Below are some thoughts about global imbalances we’ve been talking about internally for a while now that were recently highlighted by one of the independent economists we subscribe to.   

• The pain (i.e. slowing global growth) will be felt most harshly on the creditor/surplus nations, particularly Germany, China and Japan.  This is perfectly inconsistent with the previous consensus thinking that the prudent and “savings rich” countries are more insulated.  The critical, yet fairly obvious, point missed in that logic is that these countries rely on external demand

• This is similar to the US in the 1930s – the US was the world’s largest creditor nation so it suffered the most as protectionist measures erupted, stifling global trade.  Today the inverse is true (and this explains why the recession in the US in 2007-2009 was milder than Japan, Germany and China…using reconstructed data for China of course who massages their numbers)

• Germany is doubly screwed in this adjustment process.  Not only has their “excess savings” been in vein (meaning they’re still dependent on export/external demand that’s no longer there), but they’re finally going to have to share the costs of the previous boom.  This makes sense however as they benefited greatly by the convergence (of rates under the euro), which created the external demand from Southern Europe that boosted profits of German exporters

• Germany also benefitted from China’s 13% of GDP stimulus in 2009 that cannot be replicated to the same degree

• The market seems to be finally figuring this out…as you can see below, the DAX has collapsed by over 30%