BarroMetrics Views:  A Tale of Two Countries

Last week, we saw the GDP results from Germany; today we saw results from China. Both seemed strong but below the hood, there are clear differences.

FIGURE 1 shows the German growth and that of some of the major European members of the EURO bloc. Figure 1 shows that if you take the German out of the European economy, Europe is in deep difficulties.

In today’s South China Morning Post (Hong Kong’s main English paper) , we see the news that China was now the second-largest economy. Among the fine print, we see a comment attributed to Jin Canrong, associate dean of Renmin University ‘that China’s growth would help the world recover from the financial crisis’. Yet only last week saw a report from Bloomberg that ‘industrial production expanded at the weakest pace in 11 months in July’.

That weakness appears to a response to the Government’s attempts to slow down inflation. A problem of its own making when in 2009 it expanded its money supply at an exponential rate. Last year at this time, Bloomberg reported: ‘China’s new lending surged more than sixfold from a year earlier to a record 1.89 trillion yuan ($277 billion) in March’.

Germany stands out as the one country which has not given in to the temptation to try to spend its way out of the financial crisis with dollars it does not have.  At some point the piper has to be paid: spend more than your earn a crisis will be yours. With Governments that create its own money supply, this comes in initially in the form of inflation or recession. In the US, the bulk of the funds have yet to hit Main Street. I, for one, am interested to see what happens when the US job market exerts enough pressure so the Government is forced to take measures to ‘force’ the banks to disgorge the funds at the S. Louis Fed Reserve.

FIGURE 1 GDP EEC

Chart through the courtesy of PRI’s The World

http://www.theworld.org/2010/08/13/german-economy-surges/

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