Wednesday, February 5, 2020

"The Germany Shock: The Largest Economy Nobody Understands"

From Conrad Bastable, January 16:
How Germany Is Able To Run The World’s Second Largest Export Economy In The Post-Industrial Era 
The Germany Shock” describes European growth & the efficiency-maximizing centralization of European manufacturing activity after the launch of the Single Market and the Euro.
Two questions sparked this: 1) why did Europe only adopt the Euro & the Single Market after its Cold War-era existential challenge was over, and 2) how has Germany maintained an export-oriented Industrial Manufacturing Powerhouse while every other developed nation is going post-Industrial?
“The Germany Shock” — a summary:
  • Germany is a major outlier among high-GDP developed nations and nobody talks about it
    • International trade is a primary source of German economic prosperity
      • Only China runs a larger Surplus from Trade
    • No other nation has a customer base anywhere near as diversified as Germany
  • A China-USA Manufacturing Case Study:
    • i) It is possible for a region to straight up lose at trade
      • International competition can reduce employment in one geographic region without producing an offsetting increase in employment in that same region
    • ii) Manufacturing Network Effects: 3 - 1 = 0
      • When the primary economic engine leaves a community, all the supporting economic activity leaves too, from barbershops to component suppliers
    • iii) Exchange rates are a Cheat Code for selling stuff — you might not be willing to cheat, but China is
      • When China undervalues its currency, Chinese goods start looking real cheap
        • Foreigners then buy way more Chinese goods than they otherwise would have
    • iv) The price of your currency is a reflection of how desirable your whole nation’s economy is
      • The more successful your nation is, the more expensive it becomes for you to fight the free market and maintain the fiction of a cheap — undesirable — currency
        • China deals with this via intense autocratic market interventions that are unthinkable in the West or — when tried in our free markets — lead immediately to failure
  • Case Study Takeaway:
    • v) The price of industrial success is eventual failure: Industrial Exporter nations tend to become stable, regionally dominant economies…
      • …their currencies then become highly sought-after “Reserve Currencies” — making their products expensive and undermining the export-driven success that made their economies so great in the first place
        • This spells doom for Germany because of how dependant they are on selling to other countries
  • The German Solution:
    • vi) The European Single Market functions to make German goods maximally attractive to trading partners within the EU by raising the effective-cost of imported goods
    • vii) The German Euro — the currency — then has its value suppressed via contamination with all the other (poorer-performing, non-Exporting) European nations
      • This means German goods look cheaper than they otherwise would to non-EU markets
  • Result:
    • viii) The Euro & the Single Market make it possible for Germany to pursue a strategy of Export-driven Wealth-creation that would be considered impossible in any other Western, high-GDP, high-population, high-wage-paying nation
      • European nations that have found a way to support the German Productivity Engine have built a symbiotic relationship that strengthens their union
    Background: Nobody Ever Bothers To Look At The Data
    Here’s some data most people never see. None of this essay makes sense if you aren’t familiar with it. It’s a bit academic at first, but you’ve got to understand it if you want to get to the entertaining stuff later. Given my focus on the Euro (as a mechanism of exchange and therefore Trade) and the Single Market (obviously about Trade) both being adopted post-German-reunification, the data I want to see is:
  • Who is making money by Trading with other countries, and exactly how much?
  • How important is that Trade to each nation?
  • +some way to show the massive GDP differences between nations — some business models only work at a small scale
    Take a good look. The tagline here is “Germany is a major outlier among high-GDP developed nations and nobody talks about it.”:
Barely legible, I know, let me zoom in
The USA and China are massive outliers in their own right, so I’m going to shrink the X-axis and exclude them for now so we can actually compare normal nations:

Click to embiggenThe area of each bubble is based on each country’s GDP. See Notes [0] and 
 [1] for data sourcing — I made zero adjustments, these are all World Trade Organization numbers
The X-axis here represents money a country makes by Trading with other countries. Countries to the left spend more money buying foreign products (imports > exports), and countries to the right make more money selling to foreign nations (exports > imports). The X-axis therefore shows how profitable International Trade is to a country....