The Herstatt Risk

It’s true that people are continuing to produce extraordinary amounts of great pop music, probably more than ever before, even though it’s increasingly difficult to get paid for it. You could characterise this as part of a growing cultural intuition that the most valuable things in life are not part of the cash economy…We’re living in a social moment where, more than usually, money has come unglued from value.

The historical precedents – and much of the commentary coming out of Germany – suggest that Germany will not take steps to reverse the trade surplus.  Countries that run large and persistent trade surpluses never seem to understand that their surpluses are mainly the consequences of domestic policies that generate additional domestic growth by absorbing foreign demand.

On the contrary, they usually insist that the surpluses are the consequences of domestic virtue, and they see no reason to give up being virtuous.  Surpluses, they seem to believe, are the way God rewards them for their enviable behavior, and as their surpluses decline – an inevitable consequence of the malaise affecting their trading counterparts – they actually try to limit the decline and do all they can do to prevent it from becoming a growing trade deficit.

But this violates simple arithmetic.  Trade deficit nations have received capital inflows for many years from surplus nations as the automatic counterpart to their deficits.  If the surplus nations ever hope to get repaid – i.e. to reverse those capital flows – then it must be obvious that the trade imbalances must also reverse. (Read on)