem Than Debt, And Nobody Has Any Clue How To Fix It

Michael Pettis|January 09, 2012

Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms.

The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% to 40%.

This divergence has made the latter uncompetitive and has resulted in the massive trade imbalances within Europe.

Trade imbalances, of course, are the obverse of capital imbalances, and the surge in debt in peripheral Europe in the past decade – debt owed ultimately to Germany and the other core countries – was the inevitable consequence of those capital flow imbalances. While European policymakers alternatively sweat and shiver over fiscal deficits, surging government debt, and collapsing banks, there is almost no prospect of their resolving the European crisis until they address the divergence in costs. Of course if they don’t resolve this problem, the problem will be resolved for them in the form of a break-up of the euro.

The best resolution, and the one Keynes urged without success on the U.S. in the 1920s and 1930s, is that Germany take steps to reverse its trade surplus. It could boost disposable household income and household consumption by cutting income and consumption taxes, and as German household income grows relative to the country’s total production, the national savings rate would automatically drop and the trade surplus would eventually become a deficit. Or Germany could engineer a massive increase in infrastructure spending.

If Germany doesn’t do either, and especially if it imposes austerity, there must be a surge in unemployment for many years within Europe as German excess capacity meets dwindling demand in peripheral Europe. This surge in unemployment will force the peripheral countries into the unenviable choice either of absorbing that surge in unemployment themselves, or of forcing the unemployment back onto the core countries by abandoning the currency that is at the heart of their lack of competitiveness.

The historical precedents – and much of the commentary coming out of Germany – suggest that Germany will not take steps to reverse the trade surplus. Countries that run large and persistent trade surpluses never seem to understand that their surpluses are mainly the consequences of domestic policies that generate additional domestic growth by absorbing foreign demand.

On the contrary, they usually insist that the surpluses are the consequences of domestic virtue, and they see no reason to give up being virtuous. Surpluses, they seem to believe, are the way God rewards them for their enviable behavior, and as their surpluses decline – an inevitable consequence of the malaise affecting their trading counterparts – they actually try to limit the decline and do all they can do to prevent it from becoming a growing trade deficit.

But this violates simple arithmetic. Trade deficit nations have received capital inflows for many years from surplus nations as the automatic counterpart to their deficits. If the surplus nations ever hope to get repaid – i.e. to reverse those capital flows – then it must be obvious that the trade imbalances must also reverse.

Spain, for example, can only support net capital outflows if it is running a current account surplus. Germany can only receive net capital inflows if it is running a current account deficit. If Spain wants to repay its debt to Germany, and if Germany hopes to have its Spanish loans repaid, this can only happen if the former runs a current account surplus and the latter a current account deficit.

When should imbalances reverse?

The Germans, however, will argue that now is not the time for them to run a trade deficit, which would be the main way of running a current account deficit, presumably because their debt burden is rising, and so cutting taxes or increasing infrastructure investment will weaken their credit at exactly the wrong time. They need to continue running surpluses for a few more years, they will insist, to protect themselves from the impact of the European crisis.

This is insane. Countries cannot run surpluses forever, just as they cannot run deficits forever. For debt not to build up to unsustainable levels in the deficit countries, both deficits and surpluses must ultimately be reversed.

When is the best time to do so? Obviously the best time to do so is before the debt becomes unsustainable and there is a financial crisis. If we have already passed that point, however, as we clearly have, when is the next best time to reverse the trade imbalances?