“Germany’s continued prosperity has helped fuel growing anger in countries like Greece and Spain against what is increasingly viewed as harsh German domination. More and more, Germany is cast in the role of villain, whether by protesters in the streets of Athens or by exasperated politicians in the halls at the Group of 20 meetings in Cannes, France.” (link)
This quotes reminds me of a quote of Warren Buffet’s: You have to wait until the tide goes out to find out who is wearing a bathing suit and who is not wearing a bathing suit.
During an extended period of credit inflation like the one experienced by the United States, the UK, and Europe over the past fifty years “success” seems to apply to everybody.
An example I have experienced in my years as a bank executive is the area of residential real estate construction. During this fifty-year period of credit inflation it seemed as if almost everyone and his brother or sister could build houses and become a successful real estate construction executive.
One found out, however, when the credit inflation stopped who was a good builder and who was just coasting along on the inflationary wave and who really built very good houses.
And those that just “put up” houses resented the success of the really good builders and gripped about those that continued to prosper when times were not so lush.
We are seeing this shake out in Europe these days as Germany, known for the discipline of its people and the work ethic embedded within the society, continues to prosper with a relatively healthy economy and a strong export component of its Gross Domestic Product.
“When the tide goes out” there is a higher probability that the hard working and disciplined nation will come out on top. And, we are seeing that in the case of the eurozone.
The difficulty in maintaining that discipline and commitment to hard work is that during the period of credit inflation you see other nations getting by with a lot less discipline and a lot less work. It is very easy during this time period to reflect on the fact that the others are getting by much more cheaply and are still doing pretty well. And, the move to the “easy side” does not have to come all at once…it is easy to give up a little here and a little there…and slide, incrementally into the opposite pattern.
One can think of the comment by former Citigroup Chairman and CEO “Chuck” Prince who famously said that one must keep dancing as long as the music is playing.
As long as the period of credit inflation continues, increased risk taking, increased financial leverage, and increased interest rate risk taking pays off. Financial betting also pays as manufacturing firms, like General Motors and General Electric, reduce their focus on production and increasingly become financial companies.
Some nations and some corporations do maintain their discipline during these times and although they indulge in the credit inflation game, they control their risk exposure so that once the “dancing” stops, they can maintain their position and continue to prosper. JPMorganChase is an example of this. Also, there were a number of manufacturing companies that did not “over indulge” in the financial frenzy created by their governments. These companies now are sitting on piles of cash, buying back their stock or engaging in a very “ripe” acquisition market.
During such an extended time, one cannot totally ignore the environment of credit inflation that has been created. The task is not to be overcome by the exuberance and excesses of the time, and maintain and control the exposure of the nation or corporation to the environment and incentives that has been created by the economic policies of the other governments and corporations.
There is no question that this is a very hard thing to do. Yet, that is what the ultimate winners do! Super Bowl champions are invariably built on strong defenses with a good offense. The winners do not often come from teams that are just built to score a lot of points. Companies that continually push the edge of financial leverage and risk-taking to gain a few more basis points for their return on equity do not survive over the longer-run.
When the bubble bursts, as it has done now, those that have maintained their discipline throughout the “loose” times are the ones that are usually left to dictate the terms of the future, whether it be the future of nations, or, the future of industries. And, those that achieve that dominate position are not liked, are resented, and are only grudgingly followed.
“As the overall health of Germany’s economy and its fiscal position widen the rift with Europe’s poorer periphery, Germans have a ready response. They say that they already made the structural changes in work-force rules and pension reforms that they are now recommending for the slow-growth countries, and that, by the way, they actually pay their taxes. So if the laggards want Germany’s money, they have to play by German rules.”
This is hard-nose stuff! And, it seems heartless to those that have to go though the “wrenching” economic changes that are being proposed for the “laggards”. For, what about those people who were just “unlucky” and were in the wrong spot at the wrong time. And, what about the “disadvantaged” that had nothing to do with the regime of credit inflation? Just saying that the governments should have been thinking about these people when they went on their credit inflation binge is not very satisfying to these people.
Yet, nations…and corporations…and people…that control their excesses and remain disciplined over time have a better track record than those that don’t. The loss of control and the loss of discipline seem to come when nations…and corporations…and people…become short-sighted and think that they can continuously maintain short-term gains over the longer-haul.
But, the philosophy that we should not worry about the longer-haul because “in the long-run we are all dead” is not pragmatic…either for us…or for those coming after us. The long-run does come about…and we pay…and we may pay a lot…if we have just focused on the “highs” we get from short-term excesses.
The United States, the UK, and Europe are all paying for the excesses of the credit inflation of the past. The question that remains to be answered is whether or not these excesses will be corrected in the near term. Others…China…Russia…Brazil…India…and others…are waiting to see what happens.
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