Nimelt peab Saksamaa eksportiva riigina mõistma, et teatud juhtudel, erakorralises situatsioonis, on sõjalised operatsioonid õigustatud. Näitena tõi ta vaba kaubanduse kaitsmise ja piirkondliku ebastabiilsuse lahendamise juhul, kui sellel võib olla Saksamaa kaubandusele, töökohtadele ja sissetulekutele negatiivne mõju.
Miks selline suhtumine on hirmutav, on paraku pikem jutt (iga riik ei saa olla nagu Saksamaa, kellelgi peab olema väliskaubanduse bilanss negatiivne, see tähendab aga võlgu elamist, jne). Siinkohal anname mikrofoni edasi John Mauldinile, sest tema oskab seda asja oluliselt paremini lahti seletada, kui mina.
I have written several letters over the years about the basic economic equation
GDP = C + I + G + (Net Exports)
Which is to say, that Gross Domestic Product in a country is equal to total Consumption (personal and business) plus Investments plus Government Spending plus next exports. This equation is known as an identity equation. It is true for all countries and times.
Now, gentle reader, I am going to spare you a few pages of algebra and cut to the chase. 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.
Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0
This equation was introduced to you a few months ago in an Outside the Box written by Rob Parenteau. We are going to review this briefly, as it is VERY important. Paragraphs in quotes will be from that letter. As Rob noted, “…keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.”
By Domestic Private Sector Financial Balance we mean the net balance of business 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 both surpluses in the private and government sectors and run a trade deficit. You have to have a trade surplus.
Let’s make this simple. Let’s say that the private sector runs a $100 surplus (they pay down debt) as does the government. Now, we subtract the trade balance. To make the equation come to zero it means that there must be a $200 trade surplus.
$100 (private debt reduction) + $100 (government debt reduction) – $200 (trade surplus) = 0.
But what if the country wanted to run a $100 trade deficit? Then that means that either private or public debt would have to increase by $100. The numbers have to add up to zero. One way for that to happen would be:
$50 (private debt reduction) + (-$150) (government deficit) – (-$100) (trade deficit) = 0. Remember that we are adding a negative number and subtracting a negative number.
Bottom line. You can run a trade deficit, reduce government debt and reduce private debt but not all three at the same time. Choose two. Choose carefully. And before we get into the implications, let’s look at yet another equation, although this is somewhat simpler.
Delta Force
There are two and only two, ways that you can grow your economy. You can either increase your population or increase your productivity. That’s it.
The Greek letter “Delta” is the symbol for change. So if you want to change your GDP you write that as:
^ GDP = ^ Population + ^ Productivity
If you are a country facing a population decline (like Japan) that means to keep your GDP growing you have to increase your productivity even more. That is why I have written so much about demographics over the years. Population growth (or the lack thereof) is very important. Russia is facing a very serious problem over the next 20 years that will require either a significant increase in productivity or large immigration to stave off a collapsing economy. Russia’s population has declined by almost 7 million in the last 19 years to 142 million. UN estimates are that it may shrink by about a third in the next 40 years. But that’s another story for another letter.
One last economic insight. You cannot grow your debt faster than nominal GDP forever. At some point, the market begins to think you will not be able to pay your debts back. This is no different than the fact that a family cannot grow its debt faster than its income ability to pay the debt back. At some point, you run out of the ability to borrow more money as lenders “just say no.”
As a family’s or country’s debts grow, the carrying cost or interest expenses rise. At some point, the interest expense consumes an ever larger portion of the budget. Increasing the debt increases the interest expense eventually to the breaking point. There are limits.
Pity the Greeks
Some of my fondest memories were made in Greece. I like the country and the people. But they have made some bad choices and now must deal with the consequences.
We all know that Greek government deficits are somewhere around 14%. But their trade deficit is running north of 10%. (By comparison, the US trade deficit is now about 4%.)
Going back to the equation, if Greece wants to reduce its fiscal deficit by 11% over the next three years, then either private debt must increase or the trade deficit must drop sharply. That’s the accounting rules.
But here’s the problem. Greece cannot devalue its currency. It is (for now) stuck with the euro. So, how can they make their products more competitive? How do they grow their way out of their problems? How do they become more productive relative to the rest of Europe and the world?
Barring some new productivity boost in olive oil and produce production, there is no easy way. Since the beginning of the euro, Germany has become some 30% more productive than Greece. Very roughly, that means it cost 30% more to produce the same amount of goods. That is why Greece imports $64 billion and exports $21 billion.
What needs to happen for Greece to become more competitive? Labor costs must fall by a lot. And not by just 10 or 15%. But if labor costs drop (deflation) then that means that taxes also drop. The government takes in less and GDP drops. The perverse situation is that the debt to GDP ratio gets worse even as they enact their austerity measures.
In short, Greek life styles are on the line. They are going to fall. They have no choice. They are going to willingly have to put themselves into a severe recession or more realistically a depression.
Just as British incomes relative to their competitors will fall, Greek labor costs must fall as well. But the problem for Greeks is that the costs they bear are still in euros.
It becomes a most vicious spiral. The more cuts they make, the less income there is to tax, which means less government revenue which means more cuts which mean, etc.
And the solution is to borrow more money they cannot at the end of the day hope to pay. All that is happening is that the day of reckoning is delayed in the hope for some miracle.
What are their choices? They can simply default on the debt. Stop making any payments. That means they cannot borrow any money, but it would go along way toward balancing the government budget. Government employees would need to take large pay cuts and there would be other large cuts in services. It would be a depression, but you work your way out of it. You are still in the euro and need to figure out how to become more competitive.
Or, you could take the austerity, downsize your labor costs and borrow more money which means even larger debt service in a few years. Private citizens can go into more debt. (Remember, we have to have our balance!) This is also a depression.
Finally, you could leave the euro and devalue like Britain is going to do. Very ugly scenario, as contracts are in euros. The legal bills would go forever.
There are no good choices for the Greeks. No easy way. And then you wonder why people worry about contagion to Portugal and Spain?
I see that hand asking a question. Since the euro is falling won’t that make Greece more competitive? The answer is yes and no. Yes, relative to the dollar and a lot of emerging market currencies. No to the rest of Europe, which are their main trade partners. A falling euro just makes economic export power Germany and the other northern countries even more competitive.
Europe as a whole has a small trade surplus. But the bulk of it comes from a few countries. For Greece to reduce their trade deficit is a very large life style change.
Germany is basically saying you should be like us. And everyone wants to be. Just not everyone can.
Every country cannot run a trade surplus. Someone has to buy. But the prescription that politicians want is for fiscal austerity and trade surpluses, at least for European countries. But if the PIIGS reduce their trade deficits, that will not be good for Germany.
Yet politicians want to believe that somehow we all can run surpluses, at least in their country. We can balance the budgets. We can reduce our debts. We all want to believe in that mythical Lake Woebegone, where all the kids are above average. Sadly, it just isn’t possible for everyone to have a happy ending.
And this brings us to a last quick point, which some day will be its own letter. Every country wants it currency to be valued “fairly” which means lower than its competitors. With both Europe and Britain on their way to parity with the US dollar, what will be the reaction of Asia and especially China?
As Ollie said to Stan (Laurel and Hardy), “Here’s another nice mess you’ve gotten me into!” A nice mess indeed.
Robert Shiller 
FCIC 
FCIC 
