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Wednesday, June 13, 2012

Germany Still Doesn't Get it

     Hanns-Werner Sinn, the president of the Ifo Institute and the director of the Center for Economic Studies at the University of Munich, wrote a self-righteous little op-ed in the NY Times today-surprised it didn't make the Wall Street Journal.

    Mr. Sinn protests that there are "limits to what Germany can do to save Europe." He peevishly lectures President Obama:

    "If we give up the liability principle, the European market economy will lose its most important allocative virtue: the careful selection of investment opportunities by creditors. We would then waste part of the capital generated by the arduous savings of earlier generations. I am surprised that the president of the world’s most successful capitalist nation would overlook this."

    http://www.nytimes.com/2012/06/13/opinion/germany-cant-fix-the-euro-crisis.html?ref=opinion

     Surely the Wall Street Journal will be all over this soon. In addition Mr. Sinn is also an expert on US history.

     "Even a European nation, however, should not socialize debt, a lesson demonstrated by the United States in the 19th century."

     "When Secretary of the Treasury Alexander Hamilton socialized the states’ war debt after the Revolutionary War, he raised the expectation of further debt socialization in the future, which induced the states to over-borrow. This resulted in political tensions in the early 19th century that severely threatened the stability of the young nation."

      "It took the experience of eight states and territories going bankrupt in the 1830s and 1840s for the United States to shed socialization. Today no one suggests bailing out California, which is nearly bankrupt but is expected to find its own solutions."

       Very interesting that he knows more about our history then we do. That darn Alexander Hamilton! What a dirty socialist! Interestingly we don't remember it quite this way. Indeed I had coincidentally enough, written about Hamilton just this past Sunday.

         "The paramount problem facing Hamilton was a huge national debt. He proposed that the government assume the entire debt of the federal government and the states. His plan was to retire the old depreciated obligations by borrowing new money at a lower interest rate."

        "States like Maryland, Pennsylvania, North Carolina, and Virginia, which had already paid off their debts, saw no reason why they should be taxed by the federal government to pay off the debts of other states like Massachusetts and South Carolina. Hamilton's critics claimed that his scheme would provide enormous profits to speculators who had bought bonds from Revolutionary War veterans for as little as 10 or 15 cents on the dollar. "

       "For six months, a bitter debate raged in Congress, until James Madison and Thomas Jefferson engineered a compromise. In exchange for southern votes, Hamilton promised to support locating the national capital on the banks of the Potomac River, the border between two southern states, Virginia and Maryland."

        "Hamilton's debt program was a remarkable success. By demonstrating Americans' willingness to repay their debts, he made the United States attractive to foreign investors. European investment capital poured into the new nation in large amounts."

    Having explained our own history to us, Mr. Sinn next explains to us that Germany is actually more generous than us Americans by a factor of 115-yes I kid you not, that's the exact number he comes up with:

    "It is unfair for critics to ask Germany to bear even more risk. Should Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing, while the euro survives, Germany would lose $899 billion. Should the euro fail, Germany would lose over $1.35 trillion, more than 40 percent of its G.D.P. Has the United States ever incurred a similar risk for helping other countries?"

    "Some critics have argued that Germany, having benefited from the Marshall Plan, now owes it to Europe to undertake a similar rescue. Those critics should look at the numbers."

    "Greece has received or been promised $575 billion through assistance efforts, including Target credit, E.C.B. bond purchases and a haircut after a debt moratorium. Compare this with the Marshall Plan, for which Germany is very grateful. It received 0.5 percent of its G.D.P. for four years, or 2 percent in total. Applied to the Greek G.D.P., this would be about $5 billion today."

    "In other words, Greece has received a staggering 115 Marshall plans, 29 from Germany alone, and yet the situation has not improved. Why, Mr. Obama, is that not enough?"

    Is there any more starker proof that Germany still just doesn't get it? Why get yourself so out of breath trying to convince President Obama. Mr. Sinn. you don't need to convince Obama it's the market that isn't buying it. Evidently if you've already done 115 Marshall Plans the market is looking for more Marshall Plans still. How many? Well to paraphrase the Bible try "115 times 7."       

    

6 comments:

  1. I told you the other day, that it was all window dressing. Germany thinks that it bears no responsibility for the excessive borrowing by the likes of Greece, Spain, Italy, etc. at extremely low rates on the front end of this "union." Furthermore, an unwillingness to consider an ability to issue currency is what is exacerbating the problem. Every day/week we hear of new plans to solve the crisis, only to realize rather quickly, that the latest machination is a non starter. Think about it: The cash rich nations, (Germany and France), are willing to lend more money, at exorbitant rates, to EU nations that are already over leveraged with debt, and no prospects for growth. I honestly think at this point, the solution is to let Greece go. The Germans and French have been pushing pretty hard on the austerity front. Greece just might jump.

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  2. Oh if I'm Greece I do jump. Of course my worry is that Germany's going to hand this thing to Romney.

    France is actually wanting to pull back on austerity since Hollande got elected. And remember that it was Greece, then Spain, now maybe Italy, next in line is France

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  3. Well, this doesn't look good: http://economistsview.typepad.com/economistsview/2012/06/fed-watch-is-anyone-answering-the-phones-at-the-ecb.html
    Looks like the "deal" for Spain is failing miserably and spreading to Italy. It appears that the ECB is balking at buying up the debt. Rates are rising across the board. As the late Casey Stengel said: "can't anybody here, play this game?"

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  4. No you're right if the EU wont print money it's tough to see what will do it.

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  5. I think you should turn the telescope around.

    The key thing is the Nov. 2012 election. With Obama out of office, Germany gains an IMMEDIATE friend Austerity for Greece, but support for banks champion in Romney.

    This is really all that matters.

    Look, ultimately the German position is the Romeny position, is the Sumner NGDP position...

    LESS consumed in the future by the South states, and LESS paid for their labor.

    They will have to fight as the Southern US states have learned to fight.

    By deregulating, lowering corporate tax rates, providing more bare bones public services, right to work, and less lawyers in the way.

    I think everyone on the Austerity team is ready to see Greece jump, it is the Greeks who know they are bluffing.

    Germany CERTAINLY has to see benefits from a POTUS Romney - it can change the course of the Euro.

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  6. I like that "turn the telescope around." As you're going to quote Sumner to me let me quote him to you:

    Morgan, You said;

    “I think I’ve come to an epiphany.

    The Fed should say

    “DELIVER GOVT. PRODUCTIVITY GAINS”

    You have been harping on that for years. THE FED DOESN’T CARE ABOUT THE PRODUCTIVITY OF GOVERNMENT WORKERS. Only you care. NOBODY ELSE CARES.

    http://www.themoneyillusion.com/?p=14868

    As far as this idea that Romney will be Markel's best friend, Europe will be submerged under about 100 feet of water by then.

    Austerity doesn't work anyway so that would just be double the depression. For her own good you'd want Obama to win to save her from herself.

    Austerity makes things worse. That's all.

    As for this idea that Germany will be glad to see Greece jump, but that Greece doesn't want to you got it backwards.

    You need to adjust your telescope. Greece is going to jump. They will vote Tsiparis from the Syrzia party this Sunday. He will say give us a deal or we're gone. If Merkel says her usual "non' they will leave.

    This won't be a good thing-are you really this ignorant of markets? Have you seen the markets since the news that Greece might jump got out?

    Greece leaving will kill the EU. It's not Greece by itself but then Spain goes-fourth biggest economy in euro then Italy the third biggest economy in the euro, then France, the second biggest economy in the euro.

    The idea that there wont be much contagion is a German fantasy. Admittedly if this happens it may be the only thing that helps Romney-but by then the cow will be long out of the barn besides the fact that all he'd want to do is burn down the barn.

    By the way Romney's such a regular guy. I love the way he declares "I love sport." Not sprots but sport.

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