Bennie and the Debts

I read John Mauldin’s weekly missives; he excels at providing information from many influential economists, analysts and policy makers.  I don’t often agree with much of what I read, but I have found it worth reading – it helps to know what the movers and shakers think, and it is always good to gather different views.

This week, his Outside the Box is entitled “Germany’s Trade Surplus Is a Problem.” After his introduction, he offers a selection from Ben Bernanke’s new blog.  It is Bernanke who has written about Germany’s problematic trade surplus.

As I always must when commenting on macro-economic subjects, I offer the caveat: the entire concept of macro-economics as practiced in the mainstream is farcical.

Endgame: The End of th... Tepper, Jonathan Best Price: $2.58 Buy New $7.00 (as of 12:15 UTC - Details) In this specific case, what is so special about a national trade balance?  Why not a county trade balance, or a city trade balance, or a neighborhood trade balance? Individuals buy and sell; every moment some will be in surplus and others will be in deficit.  Yet every trade adds value to both parties; this can’t even be measured.

If I, as an individual, am constantly in surplus (meaning a positive net worth or net income), many would consider this a good thing; I produce more than I consume – and what I save is available for the investment necessary to increase productivity, hence increase the standard of living.  If I constantly run a deficit, a wise counselor would suggest I am the one with a problem, and should change my ways.

But not at the national level, where life is viewed through the looking glass.  It requires a Ph.D., apparently, to achieve the sophistication of Mongo: surplus bad, deficit good.

First, I start with Mauldin’s introduction (emphasis added): Code Red: How to Prote... Tepper, Jonathan Best Price: $1.10 Buy New $7.88 (as of 01:25 UTC - Details)

In Code Red I wrote a great deal about trade imbalances among the various European countries, which were at the heart of the European sovereign debt problem. As the peripheral countries have tried to rebalance their trade deficits with Northern Europe and especially with Germany, they have seen their relative wages fall and deflation become a problem. Greece is the poster child.

Please keep that italicized part in mind.

…Woody Brock met me over at Ocean Prime for some fish and wisdom. Woody is simply one of the smartest economists on the planet and knows the gamut of the literature as well as The Black Swan: Second... Taleb, Nassim Nicholas Best Price: $3.11 Buy New $10.37 (as of 01:40 UTC - Details) anyone. “It’s the incentive structure that is the driver,” he told me… (emphasis added)

Please keep that italicized part in mind.  I will just say for now, he should have listened to Woody.

Everyone responds to incentives, no matter what the country or type of government. Setting incentives to maximize entrepreneurial activity will produce the most growth and jobs. (emphasis added)

Please keep that italicized part…oh, never mind.  You get the idea by now.

Of course, it is always a balancing act.

What balancing act?  When it comes to “setting” (who will do the setting?) incentive structures, what balancing act? Dark Pools: The Rise o... Scott Patterson Best Price: $6.32 Buy New $11.74 (as of 06:25 UTC - Details)

You have to produce to consume: you have to work to eat.  Isn’t this the ultimate incentive structure?  How much more balanced do you want?  Can there be more?  For those who want to do the setting, I have a suggestion: butt out.

But I digress.  Mauldin then introduces Bernanke’s piece (emphasis added):

…think through what Bernanke is saying. Do you really think Germany will follow through on his suggestions, as reasonable as they are? Me neither. Europe is well and truly hosed. They have just not figured out yet that they need to hit the reset button. Not just on monetary or fiscal policy (which are secondary), but on the entire incentives (regulations and labor-reform) environment.

Broken Markets: How Hi... Saluzzi, Joseph C. Best Price: $7.44 Buy New $24.98 (as of 05:40 UTC - Details) Mauldin is right about this.  That’s why offering that Bernanke’s suggestions are reasonable and should be implemented makes no sense – but you don’t need to read my fourteen-hundred words to know this about pronouncements from the good doctor.

So, what does Ben have to say?  What are his “reasonable suggestions” that Mauldin is so eager to have the Germans embrace?  Needless to say, Bernanke doesn’t like “global imbalances,” and he especially doesn’t like large trade surpluses:

The distinction of having the largest trade surplus, both in absolute terms and relative to GDP, is shifting to Germany. In 2014, Germany’s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country’s GDP. That continues an upward trend that’s been going on at least since 2000.

Why is Germany’s trade surplus so large? Undoubtedly, Germany makes good products that foreigners want to buy.

This, I guess, is somehow a problem for Germany and for the rest of the world.  So you see, making good products that others want to buy is a problem for both the producer and the consumer; in The Secret Club That R... Kate Kelly Best Price: $2.23 Buy New $16.87 (as of 09:55 UTC - Details) other words, making desired products is a problem for everyone on planet earth!

Bernanke falls on the tired: he blames this on the Euro – a currency that is weaker than a currency that Germany would have if it stuck to the Deutsche Mark.  Of course, people also wanted to buy German products when Germany had the Deutsche Mark…

He also blames it on a sound fiscal policy:

…the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports.

Exposing yet another macro-stupidity.  I get wealthier when I spend less and save more. But add my balance with everyone who shares my passport?  It is the exact opposite: countries somehow get wealthier when they spend more and save less – or, in fact, spend to deficit.

The Dao of Capital: Au... Spitznagel, Mark Buy New $15.99 (as of 07:15 UTC - Details) Note the policy Bernanke picks on – the fiscal policy of Germany – not another policy, the fiscal policy.  But, could this trade imbalance be due to other policies?  Mauldin identified it in his piece: “on the entire incentives (regulations and labor-reform) environment.”

Mauldin mourns the fact that the southern European countries have “seen their relative wages fall”; yet, this is precisely what happened in Germany several years ago – putting their workers in the enviable situation of having jobs.

Germany, about a dozen years ago, went through a pretty significant restructuring of labor – regulation and labor reform.  Wages were held in check, to go along with some of the more lenient policies toward restructuring in all of Europe.  Instead of Bernanke suggesting that the rest of Europe follow this lead, he suggests Germany spends more.

You want proof?  Here are his three specific suggestions:

Investment in public infrastructure. The Great Deformation:... David A. Stockman Best Price: $2.00 Buy New $9.95 (as of 09:55 UTC - Details)


Raising the wages of German workers.


Germany could increase domestic spending through targeted reforms


All the Presidentsu201... Nomi Prins Best Price: $4.39 Buy New $44.43 (as of 08:35 UTC - Details) Look, I know Germany is no bastion of free-markets.  Relative to the rest of Western Europe, though, it is a shining light.  So, instead of prescribing the reform that Germany took a decade ago, Bernanke prescribes the poison that has much of the rest of Europe in hot water.

So, what does this have to do with all of the emphasis I added to Mauldin’s comments regarding incentives?

What incentive is there in spending?  Do you have to offer incentives to the profligate to be even more profligate?  Does Mauldin need to focus on incentives to get government to spend, spend, spend? They don’t need encouragement to do what comes naturally!

You want incentives?  You have to produce to consume: you have to work to eat. Reform regulation and labor; when capital and labor are easy to discharge, investment and hiring come easier.

As an aside, Bernanke also takes the opportunity to take a swipe at gold: Den of Thieves Stewart, James B. Best Price: $1.49 Buy New $12.03 (as of 02:35 UTC - Details)

Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. The gold standard of the 1920s was brought down by the failure of surplus countries to participate equally in the adjustment process.

Shouldn’t those with deficits come under “severe pressure to adjust”?  Isn’t this a proper incentive?  Why is it that those who produce surplus – those who produce more than they consume – are the ones to be brought down?

What complete nonsense.

Back to Mauldin:

It is my day for friends coming to Dallas. Tonight Steve Moore (WSJ and now with the Heritage Foundation) is in town for a speech, and he is hanging around to go to the Dallas Mavericks game with me. We’ll talk productivity and politics over steaks at Nick and Sam’s before we head to the game

John, can you ask Steve Moore why Paul Krugman has the freedom side of his upcoming “Dream Debate of the Century”?

Reprinted with permission from Bionic Mosquito.