The German Solution

06/23/2010 1:55 pm EST


Axel Merk

President and Chief Investment Officer, Merk Investments, LLC

Axel Merk, president of Merk Investments LLC, writes that hard work and self-discipline can set one free—or at least lower the jobless rate.

To understand how the ongoing global credit crisis may evolve, let’s look at some cultural and structural considerations. Last decade, despite being told that there may be no money to fund retirement, American consumers ramped up vast amounts of credit card debt; the European consumer, in contrast, reined in spending. Presently, European countries have recognized their debt burdens and are committed to austerity measures—contrast this with the US approach: despite Federal Reserve Chairman Bernanke’s warnings about unsustainable deficits, policy makers in the US have proposed a $200 billion mini-stimulus package, advising the world to stimulate consumption now, with little apparent concern over future deficit implications.



The bigger the country, the greater the need for a sense of urgency to embrace major reform. While Italy, Spain, and Portugal have not only announced, but passed legislation for real reform, France is merely considering raising the retirement age from 60 to 62; France also has a history of discarding reform plans as soon as a few trucks block the major highways. Similarly, in the US, as the sense of urgency has passed, the financial reforms under consideration appear not to properly address the issues that lead to the crisis in the first place.



What happens if you combine austerity measures in Europe and measures to cool the housing market in China? Amongst others, you have US policy makers urging the rest of the world to boost consumer spending. After all, who is going to buy US goods if so many around the world emphasize spending, not to speak of US consumers that themselves would rather save than spend in the current environment. While many criticize the lack of fiscal coordination in the eurozone (a deficiency that’s rapidly being addressed through the dynamics put in place as a result of the massive backstop facility as of a few weeks ago), the downside of central fiscal management is that it is far easier to spend money. And it’s not only on the fiscal side. While we have argued for some time that the Federal Reserve may need to ease further down the road, the Wall Street Journal now discussed this scenario in a cover page article; a few months ago, few believed us when we raised this possibility.

A likely outcome is that the US may be left to do the heavy lifting to get US and global economic growth going again. Given the domestic headwinds of a credit bust that has not been allowed to run its course, this has already been a rather expensive undertaking. In a nutshell, policies that fight market forces are not very effective. To boost the economy, trillion dollar deficits are employed; rather than merely cutting interest rates, trillions of dollars are printed by the Fed. All the money has to go somewhere—gold, commodities, projects abroad may be the main beneficiaries; if enough money is spent and printed, a few US jobs may also be created along the way, but it is a very, very expensive undertaking.

In summary, as the US is fighting the global debt hangover, the US may be at risk of getting more drunk (on credit and spending) itself.

Read more commentary from Axel Merk at the Merk Mutual Funds Web site here…