Germany: Currency Manipulator & Serial Imbalancer…

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“If a consequence is predictable, can it still be considered ironic when it occurs?”

                                                                         JR Crooks (aka John Ross Crooks III)

Commentary & Analysis

Germany: Currency Manipulator & Serial Imbalancer

Behind the scenes there has been official disgust with Germany at the highest policy levels for years now because of their seeming explicit exploitation of the credit crunch.  While the other big countries did their fair share to provide stimulus—the US, UK, Japan, and China –Germany did their share to make their captive little market called the Eurozone viable enough for German industrialists to get their hooks in deeper to the periphery countries who have seen domestic industry vanish. 

“Nein worry, your local German industrial group is here to help you now that structural reforms we helped fashioned along with our partners in crime: the IMF, ECB, and EU Council—have crushed your economy, make your debt level even more unsustainable.  Gee, aren’t we Germans to magnanimous?” 

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 …wait for it…wait…here’s the punch line…

Saving the euro is about saving the captive market for German industrialists and hitching one’s manufacturing wagon to a cheap currency so your exports to emerging markets can ever so competitive.

The use of the phrase “cheap currency” above is a reference to the fact that if Germany was on the D-mark, then its currency would be relatively much higher in value than the euro is against competing currencies. 

“Because the European Central Bank sets a common short-term interest rate for short-term euro debt and because the Eurozone countries all price their exports and domestic transactions in euros, we have the illusion that they use one currency.  But the truth is that the international rate of exchange of the euro to the dollar and other currencies is an average of the rates of the various national euros.  As such, the euro today is far too strong for the peripheral countries.  Were Italy, for example, to change back to lira in place of euros, it would be a much devalued lira that would greatly facilitate Italian exports while making imports from Germany, for instance, much more expensive.  At the same time, the present euro is much weaker for Germany than would be any new deutsche mark that might replace it.  Thus, Germany exports are being indirectly subsidized and stimulated and German imports inhibited by an artificially and systematically undervalued currency.”

       Clyde Prestowitz, “Germany Is a Stealth Currency Manipulator,” The International Economy

Well, evidently Treasury Secretary Jack Lew and President Barack Obama weren’t happy with what they gleaned from Angela Merkel’s cell phone calls recently—so they aren’t going to take it any more…this is from the Treasury Department’s semi-annual currency report, as reported in the WSJ

"Germany's anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment," Treasury said in its report. "The net result has been a deflationary bias for the euro area as well as for the world economy."

Well, if Germany isn’t a currency manipulator, and I think it is, they can at least be rightly accused of being a serial imbalancer.  [I just made up the phrase “serial imbalancer”…pretty good, eh?]

Here is Black Swan’s diagram of the global rebalancing process which we created a few years ago to help our clients and readers understand what it’s all about.  Notice that Japan has moved from chronic current account balance to deficit territory lately, while German is the big dog of positive current accounts…and most highly dependent on the export model of any industrialized country—much more so than even China.


Source: The Wall Street Journal

Germany’s revenge—the euro is getting cheaper by the second.  The US Treasury’s angst will grow.

But ladies and gentleman this is what you get when governments spend too much time hampering markets.  Maybe the US should lead by example and let Mr. Market clear instead of bitching and moaning about Germany—a key ally it can ill afford to lose at a time of considerable global economic and political angst. 

As discussed in my Currency Currents Shadow Dancer Part II recently, US policy makers cling to QE as an attempt to save the old order—too big to fail banks and crony capitalists—hampering the market and not allowing fresh real growth naturally wash away these global imbalances.  But, our country’s “leadership” is what it is and it ain’t pretty.  So if you can’t do the right thing, do the second best and blame Germany—whether they are guilty or not. 

Should any of us be surprised to learn protectionist sentiment is rising quickly everywhere?  Would it be a stretch to say we are careening quickly toward the 1930’s? 

I don’t think so. 


Jack Crooks

Black Swan Capital