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A future without debts? Capitalism is but a chain letter

First part of a translation of a very interesting essay on the concept of “debt” by Wolfgang Uchatius published in “Die Zeit” on  12/10/2012

Euro crisis: they have the debts – we, the profits

Do the profligate southern european countries put our wealth in danger? You must be joking .We, germans, owe them our affluence. An essay.

Three hundred people sit in the Saarbrücker congress hall and watch a shining image some metres high on a screen. It shows a smiling woman with short hair surrounded by  happy children. At the bottom of the image there´s a short, concise sentence. The people in the hall look at the woman, at the children. They read the words, they whisper  and nodd. They like the sentence.

They are officials of the CDU (Christian Democratic Union) in Saarland, one of the german federal states, the majority of them leaders of local branches , who have gathered together this 6th of february 2012. They are here in order to raise hope. There are only a few days left for the election day. Annegret Kramp-Karrenbauer, the woman on the screen, is the current CDU prime minister of the Saarland and lags behind in the polls.

The party heads have therefore designed a new campaign. The sentence on the screen is part of it. In the days to come it´s going to be displayed in the CDU election posters in Saarland. Kramp-Karrenbauer will speak it loud from speaker´s platforms and in front of TV cameras and microphones from Radio stations.

The sentence says: “I want a future without debts”

Eight weeks after  Annegret Kramp-Karrenbauer won the elections by a surprisingly wide margin. Once the elections campaign was finished, the sentence mentioning the debts spread itself in the next months occasionally in a quite different shape. The CDU top candidate in Schleswig-Holstein co-opted it. The “Junge Union” (the joint youth organisation of the two conservative German political parties CDU and CSU) in Berlin and the FDP Parliamentary group did the same.

They all want a future without debts.

We may well see the sentence sticking to columns and walls in the coming year before the federal elections. Election posters are also a mirror of what people wish. Debts were not wished in the past neither but never before has the word sound so threatening: the debts of  Greeks, Italians , Spaniards threaten our wealth and the fear of a great default spreads itself like the fear of a nuclear war used to do once.

Future without debts: one reads that and thinks about his own country, wondering that nothing of the like that has happened to Greece-where again last week flash grenades and Molotov cocktails were being flung- should ever happen to Germany. One thinks about his own children wondering that they shoudn´t grow with a financial burden on their shoulders. One thinks about his own small welfare, his new car for example, and wonders that oneself has worked hard for it instead of playing with credit.

One fails, in any case, to think about the Leopard 2

The Leopard 2 is a tank produced by the german company Krauss-Maffei Wegmann. It can crossed 4 mt. deep rivers and run at a speed of 70 Km/h. It can also shoot. It´s regarded as the best tank in the world.

Four years ago Krauss-Maffei Wegmann sold 170 models of the Leopard tank to a european partner and cashed in 1,7 MM €. That´s about one and a half times more than the company´s  normal annual turnover.The purchaser was Greece. It was  already then clear that Greece would finance the purchase with debt but nobody seemed to show any interest for that. A lot of money was flowing into Germany, that was the main thing.

The crisis- stricken countries have transferred a lot of money to VW, Daimler, BMW.

A great deal of money arrived here in the last years, not only from Greece but from Italy, Spain, Portugal. Italians for example bought annually about 450.000 german cars before the beginning of the crisis , Spaniards around 330.000 , Greeks and Portuguese 50.000 each one. Almost each fourth car that the germans sold abroad at that time was shipped to the today crisis stricken countries. Those countries, from which today is said they don´t know how to manage their money, transferred a lot of money to VW, Daimler and BMW.

This money didn´t stay in the  companies headquarters  but went on to suppliers and service companies of the german car industry, it transformed itself in the wages of german assembly line workers, in the salary of german managers, in the dividends paid to german shareholders.

Without them knowing it some german citizens may have been paying their rental, or their holiday trips or their new smartphones with money from the south. Others may have bought a new car.

A few weeks ago the following information was reported by news agencies:  the size of the cars that germans are buying has never been so big. Underground and multi-storey  carpark  operators have difficulties: there´s not enough space for such ample  four-by-fours and family vans.

There are, in contrast, more jobs in Germany than ever before. The export boom has produced a second, smaller economic miracle. One could say it has come to happen what the political parties were for a long time promising.

“More growth, more jobs” it could be seen in a CDU election poster before the 2005 federal elections

“Jobs, jobs, jobs” repeated the SPD

“Anything  likely to produce jobs is also social” said the FPD

If jobs  thus were created through money arriving from the south what is then going to happen if Greeks, Spaniards, Italians and Portuguese start saving and paying back their old debts instead of raising new credits?

And the same question goes for the Americans, French and Brits, who in the last years have piled a great amount of liabilities in order to purchase german products. What, if they also start saving?

That would mean a future without debts. But it would also mean a future full of german cars remaining unbought outside the factories. It would mean a future where german factories would be firing their workers. It would mean a future where german children would not indeed have to be held liable for the money  half Europe owes Germany, but in return they would have to finance their needy work –and- pensionless parents.

The wish for less debts and the wish for more jobs are clearly not in accord, Not immediately perhaps, not at a first glance, but if one looks  carefully enough there does seem to be a way out. Mrs. Merkel believes that she knows it.

On the 3rd of April of this year Mrs. Merkel stepped up to the speaker´s desk at the faculty of law of the Karls- Universität in Prague. Here, where 664 years ago german  students acquired for the first time the knowledge of the world, she was meant to hold a speech about “ The future shape of Europe”

Merkel talked about socialism, which she experienced first-hand and which is now something of the past. She spoke about european ideals, peace, freedom, justice and then she switched to the debt crisis.

She said: “I´d like us to think of this crisis as an opportunity” She said “Obviously growth is the issue but not growth through credit”

It´s not clear whether Merkel used her sentences as a warning to the southern European countries or whether she was conscious that also the german economy has grown through credit although the borrowers of money were just not the germans.

What is sure is that she drew a conclusion that is so simple as convincing: if credit is bad and growth is good, then what we need in the future is growth without credit. Thus a future without debts but with job creation.

The nice german economy miracle has anyhow relied on nothing but credit.

Merkel has said such things more than once, particularly before parliament. She has omitted thereafter the reference to socialism, in turn she has further explained her standpoint regarding economic growth. Se has found a term for what she has in mind: sustainable growth.

The term comes from the environmental debate. Sustainable growth referred originally to wealth growth in times of enviromental crisis. To become richer without burning oil and cutting down rain forests. The term stood for that.

Angela Merkel transferred the concept to the financial realm. Wealth must grow, jobs must be created, without people incurring debt. That was what the chancellor meant by “sustainable growth”. “ Robust finances are the essential underlying condition” she said in a newspaper interview.

Robust finances, that is: no gambling banks, no profligate governments, no consumers thinking their credit card is a money bin.

When conservationists talk about sustainable growth, they are talking about science fiction. No country has become rich without burning gas, oil, or coal. There´s no wealth growth without enviromental crisis. Wealth growth without economic crisis in contrast has ensued more than once. In West  Germany for instance, in a particularly barren area, in which the air is always a few degrees colder than in the rest of the country.

Up there in the Swabian mountains  women  pulled their handcarts to wretched vegetable fields. Men search for work anywhere and families were happy if in the evening there were some cooked turnips in the plate. Otherwise there would be nettle soup for dinner.

Some years later steaks and Swabian pockets (homemade pasta squares) replaced vegetables. Shiny cars were parked in front of house doors, homes were redeemed. Prosperity increased evenly and crisis-free. The economic miracle ensued over the republic.

How did it come to happen? Who was responsible for it?

The germans and their qualities, it goes without saying, above all their economy. Gemans don´t incur debts, the swabians, least of all.

That´s the secret of the post war german economic miracle according to the way it was portrayed on innumerable occasions in newspaper articles, novels and political speeches. It could even be heard coming out of the radio loudspeakers. Hit singer Ralf Bendix sang in 1964:

Work!, Work!, Build up the small house!,

Keep your eyes from the lass.

And when our house is built

We won´t rest that long

Because we´ve got to save, we´ve got to save

To buy the billy goat and the cow.

About 45 years later and as if she had this song in her mind Angela Merkel said – in a speech she held  this time at the CDU Party congress in Stuttgart- that the crisis could have been easily avoided. “One should only have asked the swabian housewife and her wordly wisdom would have answered: one can´t live beyond its means for an extended period of time”

Merkel prodices an opposition between an ominous present full of defaults and a cosy past without debts, when the euro didn´t exist and the german mark had a powerful protector: the german central bank.

But precisely in its archives there are documents that tell us a different story. They show spreadsheets, charts, numbers of the so called current-account balance. It follows  from this that  the present and  the past look very much the same. Already back then a big part of the jobs that were created in Germany arose from payments made by foreign countries. Already back then neighbours in Europe purchased german goods on a large scale. Already back then they financed their purchases through credit.

It was very much like today. One could even say that everything began back then.

The german economic miracle was fundamentally growth through credit. This sounds as a sudden revelation of a well hidden secret. In reality it is just the opposite. A commonplace. Of course that growth stemmed  from credit. It has always been so. There´s no alternative.

In order to understand this we should begin by setting the following scenario. Let´s imagine that in Germany there´s only one company that produces, say, soup.

Let´s assume that the company has a start-up capital of 500.000 €. This money is used to pay its workers and employees and to manufacture the soup. The workers spent their wages in consumption, they need to eat. The 500.000 € flow back thus to the soup company and the circular flow of income is closed. And soon after that the company.

Such a company doesn´t last long. Revenues: 500.000 €, expenses: 500.000 €, this means: no profit for the owners, no pay rise for the workers, no economic miracle. Wealth fails to appear. Poverty for everyone.

In order for economy to grow and wealth to thrive, the company´s revenues must be higher than its expenses. The 500.000 € that flow between the company and its workers should grow into 600.000 €. But how can money be transformed in more money?

That is the key question about capitalism, the main enigma of market economy. Karl Marx already wrote in the second volume of “Das Kapital” published in 1885: “How can the whole of the capitalist class withdraw invariably 600 £ from circulation when it invariably throws in only 500 £ ?”

Yes, how?

Marx tackled unsuccessfully the problem for a long time. It was the Austrian economist Joseph Schumpeter who years later would find the answer: in 1926 he wrote that the talented entrepreneur “rides on credit toward success”. In other words:  the economy grows only when someone takes up a loan.

Our soup company or another one could be that borrower. Let´s imagine  a company that produces bread and borrows 100.000 € to pay its workers. The german consumers have therefore 600.000 € at their disposal, this amount will flow back to the companies. The soup company records now gains, the germans may now add bread to their soup meal, the economy grows, but it won´t last long because the bread manufacturer is soon on the brink of bankruptcy.

600.000 € are not enough to rise its revenues above its expenses. In order for the economy to keep on growing there is need for more money. Where is it going to come from?

Someone has to take up another loan. Either one of our two companies or a newly created third one.

This is the way in fact in which the german economy grew after the war: firms borrowed money. “ The industry of the miracle land is more indebted than its foreign competitors”, reported the newsmagazine “Der Spiegel” in 1962

  1. Manfred Nolte
    noviembre 2, 2012 en 12:37 am

    Q Luis
    Estupendo ensayo de Wolfgang Uchatius ponderando el lado amable del credito en el flujo circular de la economia. El problema surge cuando alguien un día se pone nervioso y piensa si un pais como España, Grecia o Portugal va a repagar su deuda, rompiendo el valor entendido de que si la deuda flotante se consolida nunca pasa nada. De ahí la problemática de los desajustes exteriores, habiendo consenso de que tanto paises deficitarios como superavitarios tienen que contribuir a unos desequilibrios ‘razonables’ sin saberse muy bien cual es ese nivel de equilibrio.
    Paradójicamente las deudas que financian las importaciones del sur luego son a su vez refinanciadas por los grandes sistemas de compensación (Target2) y la posición exterior que los países centrales tienen en Balanza de capitales superavitaria. Mientras no se pida la cancelación de los saldos la vida sigue…
    Con lo cual llegamos a la conclusión de lo importante que es el mundo de las convenciones y de la sicología en el entramado económico.
    Un saludo

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