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Monday, June 8, 2009

Down and Out for the Long Term: This Time it Really is Different

FN: An excellent article by Wolfgang Manchu explains why there can't possibly be a quick recovery from this mess and why the world won't go back to business as usual.

Down and out for the long term in Germany: "Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.

The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest."

FN: For a more graphical view of the carnage New N Economics has an excellent post: World Economic Reports. The graphs for Japan, South Korea, Malaysia, India, Indonesia and Thailand are pretty freaky. The export driven economic model is being torn apart.


khalid said...

@ fajensen and Tord:
your earlier replies are well taken.


Mista B said...


Great article. As a U.S. citizen who reads both the WSJ and FT daily, it's interesting to see the different perspectives.

I was curious about one part of the article and am interested in your opinion. The author suggests that the Euro could appreciate signficantly against the dollar. (Since the top of the stock market, the dollar has beaten the Euro, especially since summer of 2008 when the economic crisis began in full swing.) With the U.S. trade deficit narrowing, as this author suggests, wouldn't this have a positive effect on the dollar? Moreoever, based on reports from Stratfor, Mauldin, and others, Europe is already in deeper economic doldrums than the U.S., and they aren't as far along in their housing crisis. Their banks are both highly leveraged and more closely tied to corporate lending. (Not to mention the fact that they're far more socialistic.) Their demographics are clearly in worse shape as well, with an older and aging population. In all, this spells great trouble for Europe going forward. Could this therefore point to a weakening Euro?

On the flip side, due to the fractured nature of the European banking system, they can't use quantitative easing to slow down deflation. Deflation I assume would bolster the Euro. So perhaps Europe experiences true deflation (as already is occurring in places) whereas the U.S. tries to stave it off with money printing.


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