Ignoring the Biggest Mistake

By Schmieding, Holger | Newsweek International, February 23, 2009 | Go to article overview
Save to active project

Ignoring the Biggest Mistake


Schmieding, Holger, Newsweek International


Byline: Holger Schmieding; Schmieding is European economist at Bank of America Securities Merrill Lynch.

The main threat to commerce is not old-fashioned tariffs or subsidies. It's that stricken banks are bringing money home.

Eighty years ago, three major policy mistakes turned the stock-market crash of 1929 into the Great Depression of the 1930s: a tight monetary policy, a restrictive fiscal stance and a wave of protectionism that paralyzed the world's greatest wealth-creation machine, the exchange of goods and capital across national borders. This time, central bankers and politicians around the world are deftly avoiding the first two mistakes.

However, there is a rising risk that a collapse in cross-border commerce could critically deepen and prolong the downturn. Countries are not shutting their borders to trade in the old-fashioned way through tariffs, import quotas or other such instruments of economic torture. Even the approaching avalanche of national subsidies to national producers, which can distort global competition as badly as tariffs do, is not the major threat to watch. At least in Europe, the key risk stems from an abrupt reversal of financial globalization. As stricken banks strive to bring money home, some of the cross-border flows of liquidity that grease the global production process are drying up.

To understand the issue, look at Europe's biggest economy, Germany. Household debt is low by international standards, and corporate balance sheets are healthy, with the ratio of corporate debt to annual gross value added at 204 percent, close to that of the United States (180 percent in 2007) and far below that of the euro-zone average, 243 percent. At first glance, Germany should not have been vulnerable to a credit crunch. Yet the German economy fell off a cliff in the final quarter of 2008, with the total value of goods and services produced contracting at an annualized rate of 8.2 percent, versus drops of 3.8 percent in the United States and some 5 percent in the euro zone outside Germany. Moreover, Germany exports just more than half of what it produces, and in December exports of goods had fallen by 14 percent below their average for the July-through-September period. Judging by the 24 percent plunge in export orders during the same period, worse is to come.

This is happening in Germany and other export-oriented nations because trade is intricately linked to finance. At the simplest level, some institution has to provide a financial bridge for the period between the production of a good in one country and the point in time when it is sold somewhere else. In normal times, and between countries and firms with a solid reputation, the financial side of such transactions hardly ever poses a problem. But times are not normal.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Ignoring the Biggest Mistake
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.