A very old friend who is a financial journalist of some 50+ years standing comments thus on the ‘crisis’:

For years apologists for poorly-performing economies have argued that the outperformers such as China and Germany are just as much to blame for the fundamental imbalance in world trade because they depress their consumer demand and so save too much.

That’s equating the thrifty with the profligate, which is outrageous. If the over-spenders curbed their excesses, that would slash demand for the exports of the trade-surplus countries and bring the system back into balance.

One important reason why the Germans, for example, are unable to stimulate their domestic demand is that its consumers, who already enjoy high living standards, are unwilling to indulge in the spending sprees fuelled by personal debt that have distorted and disfigured the US and UK economies.

The latest example of seeking to blame those who stick with the virtues of thrifty behaviour is the accusation that the Germans are responsible for the imbalances within the Eurozone, where the Club Med countries have been able to develop big foreign trade deficits without suffering any run on their currency that would force them to act to curb the deficits.

I have to disagree. There are two quite separate issues involved.

Let us take Germany first.

Germany has quite properly pursued its own national interests, as do all countries.

It has one of the strongest, efficient and prosperous industrial economies in the world. The Club Med has been increasingly unable to compete. Germany has held back wages and increased efficiency. But according to Dumas and Choyleva of Lombard Street Research, most of the proceeds were invested where there was no consumer stimulus (including Greek bonds and sub-primes); not enough money found its way back to the people for them  to spend on consumer-goods so an imbalance between the supply side and the demand side increased.

In a normal market situation, corrections would have taken place – the DM would have strengthened to reduce the imbalance with other economies. But in the ‘one size fits all’ Eurozone, this was not possible. The effect was that Germany was able to forge ahead on artificially cheap money.

This would not have caused a crisis on its own.

But this cheap money encouraged the Greeks to go on a spending spree effectively with other people’s money by borrowing exorbitantly to finance an unaffordable life-style, just like so many individuals throughout the West who led the good life on the proceeds of mortgage refinancing and credit cards until the ceiling fell in. Well, they would, wouldn’t they?

In Spain and Ireland, cheap money enabled banks and developers to create a huge and unsustainable property bubble while their governments stood helpless, unable to impose the corrective mechanisms through interest rate control because they had none.

The cause of the crisis was neither Herman the German nor Zorba the Greek.

It was the Euro.

I will return to China anon.