Some time ago, I came across this European Voice article by Adair Turner, senior fellow at the Institute for New Economic Thinking and at the centre for financial studies in Frankfurt. He argues that German growth has been fuelled by foreign demand, which itself is fuelled by cheap credit.
The first thing that struck me was the clearly English name at a German institute. So I had a look around. If are from the British Isles and the name sounds familiar it’s because you may know him as Baron Turner of Ecchinswel, member of the UK’s Financial Policy Committee, Chairman of the Financial Services Authority at the time of its abolition in March 2013, previously of the Confederation of British Business (1995-99). What’s the Institute for New Economic Thinking? It’s George Soros’ think tank, which he created after the financial crisis. It is not actually German at all. It’s head-quartered in New York, but probably has offices around the globe. It even has its own youtube channel.
Here’s what the article has to say:
With recent data showing that German exports fell 5.8% from July to August, and that industrial production shrank by 4%, it has become clear that the country’s unsustainable credit-fuelled expansion is ending. But frugal Germans typically do not see it that way. After all, German household and company debt has fallen as a share of gross domestic product (GDP) for 15 years, and public debt, too, is now on a downward path. “What credit-fuelled expansion?” they might ask.
He argues, that credit growth was private and international, characterised by countries running Current Account (CA) deficits, not by domestic German consumers. It was abnormal and effectively a consumption bubble, which popped during the financial and sovereign debt crises, transiting from the private to the public sectors. The author concludes that
We need to stimulate growth and increase inflation without generating higher private or public leverage. The only way to do that is to run increased fiscal deficits, permanently financed by central-bank money. Otherwise, the world will either become mired in deflation and slow growth, or will need to accept further increases in leverage – thereby simply postponing the problem and making it still more intractable. The end of Germany’s credit-fuelled expansion has now made that choice clear.
The author is effectively saying that the Euro-Zone needs governments to run deficits financed through seignoriage in order to return to growth and replace private debt bubbles. Do you agree with this conclusion? I’m pretty confident I don’t. Here’s why.