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Boom in Germany Recalls Titanic’s Last Hurrah

By Rick Ackerman Posted on September 7, 2010, 12:01 am EDT Last Updated September 7, 2010, 3:34 am EDT

[From reader and paid-up subscriber Oliver Fuchs of Munich, we have a very interesting metaphor to explain the seemingly anomalous economic boom now going on in Germany. Is it merely the final, spectacular tipping of a ship about to slide into the deep? Oliver explains why this may be so. RA]

If the global economy is the Titanic, then what is happening in Germany might be the stern rising as the USA “bow” begins to sink. When we read about the grim predictions of Austrian School economists in particular, a Titanic-style crack-up seems like the sort of thing anyone would notice. But the seemingly anomalous business boom in Germany that everyone seems so happy about (and the bankers say — what else? – “Be merry!”), might just be that: a boom/bust cycle bearing down on us like a juggernaut.

Whatever the case, few are voicing concern over troubling signals in this German boom: German sovereign-debt interest rates are falling as if a Fed were causing it, but on free-market action; the Euro is much stronger than anyone had anticipated, considering the PIIGS dilemma and Eastern Europe’s deep economic wallow. German wages haven’t

risen at all, even though booms usually translate quickly into higher wages. And the consumer boom, such as it is, is geared toward safe investments and matters around the house (such as installing those solar panels, etc.). The savings rate keeps climbing although there is hardly any interest being paid, and gold-buying is beginning to explode. Inflation is creeping through the holes via costs for utilities and government services. The employment situation is bright, but that has been going on for a while due to the emerging markets and the famous “Kurzarbeit,” a government-sponsored reduction of working hours to avoid layoffs in a crisis. Construction is also suddenly booming, although absolutely everyone knows the future is “unusually uncertain” at best. All these signals meet the predictions of the Austrian School in perfection.

Exporters ‘Astounded’

It is the investment-goods tier which is the happiest among exporters – and the most astonished. What might be happening is that, in anticipation of a crack-up boom, investors are thinking twice about ordering investment goods (which often necessitate complicated, long-term contracts) in the U.S. dollar realm and specifically in the U.S. realm. Are investment-goods investors and buyers beginning to walk to the other side? Given the steepness of the German-GDP ascent from rock bottom (especially in investment goods) in mind, one might also say they are…fleeing?

If we are indeed sinking bow (USA)-first, this explanation would make disturbing sense. The rise of the stern section, consisting of Germany and other nations with not so much debt and still-functioning economies, should perhaps become an indicator for the wary as the booms gain momentum as it ought, and grows scary at some point.

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  • Deja-vu September 9, 2010, 11:00 pm

    Austrian school? Feh!
    Von Hayek was discredited by events in the 1930s and never again worked as a technical economist, (unlike Keynes, for example).
    And the Austrian school’s recommendations for right now, what are they? No stimulus, that’s for certain. But if we hadn’t had the stimulus, the Titanic would have already sunk.

    DV

  • K. Huller September 9, 2010, 11:30 am

    The photograph raises the question how to steer a ship (a world economy) whose bow is under water and whose rudder is high in the air. Certainly a difficult job, even for the most competent governments and central banks on the globe. This brings us back to the much discussed question whether she will finally run aground on the starboard or on the port side of the channel (in economic terms: end up in a deflationary crash or in hyperinflation).

    Or does the Titanic analogy go so far that she is going to disappear completely in the depths of the ocean of history? What action should crew and passengers take in this case?

  • Keyser Soze September 7, 2010, 11:29 pm

    When the economy tanks, it is confirmation of the “grim predictions of Austrian School economists”. When it stagnates, ditto. Hey, even when an economy is going well, those same grim predictions are being confirmed. Huh? Is this an economic theory or a religion?

  • Chris T. September 7, 2010, 5:25 pm

    The first commentor here may be right from a more absolute point of view, but you clearly do not understand relative appearance or the situation in Germany / Europe in general.

    Because Germany (Europe too) has had growth rates so much less than the US for so long, and a far more intractable unemployment situation also, any change in a “better” direction will look good from the local perspective, when from an absolute one, it would appear minimal, nothing to crow about.
    AND, as you surely must have seen stateside, the powers that be latch onto ANYTHING, however meager, to shout: we’re back.

    Thus, when the German GDP rose by 2.2% in Q2 (however the numbers doctoring may have been to get there), that was the best quarterly rise in many years. Annualized for H1 of 2010, it’s still about 1.95%.
    Thus, from the local perspective, above the norm.
    How real that will turn out to be is the point Oliver was making, and you too, but that is how it prob. feels locally, especially with the goosing happy talk surely going on.

    This will come to an end, because one thing is sure:
    The local German politicians of all stripes have internalized the pan-European, all people are brothers kool-aid to such an extent, that they will do ANYTHING they feel necessary to try and save this utopian edifice EU.
    Even when all other 26 nations will have long ago abandoned that thing not only in deed but in word.
    And they will sacrifice any purported German traits, such as fear of debt, fiscal responsibility, anti-inflationist mind set, etc etc.
    The proof of that was seen during the recent French & German bank bailout, aka Greek bailout. Believing in their ability to actually pull this off (sure misguided) they will waste whatever is left in the country, with everyone else from Dublin to Athens, Lisbon to Tallin, laughing at that stupidity, all the while holding open the outstretched palm for more.

  • Brutlstrudl September 7, 2010, 3:38 pm

    Somebody is going to introduce a redeemable currency. that’l bring an end to this crap

    • Steve September 7, 2010, 6:02 pm

      Your currency awaits everyone at Treasury. The specie money is Legal Tender. The only problem is contract law wherein persons contract to give away their ‘inheritance” via the Law of Escheats making this state the Lord (feudalism versus Liberty). Propaganda works in the jury pool which keeps the individual from using the specie money Dollars and Eagles which are Legal Tender in Trade, a Thing to Tender in Payment of Debts (extinguishment versus discharge). The 9th circuit says that a corporate enfranchisee cannot make ‘use’ of Sovereign Coin and must be taxed at the exchange rate in tally under territorial script federal notes. People do not know the difference between democracy, and a Republic, or that giving up Liberty for a little security is a sin. Nash’s Non Co-operative Game theory works because Congress refuses to fund the legitimate Banks/Trade, and only gives us territorial banks under the Banking Act of 1913.

      You have your Legal Tender silver Specie Coin money. You can write contracts “Bills” in silver specie Coin money Legal Tender from Treasury. One is just going to have to fight to prove he/she inherited the Right to do so, and is not enfranchised to the current democracy outlawry. The problem is not the money, but; education. If public education taught the children the truth there would not be a problem with Trade, or the jury. Right now propaganda WORKS> if the jury does not know the Law and cannot understand Capacity / Character / Identity – well people; we get what we deserve for failing to educate our children and entrusting them to the governments in rebellion.

      The ‘pool’ of slaves/jury will not allow any one individual to obtain liberty via use of silver specie Coin money Legal Tender currently “Struck” by the Mint for the several States.

  • Robert September 7, 2010, 3:36 pm

    “I wonder how long it will be before Brazil starts losing manufacturing business to the US. Things are never quite as they seem.”

    – That’s a great point. we’ve all seen the Baltic Dry Index chart, and the pictures of Asian ports log jammed with cargo ships that have nowhere to go; but has anybody noticed that American railroad traffic has been kicking into high gear the past couple months? All the car dealerships in my neck of the woods still have plenty of vehicles on the lot.

    Now, I’m not portending that a real recovery is underway, but I am reflecting on how there does seem to be adequate supplies of most goods available to meet what little real demand is out there, and downward pricing pressure is being adressed by manufacturing closer to the comsumption point, rather than tacking on enormous fuel charges shipping stuff clear around the world. If there is any form of positive trend development over the next few years, it might just be in the area of what I call “price efficiency”- meaning more robust regional and local market clearing, rather than huge global confabulations where precious fuel is spent shipping a doll clear around the globe just for someone else’s kid to play with.

    • Steve September 7, 2010, 5:44 pm

      Robert, as I remember GM can claim ‘unrealized profits’ on all units out the door and delivered to a dealership (even though not one unit is sold, just sitting on the lot) This is just like GM, and all of corporate America, being able to claim 10% investment gains on their retirement accounts under ‘accounting standards’ even though the accounts lost money. The accounting standards allow any corporation to produce the product, get it shipped, and claim a gross profit line via unrealized profits / net quarterly that is nothing more than smoke and mirrors.

      I know the U.S. assembles lots of foreign parts, like G.M.C. made in China, put together here. It might be a consideration that corporate U.S. is shipping manufactured product here and there so as to be able to put the unrealized profits on the quarterly reports. Once the wonderful quarter over quarter / year to year numbers are released to ‘juice’ the market; accounting can go back and adjust the past quarter making the new quarter really rosy. (do we need to go into how reported profits often end up in officers accounts via options ex post facto) What little I know on accounting is based upon my reality from study of G.M.’s claiming 10% profits on retirement account investment, knowledge of how a local ‘computer company’ worked the books by getting product in trucks for unrealized profits, and first hand knowledge of the house behind me that B. of. A. claims as an asset of 700k with an actual present value under 300k.

    • RTS September 7, 2010, 9:40 pm

      This is a reply to Steve, not Robert:

      Steve, what you’re describing is channel stuffing. It is considered fraudulent under U.S. GAAP to recognize revenues from the “sale” of a product when (assuming all other criteria have been met) it is not likely that the ultimate recipient of said product will tender payment. Earnings revisions of a significant magnitude are not extraordinarily common with respect to one-time gains recognized from prior-quarter channel stuffing (that is not to say that some well known manufacturers – J&J and KO, for example – haven’t engaged in the practice in the past). I know from my experiences auditing that any competent CPA will immediately reverse any gains recognized as unrealizable during the course of a year-end or quarterly review. I can’t be certain as to GM’s use of dealership transfers as a basis for revenue recognition, and your observations may very well be accurate. I simply have trouble believing that any CPA worth his salt would permit GM to recognize revenues on shipments to dealerships that history indicates will be unable to move enough inventory so as to duly compensate GM. There’s no Level III accounting involved in the manufacture and sale of a tangible consumer good, so operating income from the auto division should be relatively transparent when viewed alongside reports issued by financial institutions.

      Of course, none of the above prevents GM from enacting retroactive rebates/discounts, thereby inflating recent gains and future expenses. Such a treatment would still require a prior-period restatement on the basis of materiality alone. I am not pretending that the accounting industry is free from fraud and incompetence (far from it, in fact), but my experience would indicate that most accounting firm partners fear the SEC and PCAOB beyond reason. They clearly aren’t familiar with the treatment received by i-Bank CEOs.

    • Chris T. September 7, 2010, 10:16 pm

      “I simply have trouble believing that any CPA worth his salt would permit GM to recognize”

      Somehow one wants to think you are right:

      BUT–ENRON?

    • Steve September 8, 2010, 2:17 am

      RTS,

      Whatever may be said, the facts in regard to GM are real and well documented. As to a ‘certain’ manufacture in the Portland area – product was placed on trucks, and unrealized profits taken to prop up stock prices for the quarter, sometimes for options sales. The accounting world operates under federal accounting rules mark to mark, mark to market, or whatever is needed to show assets and profits where they do not exist. There are good guys and I am sure you are one. Just the same, the accounting rules now in place would be considered a Fraud under the Common Law – maybe that is why we have Roman Civil Law, and Feudal Law ! I studied GM and their accounting knowing they were coming to an end.

      How does one get an honest accounting from the government ? I could go on an list the ways the books are cooked by the Fed and the accounting rules. But; I suspect you already know the truth.

  • Mark September 7, 2010, 3:20 pm

    Wouldn’t the above-mentioned investment goods buyers want to pay in dollars, in anticipation of the dollars declining value?

  • socrates964 September 7, 2010, 1:12 pm

    Actually, there’s a more prosaic explanation than all the ‘Austrian crack-up boom’ stuff. Americans forget that the US is only 22% of global GDP (probably less by now) and that the rest of the world can get by without it (perhaps not in exuberant US style, but consumption expectations are lower). Besides, Germany actually makes stuff which people want to buy.

    I made some comments about 6-months ago about the Euro being basically sound and they looked none too clever when it was at 1.18, but note how the usual predictions of its collapse have vanished into thin air and now it’s ‘surprisingly strong’.

    No, frankly it’s not that surprising – in fact, I’ll say that I expect at least another leg to 1.40 – basically because Euroland is a relatively closed economy and the real deal is its level of input prices – once gold/oil, etc. start to rise, the Euro will rise too to offset inflation.

    My own take is that there was a struggle going on within the ECB between the French-led pro-devaluation faction and the German anti-inflation faction. The German faction has clearly won, and the reason they have won is probably because of Greece. The enormous bailout package was not to get Greece off the hook but to shore up the banks which had overlent. Hence, not a squeak out of the French, since the deal was ‘we bail out your banks and in return, you shut the **** up”, as well as
    screams of anguish from the street in Athens of the ‘we got the shaft’ variety. Yes, boys you did, but the whole ‘risk of contagion’ was always about the banks in France, Germany, Switz getting dragged over the cliff because their loan portfolio was tied to you. They were bailed out, not Greece. In fact, all the bailout was about was whether the check went straight from the German taxpayer to them or was mailed via Athens.

    There are still problems in Portugal/Spain but I’d bet that they are containable.

    • socrates964 September 7, 2010, 1:19 pm

      As someone who does a lot of business with Germany, one point you may like to ponder is this: the Germans (and the Japanese) are doing a lot of business with a very large emerging economy which you never hear about – the Deep South of the US. Car production has moved from Detroit, but to the un-unionised, low wage, high tax break Deep South – Alabama, Georgia, etc. Everyone has their production down there, and given how expensive Brazil is becoming (since it is run by idiots), I wonder how long it will be before Brazil starts losing manufacturing business to the US.
      Things are never quite as they seem.

  • Lee September 7, 2010, 1:03 pm

    Yes, it could be the German government that is behind the boom, or… it might be such a Titanic situation. One thing for sure, the Titanic did not stay in that position for very long and so such a theory will have to prove itself in short order.

  • Benjamin September 7, 2010, 5:47 am

    ie Because Germany looks comparatively better than the weak to non-existent fundamentals of the U.S. ?

    With everything happening so fast anymore, I’m not really sure what is and what isn’t going on elsewhere. However, I seem to recall that, in wake of the Greek debt crisis, that the Euro plunged. I thought that it would rise right back up in a short time, because…

    The EU would want to avoid a trade war with China, as the EU isn’t in any shape to engage in such a thing. So back up the Euro would go (it has, sort of), with perhaps a resurgence of investment in productive goods.

    “It is the investment-goods tier which is the happiest among exporters – and the most astonished.”

    Except that, if the above quote is correct, my prediction was backwards. I thought the EU/Germany in particular would _import_ more cheaper productive goods from, say, China, while the State attempted to maintain and rebuild a more “solid” EU economy. Not to say a centrally planned and executed economy would work. Just that this would happen.

    Anyway, it is odd that it is the exporters seeing a boom, given the (relative, comparitve) strength of the currency.


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