Germany's strength - they save, they invest and they consume

29 Aug 2011 Bloomberg
Thorsten Polleit is German Chief Economist for Barclays Capital in Frankfurt.

Background: Some relief in Germany -- inflation has dropped to 2.4% in August. Some of this is due to the fall in the oil price.


[Presenter - Germany still has a lot of work? What is your concern? What can the government do to give it a boost?]

Germany is still in a favourable position. Employment is at the highest level since the 1990s. In June 41 million people had a job. Also price competiveness of German firms is extremely favourable. The major challenges come from the global economy. A slowdown in global growth would sooner or later of course affect production in Germany.

[Presenter - In terms of what Germany can do, in terms of spending more, a lot of Germans are saving instead of spending. How to Germans make that shift?]

Economic expansion essentially rests on corporate investment, because corporate investment increases the stock of capital. The higher the stock of capital is the higher will be the real income growth [Beautiful!]. And this translates into higher private consumption. This is exactly what has been happening. We expect this process to continue. And with current inflation coming down it should actually translate into higher real disposable income. That should also support private consumption going forward.

[Presenter - Of course the energy prices are bringing some respite to the price pressures we are seeing especially if the ECB is going to keep rates on hold for the near future. Is that going to have an impact on German inflation overall?]

Absolutely. Energy is possibly the most important factor affecting headline inflation. It should actually lead to a moderation in CPI going forward.

[Presenter - You're optimistic about the German economy. Will the German government give a hand to the Eurozone?]

Let me say, but I still think economic expansion in Germany could be 3%. But we have already pencilled in deceleration of economic expansion. But Germany is doing reasonable well. Your second question of rescuing countries -- that remains of course a critical issue. The German Chancellor must be able to muster support. She needs to make her case.

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[MrNChoudhury]

@orthzar

Yours is a theory of fundamental instability of the credit system? More credit leads to under-pricing of credit and over-pricing of capital? I think we can agree this is the cause of all instability.

However if money equals credit - if 'loans make deposits' then monetary targeting *may* be a means to control the mis-pricing itself. No doubt they fail at doing it but that's not to say it can't work.

The question then becomes why it is not possible to make the price series stable.

[orthzar]

@MrNChoudhury

I am not sure I made it clear enough. I have been arguing against price stability, thus I see no possibility for any successful stabilisation of prices.

Because governments operate on taxes, all government market activity necessarily pushes prices into disequilibrium. In particular, government expansion of credit causes both the prices of capital to move above market value and the price of credit to decrease below market value.

[MrNChoudhury]

@orthzar

Absolutely true I couldn't agree more. It's monetary targeting that really determines the success or otherwise of price stability. They can't bring themselves to admit the obvious.

[orthzar]

@DukeofAnarchy Yes, having a stable money supply does make sense if one wants the prices of goods to be determined by the supply+demand of goods. However, market prices seems to never be the goal of any price stabilisation policy. Falling prices is seen as the bane of economic growth, thus price stabilisation involves increasing the money supply through credit expansion to keep prices of goods from falling. Price stabilisation advocates may as well advocate a non-market economy.

[DukeofAnarchy]

@orthzar It depends on whether the change in prices is due to changing supply of/demand for the real goods, or supply of/demand for money. The ideal is to have the monetary side stable, so that changes in the price of a good only reflect real shifts in supply and demand for it.

[orthzar]

I really think I've seen the guest somewhere, and I think I saw him in relation to the Mises Institute.

Also, I think the falling oil prices are good, because that leads to consumers being able to afford more gasoline and other oil-based consumer goods. Thus, a falling price should encourage buying.

I wonder why price stabilisation is ever a good idea. You can't have rising prices and increasing consumption simultaneously, because that is contrary to the laws of supply and demand.