From the desk of Peter Blatt
Recently President Obama made a statement that he wants the United States economy to mirror Germany’s. This statement raises a lot of why, who, what, and where questions. What makes Germany’s economy better than ours? Who is making Germany’s economy flourish? Where are they getting the money from? Why isn’t our economy as strong as Germany? Why is our economy not stronger than Germany’s? Just a few years ago we were calling Germany “the sick man of Europe,” now they have the fifth largest economy in the world. To understand Germany’s success we must first understand how the economy works.
(An Aside, at Blatt Financial Group, we hire a yearly summer intern. Our intern, Leah Avni, shows great promise and wanted to provide the research for this week’s Blatt Watch. It is important to understand the strength of the American youth and see that this is how we as American’s can compete globally. Thank you Leah Avni for the rewrites and the excellent research.)
There are many aspects of what makes up an economy. We will be focusing on three important ones: debt, gross domestic product (GDP), and exports.
- Debt has many different ways of being handled, or not.
- A GDP is an economic indicator that measures the total country’s output, including what the people and business’ produce.
- Exports are when articles or commodities are sold abroad.
Germany is a part of the European Union. The European Union establishes a common market for its 27 members. With these terms we can begin now to understand the difference between the US and Germany’s economy.
The United States’ debt stands, as of right now, at more than $16 trillion. Nearly two-thirds of the debt belongs to the people, businesses, and foreign governments that bought our treasury bills notes and bonds (also known as public debt). The government owns the rest and is held as Government Accountant securities. We have the largest single country debt in the world.
How did the United States get such a large debt? Well for one thing, since we are Japan and China’s largest customers we are allowed to run a huge tab so we can keep buying exports. With the dollar’s value diminishing, the foreign countries that hold a part in our debt are starting to invest in their own economy instead of ours because they do not want to be paid in worthless dollars. Other contributors are tax cuts, the economic stimulus package, and the $800 billion spending on the military. Those are not the only contributors: the War on Terror and bank bailouts also increased our debt.
As a result, the national debt, the debt as a percent of GDP, has made the debt-to-GDP ratio greater than 100%. This means that we are not making enough a year to cover our debt which will keeps accumulating over the years if we cannot get higher revenue or decrease expenses. To try to prevent the United States from accumulating more debt, the government has implicated a debt ceiling; a debt ceiling is a set amount of debt that the United States can have at any given point. The debt ceiling has been raised a couple of times; the most recent was during the Fiscal Cliff crisis. The government also issued a sequestration which cut funding from the military to Meals on Wheels. But even with a debt ceiling and budget cuts, the US Government cannot stop the United States from accumulating debt. For now, America’s debt keeps going up.
Germany’s debt is only $2.4 trillion. But if Germany keeps soaking up Europe’s debt they will have another financial crisis. With the Euro-Zone in crisis, Germany could be the next country to go into bankruptcy. Because Germany’s economy depends on the global economy, their economy could go broke. Germany did many bailouts with countries such as Greece which has affected them. These bailouts have affected Germany’s banks and exports. Germany has two choices; let the Euro-Zone go bankrupt or bailout the Euro-Zone. Both choices will cost billions of dollars with no clear positive result.
A GDP has many factors: government spending, personal consumption expenditures, and business spending. There are many different types of GDPs. There is nominal, capita, and real. A nominal is the raw measurement that leaves prices increased in the estimate. GDP per capita is the GDP compared to other countries. This system keeps in mind that other countries may have more economic output because they have a bigger population than other countries. Real GDP compares the GDPs from year to year. Real GDP takes out the effects of inflation so it can tell you how much prices have changed throughout the year. Investors like to see what the GDP is in America and other countries so they can see which economy is doing better so they can invest in the best company.
In 2012, America’s GDP was over $16 trillion, while Germany’s was over $3 trillion. Germany’s GDP has been doing well for the last few years. However, with the Euro-Zone in crisis, Germany is losing money.
The US is the third largest exporter, after the European Union and China. The US made over $4 trillion in trade with foreign countries. The US made a little over $2 trillion in exports and close to $3 trillion in imports. The US exports items ranging from aircrafts, to medical equipment, to fuel oil, to automobiles. American’s problem is, we import more than we export, thus increasing the trade deficit. In 2012, our trade deficit was over $530 billion – in 2011, it was over $550 billion, which does show improvement. Though slowly improving, the US economy is still in bad shape due to our huge deficit-money owed. At one point, American goods were cheap to Europe so the US exported a lot from 2001-2007 which promoted competitiveness in the US. When the recession hit in 2008, the competitiveness declined. The countries the US is borrowing from are also the countries they are buying from. The US has a huge tab. When the day comes that the countries ask to be repaid, the US might
not be able to. Also the trade deficit has lowered the US competitiveness. More jobs are being outsourced and factories are closing down. When was the last time you saw a pencil saying “Made in America”?
Germany’s major exports include textiles, vehicles, and chemicals. Germany’s exports have also fallen. Germany’s economic strength comes from exporting, and with not a lot of money in the Euro-Zone, Germany has not been able to export. With Germany being the Euro-Zone’s largest economy it does not have many countries to depend on for financial support.
The future of America’s economy is unclear. With the economy slowly rising, any sudden disrupts could affect the economy. Asian markets are rising and by the year 2020, China could have the biggest markets in the world. With the recent turmoil in Iran, oil prices can go up. Germany, at the moment, is doing well, but if Europe’s economy suffers any more, then Germany will be in economic trouble. Because Germany’s economy is dependent on the global-economy, their economy can turn for the worse at any moment. However, domestically, Germany’s economy is strong due to all the reforms made in the past few years.
The US can learn a few things from Germany. Gerhard Schroder, Germany’s Chancellor from 1998 until 2005, help set up most of Germany’s reforms which have been able to keep unemployment low due to its Kurzarbeit system, which reduces the workers hours instead of flat out firing the worker. Germany’s government is more involved with companies than the US. Universities in Germany have paired up with factories to have classes on how to do a skilled labor job. Germany also made welfare reforms very strict; they made it so, by reducing the incentive to retire early. They did this by pairing people who could still work with jobs and giving them their benefits little by little, and if they chose not to work their benefits would be reduced. Germany has learned from their past financial mistakes and has been able to reform them. If the US could learn from their mistakes and follow Germany, they too can be successful.
Comparing one country to another helps decide how to prepare for the next bear market. If we are going to think about our future, our children’s future, and their inheritance, we need to be mindful of the past but live in the present. We are all proud to live in the United States when things go correctly. We hope in the future to be able to live comfortably here even if we have to go through governmental entitlement cutting and tax increases. This information is also useful in your financial planning.
Until next time,