Monday, August 30, 2010

National Discipline or the Lack Thereof

I read with dismay an editorial piece in the Financial Times this morning entitled “Germany’s rebound is no cause for cheer,” ( by Wolfgang Mϋnchau. The conclusion of the piece: “Germany’s economic strength is likely to be persistent, toxic and quite possibly self-defeating in the long-run.

Germany’s economic strength is likely to be persistent because it is more disciplined than other countries in the Eurozone. The German fiscal budget is more under control than is that of other Eurozone countries, especially those on the periphery like Belgium, Italy, Greece, Spain, and Portugal and German wage moderation is significantly different from these other areas. This discipline is likely “to be persistent.”

Germany’s economic strength is likely to be toxic because the adjustment mechanisms do not seem to be in place within the European Union because it seems that “it remains surprisingly hard to shop cross-border in Europe and “the European labour market remains almost perfectly fragmented.” Furthermore these “peripheral” nations seem to lack the fiscal discipline of the Germans and they seem to be more dependent upon labor unions and those receiving “social benefits” than do the Germans. After years of giving out substantial “social benefits” to their people and after years of credit inflation to stimulate local economies and “keep the dance going” the politicians of these nations are not going to back off what has kept them in office in the past. Without changing their path, the peripheral nations will continue to suffer relative to the Germans and will continue to identify the Germans as the real problem-maker.

And, according to Mr. Mϋnchau, Germany’s economic strength is likely to be “quite possibly self-defeating in the long-run” because the European Union cannot allow these imbalances to continue and still keep the Union together. That is, Germany must become like these other countries or the political union will fall apart. Thus, by continuing to maintain its self-discipline, Germany could cause the dissolution of the European Union which would not be beneficial to it in the long-run.

I am very uncomfortable with this argument.

This argument, to me, says that in playing golf I should not work several hours every day on the practice range hitting ball-after-ball-after-ball, and I should not play several rounds of golf every week against very competitive golfers, and I should not practice my putting for each day for a lengthy period of time, and I should not train in the gym or run 35 miles every week to develop my physical conditioning, and I should not watch my diet and weight. Such discipline gives me an unfair advantage relative to those that are not willing to maintain this kind of discipline. My efforts will cause the resulting inequality in performance “to be persistent, toxic, and quite possibly self-defeating in the long-run.” Thus, I should not practice, etc..

Discipline, in the longer-run, conquers lack of discipline.

Now, I am not advocating the making of discipline into an idol. It is just that in order to achieve other goals and objectives, hopefully good goals and objectives, discipline is an important factor helping one to accomplish these other things.

One problem that arises when one fails to maintain self-discipline is that other problems often arise making it even more difficult to re-establish discipline when you try to get your life back in order. That is, a lack of discipline can make it just that much harder and painful to become competitive when one finally reaches the stage that getting back in the game is a vitally important goal.

The United States, to me, is an example of a nation that has lost its self-discipline. But, this loss is not just a recent problem. The movement in this direction began in the early 1960s and has been going on for about fifty years. Beginning in January 1961, the Gross Federal Debt has increased at a compound rate of more than 7 percent every year up to the current time. Inflation became such a problem that wages and prices were frozen in August 1971 and an extremely restrictive monetary policy had to be enforced in the late 1970s.

Economic leadership of the United States currently rests in the hands of individuals that were an instrumental part in the excessive credit inflation of the 2000s. Ben Bernanke was a member of the Board of Governors of the Federal Reserve System and a vocal supporter of Alan Greenspan’s move to keep the Federal Funds target rate around one percent in 2003 and beyond, having joined the Board in 2002. Timothy Geithner became President of the Federal Reserve Bank of New York in 2003. This position has a permanent vote on the Open Market Committee, so that Geithner was in on all votes during this time as was Bernanke. After a short stint as the Chairman of the President’s Council of Economic Advisors in 2005-2006, Bernanke became Chairman of the Board of Governors of the Federal Reserve System in February 2006. Geithner moved from the New York Fed to become Treasury Secretary in January 2009.

These two leaders, arguably the most important leaders in economics and finance in the United States government, have held top positions and been voting members of policy boards during one of the most un-disciplined times in United States history. And, their lack of discipline continues, as is evident by the speech given by Bernanke last Friday at Jackson Hole, Wyoming. The only policy that these two people follow is one of throwing everything they can at a problem and seeing what works.

The problem is that their interest rate efforts in the 2003 to 2005 period led to a housing bubble and stock market bubble which resulted in the collapse of the sub-prime market in 2006 and 2007. Their response to this break-down resulted in the financial disaster of the 2008 to 2009 period when the government threw just about everything it could at the disaster in order to try and avoid worse. We are now in 2010 and the evidence of the lack of discipline is still around us. Consumers are plagued with debt fostering record numbers of foreclosures and personal bankruptcies. Businesses are overwhelmed with debt, not only with high-yield bond debt but also with commercial real estate loans and foreclosures and bankruptcies are also high in this area. State and local governments are piled high with debt and we find that states and cities are cutting back on the most basic of services including the release of fire fighters and police. And, the federal government faces budget deficits that some estimate will result in $15 trillion or more in additional debt over the next ten years.

The United States has lived off of its position as Number One economic and military power for years and this has allowed it to be so profligate. Only China, in my lifetime, really seems as if it might be a potential threat to this position.

This lack of discipline has shown up in one spot, however. Since the United States dollar was floated in August 1971, it has declined by about 40 percent in value. There were three periods within this time frame when this general trend was challenged. First, was during the time that Paul Volcker headed the Fed and caused interest rates to reach post-World War II highs. Second, during the Clinton administration as the federal budget moved into surplus territory. Third, during the financial crises when the world seemed to be falling apart and there was a “flight to strength.”

In my book, history shows that discipline wins over the longer run. The United States is struggling because it lost its self-discipline. The criticism of Germany presented above shows the mentality in the west that is indicative of this undisciplined approach to living in the world today.

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