vendredi 30 septembre 2011

The good germans don't always tell the truth...

Much has been said already about how the markets and therefore, savage capitalism rules the world. Almost none, about political nonsense blaming on the markets when confronted to their decisions. By not talking clear to their constituents, politicians are playing a 'no winner' game, which isn't the same as a draw. Whether moral or not, markets don't risk a penny if they will lose it. Political flaw works in the opposite way. Politicians will risk with populism, when losing. The ethical movements of our politicians can be questioned, but democracy is not always a reasonable output. Voters are willing to support nonsense as long as this nonsense never becomes real. Our politicians democratic transactions need to examined by truth and nothing but the truth.

State of the World's economy (US, Japan, UK and the EU)

The current financial position (private and public indebtedness, fiscal balance, trade balance, savings rate) of the European Union (EU) is much better than any of its major partners. Therefore, why prospects are so bad? The potential growth of the european economy to pay off its debts, maintain a sustainable health of public finances (high cost of unemployment and social security), pursing trade surplus that will secure current european wealth is unclear. Investors are pushing for single markets rules such as fiscal union with single european VAT, corporations tax rate and labour code, which needed to be implemented as the Euro was introduced.

German contribution to the European Financial Stability Facility (EFSF)

Together with neighboring France (both AAA debt issuers), they make up for 47% of the total fund liabilities. The effective interest rate to which the fund is borrowing from the markets nears Germany's borrowing interest rate (at lowest in history). The fund (rated AAA by major credit agencies), will rescue european States unable to finance themselves at the markets. Currently, Ireland and Portugal are among countries rescued under this financial facility programme (Greece has been bailout under another financial programme that includes the EU and the IMF). To be able to lend the fund needs to borrow as low as possible. Austria, the Netherlands and Finland may add credibility to the fund but with their low stakes they aren't dissuasive. Moreover, two big AAA countries with deep influential markets like Germany and France are in need and while French banks credibility struggles at the markets risking France's AAA rate with them (France will have to bail out its Banks), German contribution to the fund is the only credible source for the markets. To dismiss current debate in Germany as 'simply german greed' denotes a lack of understanding on how financial markets work. Germany is risking its AAA rate, will have eventually to bail out its banks (again) and already has a higher debt in proportion to its GPD (over 82%). Therefore, germans need to decide, whether they want to be Europe's paymaster or not? But why are we here?

GDP or Y = C + I + G + (X - M)

Y represents a country's total gross domestic product (GDP) or its income. C stands for consumption of individuals, I equals the total investment in the country (public and private), G represents the net position of government (taxes vs expenditures) and its trade balance (X for exports vs M for imports).

One can lie in politics but in math, it is not that easy. Because most of Germany's income comes from trade balance (Exports), Germany needs healthy financial customers that will pay off for its high quality goods. About 65% of all german goods are sold in the European Union, establishing that a disruption inside the Union will have direct consequences on german companies. This is partially true but for different reasons. The hard truth is that politicians in Germany have been playing “the jobs card” to actually cut middle class salaries, benefits and therefore, inflating company balances, big managers salaries and DAX profits. If Germany is exporting more than ever, its workers are earning less than ever (discounting inflation real salaries are at 1991 levels), government is asking for less corporate tax; what are companies doing with their export income? Just sticking it on rich shareholders pockets while export jobs represent less than 18% of total employment.

After the Hartz reforms, DAX dividends (pay out to shareholders) together with profits has soared to levels never seeing before in the German Federal Republic. The corporate tax rate together with the effective corporate tax rate (what companies really pay after discounting credits and exemptions) has been at its lowest since the foundation of the Federal Republic in 1949. In the meantime, poorly paid jobs have flourished together with the amount of workers applying for government assistance because their wages are too low to live from.

Politicians are responsible for decisions like: reaching poverty line salaries, no federal minimum wage, low company taxes, higher profits, higher dividends, rising inequality and rising poverty.

Living in a deflationary world

The culture of 'low and cheap' has arrived to stay. Politicians convinced by the idea that 'tax credits and exemptions' (less State revenue) together with lower social charges for employers and low workers salaries would push costs down and therefore, boost economic activity is flaw because german economic activity is directly attached to its partners performance. In 2008 as global trade collapsed, Germany saw its GPD shrink by 5% (higher pace since the WWII). In the meantime, politicians were 'rescuing' regional banks (Landesbanken) well-fed with subprime mortgages that added up 15% in debt to GPD. The german economy is a reflection of global demand: as world trade grows, German exports rise not so workers wage.

Politically flaw and intellectually dishonest

Under this 'deflationary world scheme' a worker's salary is considered a 'company cost'. But does it? Of course not. A worker's salary is its capacity to buy (purchasing power), acquire goods and services available in the markets. Therefore, higher salaries (increase demand) mean higher consumption (increase profit). Increase demand and increased profit, means companies can put more money into the bank, pay their staff more and pay dividends to shareholders. Why not in Germany? Because politicians would have to confront their own lie: 1.export policy means salaries won't rise at parity with economic activity. If the wages of the neighbors ain't rising, yours can't rise either. 2.Export jobs which account for almost 18% of all jobs are ruling over the rest because companies not only finance campaigns but lobbies for friendly laws. 3.Inequality will continue growing because workers aren't shareholders and therefore, aren't profiting from 'export gains'. The workers will continue to pay (working for less) and the shareholders will continue to profit. 4.Most german workers can't buy their own products and moreover, you aren't in charge of your future.

Good Europeans vs Bad Europeans

While politicians labeled countries and their citizens as good and bad based on economic premisses (debt, deficit, indebtedness, trade balance) they failed to come up with the truth. In 2003 while Ireland and Spain where among the outstanding countries fully complying with the Maastricht Treaty, Germany and France asked for 'relaxed conditions' breaking up the rules for the first time. Who was bad back in 2003 or who's lying now? On past August, politicians of the two countries proposed a 'true economic government'. Certainly, we have only hear one part of the story and there's much to be say.

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