News from Germany

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Michael Höhne
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News from Germany

Thought it might be intersting to know what happens outside the US, so here are some recent headlines. The original sources are German, so I translated them for your convenience.

Until now, the Federal Ministry of Economics said it expects the GDP in Germany to decline only by 0.2% in 2009. Today it was reported that the last quarter of 2008 always will see a decline between 1.25 - 1.75% compared to the last quarter of 2007 and forecasts for 2009 were changed to a GDP decline of 2.2 - 3%.

Andrea Merkel (our chancellor) said that 2009 must not be a year of job losses and the big companies followed with a self-commitment that they won't cut jobs due to business operations. Medium-sized businesses, however, said that they cannot promise the same.

The Government is prepared to spend more money for short-time compensations.

It is important to know that the majority of jobs is created by small and medium sized businesses, so a self commitment of large enterprises doesn't mean too much. If small and medium business struggle, then it will be mostly unimportant what is said today.

These are clear signs though and one thing scared me when listening to today's radio news: someone (haven't understood who it was but will try to find out) said that we should stop telling these numbers (GDP decline) to not further irritate people. Do you get it? As it now becomes more obvious that things get worse, we should just stop talking about it. If nobody knows it, then where's the crisis? This is ridiculous.

 

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Michael Höhne
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Re: News from Germany

Original story (German) at http://www.spiegel.de/wirtschaft/0,1518,596666,00.html

Hamburg - As forecasts on German economy are getting worse, Klaus Zimmermann, chief of the German institute of economic research (Deutsches Institut für Wirtschaftsforschung, DIW), demanded a pause of further forecasts at a meeting in the chancellery: "We talked about the fact that economists irritate all people if they continue to constantly post new numbers ", said Klaus Zimmermann in an interview with the Financial Times Germany.

According to the newspaper, Zimmermann also said that they could think of not providing new forecasts for some amount of time: "This is a question of intellectual honesty", because there are no financial crises in most financial models used by economists. "And if they are contained [in these models] then this crisis is so specific that we cannot measure it. We can say  that something bad is happening, but we don't know how bad it will be."

No economic forecaster, whether from banks or other institutions, can be forced to forswear forecasts. "That would be some kind of self-commitment of the involved people", Zimmermann said. Of course it would make sense if all [people] stopped [publishing forecasts]. "We won't be able to stay the course in our media society though and therefore we haven't earnestly discussed this proposal up to the end."

In another interview given to SPIEGEL WISSEN, the economist said he's "frightened of self-fulfilling predictions, which would be the case here." Politicians shouldn't start a footrace on subsidies to save every business in front of their own house, and so economists shouldn't start a footrace in presenting the worst numbers, Zimmermann said.

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Nichoman
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Re: News from Germany

Two things from your posts...

 

1.)   Changing nature of forecasts indicate poor understanding what's happening and why.

 

2.)   Avoidance on large scale part of the "denial".

 

Sounds like they've got a good handle on things...just like USA.  Wink

 

Nichoman 

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Michael Höhne
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USD losing value

It was asked when the USD will start losing value. Well, it seems that we are already there. Here are the exchange rates of the last days:

2008-12-05 0.790264 EUR
2008-12-08 0.772678 EUR -2.23%
2008-12-09 0.772977 EUR +0,04%
2008-12-10 0.767813 EUR -0,69%
2008-12-11 0.752219 EUR -2,03%
2008-12-12 0.749120 EUR -0,41%
2008-12-15 0.731850 EUR -2,31%
2008-12-16 0.724113 EUR -1,06%
2008-12-17 0.706800 EUR -2,39% (as of 9:30 CET)

This is a decline of 10,56% in 12 days. Oil, gold, silver and other precious metals are traded in USD and their price is rising. They also rise compared to the Euro, but much more slightly. As there is not too much manufacturing left in the US, it will lead to an even bigger trade deficit. Germany, being one of the top exporting countries - not sure if we're still #1 or if it's China - will have a problem soon because of the Dollar collapse, because though the oil producing countries get more Dollars for a barrel, they find themselves not being able to buy more goods from Europe, unless we decide to lower our prices, which will be the official start of our deflation. 

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Michael Höhne
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Strange interest rates

One thing that really amazes me are current interest rates. The FED found a way to give money to banks at a effectively negative interest rate. But look at the following numbers I found in the Internet:

Barclaycard: You can borrow 25,000 Euro for 12 months with a monthly payment of 2,127.61. The total interest is 531.32.

Cortal Consors (BNP Paribas): When creating a new account, you can deposit 25,000 Euro at a guaranteed interest rate of 7% for 12 months. This is money at call, so you can transfer it to another bank account at any time. 7% of 25,000 is 1,750 Euro.

The difference between 1,750 and 531.32 is 1,218.68. Of course you have to pay taxes on that, but starting with next year we have a fixed rate of 25%, so net profit is 914.01 Euro, roughly 76 Euro every month.

I have never seen such things before. Interest rates for credits were always higher than what you got for your savings, because that's the business model. With the current rates the banks are willing to lose money. I cannot trust a bank offering 7% on my savings for 12 months. They have to invest the money in something giving them a margin of say 8-10% in order to pay the interest and their employees. And what type of investment can guarantee such a margin?

Do you see the same in other countries?

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Re: Strange interest rates
Michael Höhne wrote:

One thing that really amazes me are current interest rates. The FED found a way to give money to banks at a effectively negative interest rate. But look at the following numbers I found in the Internet:

 

Barclaycard: You can borrow 25,000 Euro for 12 months with a monthly payment of 2,127.61. The total interest is 531.32.

Cortal Consors (BNP Paribas): When creating a new account, you can deposit 25,000 Euro at a guaranteed interest rate of 7% for 12 months. This is money at call, so you can transfer it to another bank account at any time. 7% of 25,000 is 1,750 Euro.

The difference between 1,750 and 531.32 is 1,218.68. Of course you have to pay taxes on that, but starting with next year we have a fixed rate of 25%, so net profit is 914.01 Euro, roughly 76 Euro every month.

I have never seen such things before. Interest rates for credits were always higher than what you got for your savings, because that's the business model. With the current rates the banks are willing to lose money. I cannot trust a bank offering 7% on my savings for 12 months. They have to invest the money in something giving them a margin of say 8-10% in order to pay the interest and their employees. And what type of investment can guarantee such a margin?

Do you see the same in other countries?

Michael,
interesting observation. Lucky you to have your own risk-free carry trade at the retail level.

Why do I say risk free? Isn't there some chance that a bank offering such a high rate has to do so because it is floundering?
I think not, and the reason why has to do with the banking business model.

Suppose you borrow 10,000 euros and have to pay that back at the 2.1% rate you've identified.

You then deposit this money at the same bank and they pay you 7%, or 700 euros.

Seems like the bank is losing 5%, or 500 euros on the deal right?
Here's where the miracle of fractional reserve banking comes along.

They can take the 10,000 euros that you've deposited and can convert that into another 90,000 euros of new loans.

Assuming that each of these 90,000 new euros are lent at the rate of 2.1% then the return from these loans to the bank is 1890 euros pleasantly offsetting the 500 euros they paid to you in interest with some left over to conduct their business.

Now if everybody went ahead and simply redeposited the new loans to chase the higher yield then this model well and truly breaks down but that won't happen. Much of that new money will be used for regular spending.

At least that is what the banks are counting on....the deep worry is that perhaps consumer psychology has shifted far enough to break this model. Then it doesn't work at all.

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Re: Strange interest rates

Many banks are desperate for cash. Those banks offer 5% or even more to attract additional cash. Like, say, the banks from Iceland did last year. Those offers are for additional cash only, they are not for cash you already have invested at that bank one way or another.

Conversely, the fact that a bank does offer 5% is an indication that the bank has a liquidity problem (be aware of the difference between liquidity and solvency)

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Michael Höhne
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Re: Strange interest rates

I totally agree and thanks to Chris I also understood the idea of fractional reserve banking. What I noticed though is a declining interest rate for credits and an increasing rate for deposits in the last two years, especially the last 12 months. Banks would never do this unless they have to and it really shows how desperately they are trying to get fresh money.

What I was mainly interested in is whether you see the same outside of Europe or if it's somehow special to our continent.

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Re: Strange interest rates
Michael Höhne wrote:

Barclaycard: You can borrow 25,000 Euro for 12 months with a monthly payment of 2,127.61. The total interest is 531.32.

Are you sure this is correct? Did you check with them?

AKAIK Barclaycard is a credit card, so it could it be a monthly interest rate.

Also, it looks very strange a bank would lend for such a low interest rate (2.13%) whereas it could lend to another bank at a higher rate! 1 year Euribor is at 3.185 % as of today.

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Michael Höhne
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German bailouts, gas shortages and a failed bond sale

Dec 20, 2008: Germany plans second stimulus package worth 40 billion euros
http://english.peopledaily.com.cn/90001/90778/90858/90865/6558147.html

The German government has planned its second stimulus package worth up to 40 billion euros (around 56 billion U.S. dollars) to fight recession, the on-line German magazine Spiegel reported on Friday.

The funds would be spent on public infrastructure improvements, especially on roads, schools and high-speed Internet access, as well as on tax cuts and decreases in health insurance costs, the magazine quoted government sources as saying.

Dec 23, 2008: Germany's faltering bank bailout program
http://www.spiegel.de/international/business/0,1518,598207,00.html

The German government whipped its €480 billion bank bailout package through parliament in record time, but now the program has run into trouble. The banks are still fighting for survival, the money market isn't functioning properly, and taxpayers' money is being burned.

Dec 24, 2008: Germany Stimulus Package Smaller Than Expected
http://www.dw-world.de/dw/article/0,,3899386,00.html

German papers reported on Wednesday, Dec. 24, that Berlin is planning a package of measures to help the country fight recession worth 25 billion euros ($35 billion), less than the 40 billion euros reported earlier.

Jan 07, 2009: Germany Considers 100 Billion Euro Fund for Ailing Industry
http://www.spiegel.de/international/business/0,1518,599906,00.html

Chancellor Angela Merkel's government is close to agreeing on the details of a €50 billion economic stimulus package now that Social Democrats have given up their opposition to tax cuts. In addition, Berlin wants a €100 billion fund for German industry.

Jan 07, 2009: German bond sale’s failure signals trouble ahead
http://www.freerepublic.com/focus/f-news/2160776/posts

A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.

The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

Nov 21, 2008: Problem for Europe: Russia needs gas, too
http://www.iht.com/articles/2006/11/21/news/energy.php

Ideological disputes over reliability of Moscow may mask a larger truth

Jan 6, 2009: Russia Cuts Gas, and Europe Shivers
http://www.nytimes.com/2009/01/07/world/europe/07gazprom.html?partner=rss&emc=rss

MOSCOW — Gazprom, the Russian gas monopoly, halted nearly all its natural gas exports to Europe on Tuesday, sharply escalating its pricing dispute with neighboring Ukraine. The cutoff led to immediate shortages from France to Turkey and underscored Moscow’s increasingly confrontational posture toward the West.

Prime Minister Vladimir V. Putin of Russia conferring Tuesday with the chief executive of Gazprom, Aleksei B. Miller. Gazprom said Ukraine had shut the gas pipeline. Ukraine denied it.
Across Europe, countries reported precipitous drops in gas pressure in their pipelines at the peak of the winter heating season in a bitterly cold January.

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Damnthematrix
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Re: Strange interest rates

Hangabout......  are you saying you can borrow money on your credit card, reinvest it with the same bank, and make a profit...?

Geez...  that's even better than debt cancelation!  Not even I would have thought of THAT!

I like this new Matrix...

Mike 

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probable gas shortages in europe

Michael,

thank you for collecting and presenting news from germany here.

I think the probable gas shortages can turn out to be quite serious in the short term, and bring the "Peak-Gas" agenda to the headlines pretty soon. It may also be another example to show the dishonesty of our political elite, who actualy assures, we have nothing to fear about.

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Michael Höhne
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Re: Strange interest rates
Michael Höhne wrote:

Barclaycard: You can borrow 25,000 Euro for 12 months with a monthly payment of 2,127.61. The total interest is 531.32.

 

Are you sure this is correct? Did you check with them?

AKAIK Barclaycard is a credit card, so it could it be a monthly interest rate.

Also, it looks very strange a bank would lend for such a low interest rate (2.13%) whereas it could lend to another bank at a higher rate! 1 year Euribor is at 3.185 % as of today.

http://www.barclaycard-kredit.de

Prices have changed, but here are today's numbers:

25,000 Euros / 12 Months: 12 monthly payments of 2,146.50 = 25,758 Euros

25,000 Euros / 36 Months: 36 monthly payments of 736.30 = 26,506.80 Euros

 

Or Citibank, https://www.citibank.de

25,000 Euros / 12 Months: 12 monthly payments of 2,134,55 = 25,614,60 Euros

25,000 Euros / 36 Months: 36 monthly payments of 745,15 = 26,825.40 Euros

Currently, you can always create a new account somewhere and get 5% or even more for 12 months (e.g. GE Money Bank and DAB Bank offer 5.5% today). If I had 25,000 Euros to invest, then I could do it like this:

Year 1: go to bank A, deposit 25,000 and after 12 months get 1,375 (5,5%). I have to pay 25% taxes on 1,375, leaving 1031,25.

Year 2: go to bank B, deposit 26,031.25 and after 12 months get 1.431,72 (again 5,5%). I have to pay 25% taxes on 1.431,72, leaving 1,073.79.

Year 3: go to bank C, deposit 27,105,04 and after 12 months get 1,490,78 (again 5,5%). I have to pay 25% taxes on 1,490,78, leaving 1,118,08.

This is hypothetical, because I cannot predict how much interest you get in a year or two, but say the 5.5% were valid for 36 months, then I have 28,223.12 *after tax*. I can borrow the investment for 26,506.80, giving me a net profit of 1716,32 in three years without having done any productive work. 

Maybe there are some hidden costs not mentioned on the web site, but anyway there's clearly something wrong here. Fractional reserve banking allows this game to be played, but I wonder how long it can last. I don't expect any changes in regulations though, because Germany has many elections this year, including the election for the Bundestag, so politicians have already started to compete and the financial meltdown turned into a discussion where parties are trying to profile themselves as the best party to solve the problem. They don't have any clue and starting to do the same we know from the US. It won't take long until we bailout our auto industry as well.

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Re: News from Germany

Michael,

You can appreciate this video...Ron Paul on Germany and hyperinflation

http://www.youtube.com/watch?v=2XkabcSkpOA 

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Michael Höhne
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German TV on the 1 trillion FED move

There was a shift in news presented in the main stream media in Germany recently. While it has been said for a long time that Germany has to do the same bailouts as the U.S., there now is a more critical opinion. The FED announcement to buy treasuries worth a trillion seems to form a cornerstone. I saw two news shows today on different channels. In one of them a former CEO of HypoVereinsbank was interviewed and he said that the FED has to be very careful about its monetary policy, because it will be very difficult to remove the injected money when it's time to do so. He was also asked if the U.S. will be able to pay back the massive debt. It first seemed that he wanted to say "No", but he then decided to use "It will be very difficult" and "History shows that it never worked" instead.The second was one of the most popular news show in Germany and they showed what happened in the markets after the FED announcement. The Euro gained about five cents from 1,31 to 1,36 and Gold raised from 895 to 945. Gold is rarely mentioned here. It was when heading for 1,000 dollars but suddenly disappeared from the news. You have to search for it when interested. Seeing it back in public media is worth mentioning.All in all, the opinion shown on TV goes into a direction where it modestly starts to criticize the U.S. Why that doesn't surprise us, it's an important change for the mainstream media. It will be interesting to see how it continues. 

 

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Michael Höhne
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More news from Germany

Scrapping Premium likely to be extended

The scrapping premium of 2,500 Euros to promote the sales of new cars will most likely be extended. The initial budget covered 600,000 applications worth 1,5 billion Euros. However, more than 350,000 were already requested in the first quarter of 2009.

The majority of purchases is for smaller cars with less gas consumption. More than 50% of these cars are from foreign (non-German) producers. Of course the companies having such small cars in their portfolio are urging government to extend the program, while companies selling bigger cars are against it. There are some voices saying that helping a single industry doesn't help to solve the crisis. But all in all, the government is celebrating its great success.

I wonder what happens when they stop the program. At this time all people that haven't bought a new car are either waiting for a new bailout package (oops, meant scrapping premium) or already decided that they don't need a new car. And then sales figures will plummet once again.

BDI president says that the limit of indebtedness is reached

Hans-Peter Keitel, president of the federal association of the German industry (BDI) warned against further stimulus packages. "We are clearly in favor to say that the end uf such programs is now reached", Keitel said to the Deutschlandfunk on Sunday.

And this shouldn't be changed by campaigns in this super election year. "We believe that the limit of indebtedness is reached", Keitel said, considering the several billions spent to cope with the financial crisis. 

At least more people in influential positions are calling to stop these bailouts.


By the way, we have the election for the European Parliament in June and the election for the German Bundestag in September. Of course our politicians have already started the usual mud fight for the September election (Germany), but almost nothing is heard about Europe. This is quite usual here, because the Eurocrats are not too much interested in telling the people about how the European government works and what power is has. Almost 80% of new laws are decided in Brussels by unelected people and all member states have to adopt European law into national law. Though we elect a European parliament, this parliament cannot introduce bills. Only the European commission is allowed to, and these commissioners are not elected by the people.

The election campaigns will take ownership of public media soon and I already know what the guys will promise us. These campaigns will lead to people caring even less about the financial collapse than before, so I don't expect Germans to be helpful this year. I'm trying to make a difference though.

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