The truth about import export imbalances.

I've been rather quiet on this blog for a few weeks because I've had little to say.  The markets are quietly setting themselves up for eventual collapse as money runs out the back door while the headlines still look for hope.  We got a fancy 330 point rally on the Dow today based on more Wimpy promises from proven liars in Euroland that everything is going to be just fine.  Seriously, how can anyone listen to these pathological liars without vomiting in their Cheerios anymore?  Nobody can say when reality will set in because we want to be lied to.  We beg them to PLEASE lie to us.  At the end of the day, Jack Nicholson was right: "You can't handle the truth", people.  Well, maybe YOU can handle it otherwise you would have stopped reading this blog a long time ago.  But how about your spouse, parents, siblings or friends?  Oh, that's right, you haven't told them about this blog have you...?  You know they can't handle the truth.  After all, giving bad news is such a downer don't you know...

I am more convinced than ever that the stock market is going to collapse.  I see the real action happening in the background while the foreground is being painted a prettier picture.  The global banking system is, for the first time in history, completely bankrupt.  Even China is a dead man walking.  Anything you think you know is likely tainted or just outright wrong, especially if you learned it from the main steam media.  I wish it were not so but I talk to so many people who think they have a clue.  They have strong opinions no matter how uneducated they are.  This is, it seems, an American birthright.  I feel a bit sad for them because they are merely repeating the failed Keynesianism that got us here: "Government should do more.  We would all be OK but government doesn't want to do anything for us".  I used to be angy with them but now I just understand that it is not for everyone to know the truth.  It is not for everyone to survive.  And so they won't.  Economic Darwinism will have its day. 

But enough of all that "pessimistic talk".  In today's lesson I want to explain something that is very simple in concept but almost impossible for economists or politicians to wrap their arms around: the truth about import/export imbalances.  I've written several times about the basic premise that exporting as a sustainable profit mechanism is a scam.  The logic is inescapable and if you are an economist or if you fancy you know better, I challenge you to express your views in the comments section on this post. I do not suppress dissenting views, I welcome them and I promise to be gentle when I rip you to shreds as I respond  ;  ).  But now I want to explain a new insight that I have had regarding how countries find themselves on the losing end of the trade game.  The insight stems from the age old article that any business traveler has read in the magazine found in the airplane seat back pocket by Chester Karrass who states, "You don't get what you deserve, you get what you negotiate."  Side note: amazing, isn't it, how Karrass' photo in those ads hasn't aged at all over the years? 

When I first read that, I blurted out loud "ain't it 'da trut'" as diet Coke from one of those little plastic airplane cups spurted out my nostrils.  How many worthless, soul-less, brainless, visionless, bureaucratic VPs and directors of this and that have I met in my career in high tech?  More than I want to count.  Several of them touted PhDs and other useless sheepskins and intimidation credentials that had propelled them so far beyond anything that the Peter Principle had ever envisioned that it was mind numbing to watch them in action.  Sure, they talk a good game but they are nothing without standing on the shoulders of anyone in range.  If plunked down in the middle of a wilderness they would certainly die of stupidity and the attempted execution of grand but asinine ideas which are their stock in trade.

But I digress.  Back on subject, let's ignore Greece for a minute.  Actually, I think it is safe to ignore Greece forever from a purely economic perspective (drums go Ba Dum Bah).  So let's talk about Spain.  The reason Spain is in debt is because it is running a trade deficit with France and Germany.  Let's keep it simple and just make it between Spain and Germany.  Spain is famous for its apples; Germany for its cars.  When they come together to trade on these things, Germany has negotiated a high value for its cars and Spain a low value for its apples.  Thus, Spain could never have a trade balance with Germany.  Now, if you have ever flown into any major German city you would know how bleak they look from the air.  How much bleaker would they be without Spanish apples?  Said differently, what would Germany do if all the food producers said "F U Hanz; Your cars are nice but food is nicer.  You want food?  We will trade 1 barrel of apples for one Mercedes Benz".

If this sounds simplistic, you still don't get it because this is essentially already happening without the expletive deletives.  Spain and Germany are trading what Spain has to offer for what Germany has to offer.  Spain is offering a load of goods plus some paper markers which are supposedly good for future trade (AKA Euro notes AKA IOUs AKA debt) to Germany in exchange for manufactured goods (symbolized by the Mercedes).  But Spain can never pay off this negotiated debt.  And it's not that Spain doesn't choose to pay off its debt but rather that Spain is mathematically incapable of ever paying off its debt.  Why???  Because it didn't negotiate worth a damn when trading apples for cars!  Chester Karrass where are you??

The only difference between what is happening now and between my scenario is honesty.  The dishonest part of the current situation is that Spain is holding off on the "FU" statement since Germany is accepting the worthless promises to pay later (Euro debt).  Other than that it's exactly the same because the debt they have assumed will never be repaid.  When you factor out the worthless debt, Spain is trading apples for Mercedes straight across.  Since this is the only reality that can ever sustainably exist in the export game (trading goods for goods straight across without the use of debt), Spain needs to hire Karrass to negotiate a better price for apples (and everything else that Spain exports) so that it can just stop using fraudulent debt to balance the trade.  Until then, it needs to stop buying Mercedes and instead should look at the newer models of Kia.  That would bring down the price of Mercedes in a hot hurry because, at the end of the day, sellers don't set the prices in the market place - BUYERS DO.

If this sounds just too easy to be true then contemplate this: what would Germany do if Spain just said "FU, your car prices are just TOO DAMNED HIGH relative to the price of our apples (and other stuff we export).  Keep your cars, Mein Herr.  Germany has ramped car production to meet Spanish (and other PIIG demand).  They took on big time debt to do this.  They need to service that debt.  They cannot live without cash flow any more easily than you or I.  Trust me, the result would be prices on German cars falling faster than tool prices at Harbor Freight during a holiday sale.   OK, well, that is what would happen if Spain voluntarily curtailed its import purchases.  But consider what the outcome would be if Spain were involuntarily forced to cut its import spending because nobody could offer them credit anymore...  this is going to happen and soon.

And now you know why Merkel is so keen on keeping the PIIGS in credit...  It is nothing but a con job to convince Spain that apples are worth nothing compared to cars even though the labor required to bring them to market is the same as that required to build cars (minus the debt from German factory automation of course).