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Monday, November 3, 2008

Stimulus: The Germans Do It Differently

“History shows that economic stimulus packages aren't a panacea. Taking into account what we know now, the measures will alleviate the looming recession but won't stop it.” -Joerg Kraemer, Commerzbank AG

Germany Plans Stimulus Program to Boost Economy (Update1): “The German government plans a two-year program of investments and incentives to provide a 50 billion- euro ($64-billion) boost to the slowing economy hit by the freeze in global credit markets.

“Measures to safeguard companies' financing and liquidity are provided by funding investments worth slightly more than 20 billion euros,” according to a joint paper by the economy and finance ministries obtained by Bloomberg News. They “will encourage investments and orders by companies, private households and municipalities totaling about 50 billion euros.”

Chancellor Angela Merkel said yesterday the government will enact “broad” measures to bolster the economy. The government has so far been divided on whether to offer tax cuts or boost spending, and the Cabinet will discuss the package on Nov. 5.”

The U.S. government recently implemented their own stimulus package which I covered in Fact Sheet: The Bush Stimulus Package:

“My Comments

1. The tax rebates won’t be spent on consumption. They will be hoarded and used to make last ditch debt servicing payments. The rebates are barely the equivalent of a single month’s mortgage payment for a couple. These rebates will simply buy some time. A month or two. They will not stimulate the consumer.

2. Businesses are expecting a slowing economy. They will not purchase new equipment with wild enthusiasm just because they can deduct more of the cost. The primary driver of a business purchase decision is definitely not the tax implications. If a new machine is not needed, it is not still purchased because of some tax advantage. The tax break will likely only have a small affect on businesses purchases. Positive economic effects would be marginal and temporary. For example, it may push up by a quarter or two purchases that were planned for later. Naturally, this then results in weak business demand later.

3. Bottom Line: The average Joe six pack is a baby boomer quickly running out of time. His single largest asset, his primary residence, is deflating rapidly. This single largest asset is also the primary collateral for his single largest liability. His balance sheet is rapidly deflating as all his assets, from his home to his equity portfolio, all simultaneously deflate while his debt outstanding may actually still be increasing. His debt servicing costs not dropping, despite aggressive rate cuts, and may actually be rising. It has also become damn near impossible to refinance certain mortgages as easy credit evaporates. On top of that, Joe six pack should now be seriously concerned about his job security. So when a cheque for $300 to $1500 arrives in the mail, Joe six pack is not going to spend it on a $200 steak dinner or a new computer or on a vacation. Got it?”

Well, it all came to pass, EXACTLY as predicted. I tackled stimulus packages again in Stimulus: Does It Even Work? where I use the Japanese experience with a credit, equity and real estate bubble as an example:

“In the end it all didn’t work. The agony was prolonged and is now referred to as the Lost Decade in Japan.

Sparked by low interest rates, Japans average home value more than doubled from the early 1980's to 1990 (sound familiar?). Now, over 16 years after prices peaked, home values are still declining and are nearing the average price of 1980.

The situation in Japan then and America now are eerily similar. I would argue that America is actually worse off. The ABSOLUTE lack of personal savings is really going to hurt the team here.”

The question then is why, after so much evidence to the contrary are the Germans now trying to make a stimulus package of their own work? The Germans actually admit that they don’t expect the traditional stimulus package to work:

“A broad-based, economic stimulus program financed through debt would only burn taxpayers' money. After a couple of years, at the latest, middle-income people would have to pay for it through higher taxes.”

What then are they up to?

“Possible stimulus measures include a two-year tax break on purchases of cars with lower-than-normal carbon-dioxide emissions, greater tax relief on household repairs and funds for improving the energy efficiency of buildings, according to the document.”

Notice the absolute FOCUS on energy efficiency? The Germans are planning for the long run. They clearly view the current collapse of crude prices as a temporary phenomenon. When crude prices do another moonshot, to new highs, the Germans expect to be prepared. Americans, having spent their stimulus checks on new Plasma screen TVs and filling up their giant SUVs will get pwned. AGAIN.

The Germans do it differently.


Anonymous said...

The Germans had their cities bombed to rubble within living memory...

Anonymous said...

Obviously you like German policy!!!

quads4444 said...

..."tax break on purchases of cars with lower-than-normal carbon-dioxide emissions"

Notice how the tax break is targeting emmission efficiency and not energy effeciency. This is the wrong emphasis, but totally expected from a green leaning party.

Sush, have you got a chart or link to those Japanese housing prices? Incredible!! Are they really returning to 1980 levels?

Anonymous said...

The rules for determining the mileage in Europe are also used to measure CO_2 emissions. The 93/116/EC standard used to measure CO_2 emissions seems to be used as synonym for "mileage" (try to google 93/116/EU).

The CO2 emissions crudely corresponds to energy efficiency. Diesel fuel and modern gasoline seem to have roughly the same same energy density. Diesel oil contains some 20 % more carbon than gasoline, but a car with an Otto engine consumes 20 % more fuel than same car with a Diesel engine.

I guess they bend the rules for plug-in hybrids and pure electric cars when they start to make them in Germany.

Anonymous said...

This is the wrong emphasis in total, but totally expected from a green leaning party.

Anonymous said...

Focusing on energy efficiency is absolutely essential for Germany. Not just because of oil prices, but the fact thet the Germans (and many other europeans) are at a constant risk of being held hostage by their biggest supplier of natural gas - Russia.

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