Something fascinating just happened in Germany.
They balanced their fiscal budget.
From a US perspective, as surreal as it might seem, Germany’s government spent less than it brought in in 2014.
That’s right Germans paid more tax than their government spent.
They actually get to pay down their debt with cash, not via the flim-flam of accounting tricks or the stealth QE.
This is the first time for Germany since the 1960’s.
Depending on what numbers you take notice of, Germany could be running $10-20 billion dollar surpluses for the next few years.
Meanwhile the US is stuck with increasing its debt pile by half a trillion or more a year with a debt Himalaya on its way to 20 trillion.
There are a few countries that run surplus fiscal balances, Norway and many middle east oil producers; at least till recently. Switzerland has. Singapore too and a smattering of other outliers.
However, in the main, governments don’t look to their total debt, they look to economic growth, so they can continue to balloon their total debt.
The US and for that matter most of the developed nations look to a rise in GDP to keep their debt to GDP ratio sustainable.
As GDP rises, so they grab more debt to fund and grow the most important thing to all governments: Government.
Most developed world governments take all private sector GDP in taxation leaving scraps for those not in the government system, ie the wealth generators. This means there is little fuel for growth a hard lessons high tax countries learn. This is why growth has been slow to return to the west.
So what is the lesson of Germany for fiscally incontinent countries like the US and most of Europe?
After all Germany is a high tax country, a developed nation and a highly socialized one to boot.
You have to take a hard fiscal line.
If any major developed country can be called austere, it is Germany. It turns out austerity should be a way of life for governments and not regarded as some kind of social disease.
While the so called PIIGS were living it up on credit, Germany wasn’t. When the balloon went up in the Euro crisis Germany wouldn’t agree to US style bailouts. It is still slowing down the ECB’s desire to QE the EU periphery. Germany is economically hard line. German’s hate printing money.
As anyone in debt knows, it is easy to spend money but hard to earn it. Most countries use their credit in the short term to put off the terrible day when austerity becomes the only option.
Germany feels austerity should be the only option anyway.
Make stuff.
If you look at the countries with growth and fast accelerating economies, they make stuff. All companies can’t all be Apple and get obliging foreign serfs to do all their work while they regally keeps all the value. That might work for a bit, but this kind of plutocracy doesn’t usually end well. A revolution comes and the Aristos end up on the block.
IP only gets a country so far. Germany makes stuff. Very clever stuff, like machine tools and fabulous cars. They make them.
Germany is not a hollowed out economy like so many countries of the west. Germany is not forced to create money from liquidating its assets through financial engineering. Remember manufacturing, maybe it was important afterall.
Have a trade surplus or wither away.
Germany exports more than it imports. That’s a simple and powerful form a wealth creation. It was how Japan got to be a major power. It is how China is rising to be the dominant superpower of the future.
A trade deficit means you are getting poorer in terms of the rest of the world.
If a country wants to remain in the top rung of the rich nations it needs to have a trade surplus, otherwise it is going to descend down the rankings. Anyone going to Shanghai or Dubai will note that the future seems to have arrived there already. It is a wakeup call because it has and countries with chronic trade deficits aren’t keeping up. The US and the UK don’t seem to be able to spend less than they earn both on a fiscal or trade basis, it’s a kind of countdown to political and economic mediocrity.
So why should be care or wish for a budget surplus in the US or in other European countries? If governments can stay afloat by matching debt growth with economic growth, why not let it roll on?
It boils down to security, which after all is the purpose of government. A country that saves, saves for the future and country that borrows, borrows from the future.
That future is going to have us in it.
Aesop had it down. While most countries prefer the economic life of the wastrel cricket, Germans will do better with their government following the path of austerity. Then again, you only live once, right?