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Who's Worse: Germany or Japan? and PE Looks Iffy
The New Rules of Trade and Interest Rates
Alan Pentz
August 21, 2024
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Let’s dive in…
One of the key New Rules that I’m going to do a lot of posting on is how distorted the global economy has become as the result of trade imbalances. I believe this situation has led to everything from the anti-immigration riots in the UK to the rise of Trump to the rebirth of US industrial policy.
The situation is not sustainable and I believe a major rebalancing of world trade and economies is already underway. How destructive this process is will depend on how the US and other countries respond. But a collapse of China and the breakup of the EU aren’t out of the question.
For decades, we’ve been told that trade is a way to grow the total pie and make everyone richer. In theory that is true. If each country makes what it is best at making and then uses the proceeds of selling those goods or services to buy what other countries are comparatively good at producing, the system balances.
But it’s also true that if some countries choose to exploit that system, trade can become a weapon. If one country subsidizes certain sectors or adopts policies to artificially lower key costs like labor, you get imbalances. In the end, weaponizing your trade as a country will make everyone, including you, poorer but this can go on for a long time.
Going forward, I’m mostly going to write about China’s huge imbalances and how they cause the US to run large budget deficits. But China isn’t the only offender even if it is the largest. See this chart on Germany.
Germany is to the EU what China is to the US - a dagger pointed at the heart of others’ manufacturing. It is the destabilizing country.
It’s amazing anyone thinks this is a good thing. Daniel makes a passing reference to “weak domestic demand”. This means that German workers don’t have the money to buy other countries exports. Competitiveness in this context means poorer German workers.
Between 2003-2005 the German government implemented a series of labor reforms called the Hartz Reforms that brought a large portion of its unemployed back into the labor force by cutting benefits for the unemployed and salaries and protections for the employed.
Take a look at when that light blue area in the chart begins blowing up. This is Germany exporting its unemployment to the rest of the EU through the Hartz Reforms. And when does that blue area peak? Right at the Great Financial Crisis.
While most Americans were distracted with our own problems, I remember the property bubble in Spain, banks collapsing in the UK, and Italian manufacturing getting whipped out.
In previous decades, these smaller economies had a response to German “competitiveness”. They could devalue their currencies and make their exports cheaper to buy and thus equalize their competitiveness with Germany. But this time they couldn’t because they don’t control their own currency anymore. They are now trapped by the Euro.
More on this in the future but Germany having destroyed growth in the EU looks like it’s after its next victim, the US. They want to get in before the Chinese pick all the meat off the bone.
We’re going to have to get serious about these issues if we want to retain any manufacturing capability at all in the US.
Tanner Greer is one of the best writers and thinkers on China. He writes about Xi and China’s drive to export its way to global dominance in every key technology sector. The explicit goal of the policy is win the next war without a shot. No one else will be able to build anything that matters.
He writes:
“Endorsed by President Xi Jinping and popular among Chinese policy elites, this set of ideas argues that there are hinge points to human history. In these rare moments, the Chinese leadership believes, emerging technologies can topple an existing economic order. Grand changes mean grand opportunities: The British Empire and the United States rose to global hegemony because each pioneered a global techno-economic revolution. Now the past repeats. Humanity again finds itself on the precipice of scientific upheaval. The foundations of global economic growth are about to be transformed—and Xi is determined that China will lead this transformation.”
Game on. Let’s hope the economics profession in the US can get its head out of its a@# long enough to understand the stakes.
Bloom Equity Partners write that the private equity industry is suffering from higher interest rates. They are buying fewer companies, exiting from their investments after a longer time, and taking on increasingly riskier forms of debt to get some capital back to investors.
“In an economic landscape marked by high interest rates and heightened volatility, the high cost of capital is reshaping the private equity sector, challenging investors and portfolio companies to adapt to a new reality in which borrowing is more expensive and returns generated through the use of debt financing are more elusive.”
Another of my New Rules is that strategies like private equity that rely on financial engineering and debt will be far less compelling investments over the next several decades.
Keep growing,
Alan
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