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In an April
speech in Berlin, Dr. Andreas Dombret, a member of
the Executive Board of the Deutsche Bundesbank (the
German central bank), offered a startlingly frank assessment of the current
problems in Europe. Although his comments were meant to apply to the tensions
and imbalances that exist between the northern and southern tier of the
17-member eurozone, they shed inadvertent light on
the broader global economy.
Rebuffing calls that Germany do more to
support the faltering southern economies, Dr. Dombret
said:
...Exchange
rate movements are usually an important channel through which unsustainable
current account positions are corrected....In a monetary union, however, this
is obviously no longer an option. Spain no longer has a peseta to devalue;
Germany no longer has a deutsche mark to revalue. Other things must therefore
give instead: prices, wages, employment and output.
The question
now is which countries have to shoulder the adjustment burden. Naturally,
this is where opinions start to differ. The German position could be
described as follows: the deficit countries must adjust. They must address
their structural problems, reduce domestic demand, become more competitive
and increase their exports.
In economics it is axiomatic that
positive and negative current account balances will ultimately be offset by
changes in relative currency valuations. The currencies of surplus countries
are supposed to rise and the currencies of the deficit countries are supposed
to fall. But the current global political alignment has altered this process.
Like many of his German and continental peers in government and finance, Dombret is likely in favor of maintaining a common currency
at all costs. But as he outlines, when currencies fail to adjust something
else has to give. He insists that the giving come from those who have been
getting.
Given their weak economies and strained
fiscal positions, it should be evident that citizens of Greece, Portugal,
Spain and Italy have been living beyond their means. Their relative
prosperity over the last decade has largely been maintained by the purchasing
power of the euro which itself has been buoyed by the strong German economy.
Rather than forcing Germans, whose savings rates and current account surplus
results from years of fiscal prudence, to lend even more money and suffer
higher inflation so that the southern tier can receive more monetary
stimulus, Dombret argues the citizens of deficit
economies must spend less while working, producing and saving more. In other
words, their living standards must match their productivity.
Economic dynamics do not change with
scale. And as it happens, there is a much bigger and equally flawed currency bloc
in the world than the one Dr. Dombret is seeking to
cure. In that larger bloc, the exact same dynamic of surplus and deficit
nations is playing out within an inflexible monetary straightjacket.
In order to maintain exports and to
manage economic expectations, many nations (most notably China) have
instituted fixed exchange rates between their own currencies and the U.S.
dollar. Although this system is not governed by a formal treaty like the one
that binds the 17-nation eurozone, it has given
rise to a virtual bloc of currencies that are unnaturally tethered, even
while the underlying economics are drifting apart. And although there has
been some recent flexibility from China on exchange rates, there is nearly
universal consensus that these movements would be far more pronounced absent
significant central bank manipulation.
Like the nations of southern Europe, the
United States consumes far more than it produces. But rather than closing the
gap by producing more and consuming less, both have followed a far less
painful path. They have borrowed instead. Who can blame them? After all, it's
far more enjoyable to consume than produce. And as we have seen in many
financial arenas, a borrower will tend to borrow for as long as a lender is willing
to lend, especially if there are no immediate adverse consequences.
Both Germany and China produce more than
they consume. It is from these resulting surpluses that the deficit nations
are borrowing. But these two creditor nations are currently showing different
policy drifts with respect to their hard-earned savings. In Europe, German
leaders are showing increasing reluctance to sacrifice the living standards
of their own citizens to perpetuate an imbalanced economic system. The
Chinese on the other hand appear to heartily encourage such a policy. This
difference can be attributed to their respective political systems. In
Germany, public opinion matters. In China, not so much.
The currency peg of the Yuan against the
dollar, which China has enforced with varying degrees of exactitude over the
past few decades, has helped the Chinese government exert greater influence
over the growth and contours of its economy. But the policy has created
hardships for Chinese citizens (such as disproportionately low rates of
consumption and high rates of inflation). But lacking any means to overtly
influence public policy, Chinese citizens have had little choice but to take
it on the chin. German citizens on the other hand are much freer to voice
their discontent. And in fact, fears of a voter backlash have been
determinative in setting Berlin's agenda.
The question for the global economy is
whether China will become more like Germany, or Germany more like China. From
my perspective the answer is clear. German leaders are unlikely to risk the
scorn of voters by repudiating their cultural aversion to overly
accommodative monetary policy. In China, the decisions will be more
pragmatic. Currently Beijing perceives advantages in the status quo. But
ultimately the costs, in terms of increasing foreign exchange reserves and
rising inflation, may force its hand. When that happens, the United States
and Southern Europe will be in the same boat.
To many, the "Golden Rule" is
an idea that underscores the value of civility and fair dealing. But there is
another, less magnanimous definition: "He who has the gold makes the
rules." In the current global economy, the surplus countries have the
gold and sooner or later we will be living by their rules.
Peter Schiff is CEO
of Euro Pacific Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. To learn more,
please visit www.europacmetals.com or call (888) GOLD-160.
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