Déjà Vu All Over Again

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—12/5/11—The inimitable Yogi Berra had it right. Much of life is a tiresome re-run.

Take the Eurozone crisis. It’s a re-visitation of the crisis that devastated the US economy in 2008, which was in many senses a re-visitation of the Great Depression of the 1930s.

A central causal thread in all these crises is a recrudescent mercantilism. Some international economic actors want to sell but are loath to buy, while others are more prone to the opposite and concomitant affliction.

Production is designed for consumption. It is self-evidently impossible to have one without the other.

Yet the immediate interests of producers and consumers do not coincide. Producers want low exchange rates so they can sell cheaply overseas; consumers want high exchange rates, which subsidize imports.

When there was parity between the dollar and the euro, American consumers obviously needed only a dollar to buy what was selling for a euro in the Eurozone. When the dollar fell in worth and Americans had to offer around $1.35 for the same item, they were far less happy and forthcoming purchasers.

But the latter situation suited American producers. At parity, European customers had to earn a euro buy a US product, but at the lower dollar valuation, they had to make only about .75 euro, a circumstance that obviously increased American export potential. Indeed, at the lower dollar valuation, American exporters could even increase prices, denominated in dollars, and still reap sales gains because of the lower euro prices.

And that’s a good part of the story of economic crises.

China wanted to develop rapidly by selling far more than it bought, so it prevented its exchange rate from rising as much as it should have. It did so by restricting domestic consumption and, instead, saving via the purchase of dollar assets. In effect, it offered its main customer, the US, installment finance.

So the Chinese over-emphasis on production caused a fall in US interest rates, which contributed to an explosion in US housing purchases, which resulted in a crash.

It didn’t have to lead to this result. The US could have channeled the Chinese largesse into more productive outlets. But neither US policy nor the US tax system encouraged such an outcome.

In Europe it was and is the Germans who over-emphasize production. So the Germans, champions of production, formed a currency union with a group of countries, many of which champion consumption far more than production. The fact that they are so consumption-oriented has reduced the value of the common currency unit, the euro, relative to what it otherwise would have been. So the Germans do not have to do quite as much work as the Chinese to depress the value of their currency. Greece, Portugal, Spain and Italy are there to pitch in.

But, of course, German exporters to non-euro countries end up as beneficiaries.

It is not clear, however, that German citizenry ends up better off for, just as the Chinese had to pay for their production and export triumphs by buying American debt and thereby subsidizing American consumption, Germans face the prospect of doing the same for the peripheral countries, the alleged profligacy of which has contributed to German production and export success.

It would be pleasant if the never-ending conflicts between production and consumption could be resolved without wrenching crises. It would be pleasant if the Chinese and Germans agreed gradually to raise their consumption and thus reduce their surpluses while Americans and some European countries synchronously pared their deficits.

Pleasant but unlikely.

The monotonous rhyme of history argues not for the euphony of reasoned resolution but for the cacophony of economic dislocation and trade war.