Merkel 1, Bernanke 0

With the G20 Summit taking place this week outside Seoul, global trade imbalances and differing responses to the global recession have again taken center stage. In this piece over at The Daily Capitalist, Jeff Harding revisits the March 2009 G20 Summit, and the rift between Germany (led by German Chancellor Angela Merkel) and the United States (led by Tim Geithner and Ben Bernanke) that developed.

Harding finds that Merkel (and Germany) is the clear winner so far. Citing his own post from August 2009 (and quoting Merkel), he writes:

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”

[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”

Essentially, Bernanke and the Fed elected to repeat the financial mistakes of 9/11, and to do the same thing all over again. Merkel and Germany did not, choosing instead to lower taxes and cut government spending, essentially rolling back government stimulus and encouraging private investment instead. They took their medicine and pressed the "reset" button. Now, while the U.S. struggles with anemic growth, Germany is set to grow at a robust 3.4% rate this year. Their recovery seems to be well under way, even while we continue to flounder.

Propping up demand with stimulus, perverting the market, playing "extend and pretend", hiding bad debts in various vehicles, and shifting around assets on the merry-go-round is silly. It delays the inevitable, and confuses market participants. The Fed and the Obama administration have elected to inflate asset prices, rather than letting them find their proper level. This approach encourages speculation and risk-taking, NOT capital investment and sustainable economic growth. We've got it wrong, and Germany has it right.

True, Germany's robust growth comes at least partially on the back of other governments' pedal-to-the-metal stimulus, but that's even more of an indictment of U.S. policies. Our government ramps up spending, engages in massive stimulus, inflates the debt, and our economy continues to flounder while Germany enjoys the spoils. That's a problem. We need a better and more comprehensive tax policy (to avoid more Googles), and we must also (carefully) remove the stool of government spending-based stimulus. As long as the government insists on creating artificial demand, there will be little incentive for American businesses to invest in sustainable growth, and Germany's economy will continue to lap ours.

[The Daily Capitalist]