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Germany’s Secret Credit Addiction

With Germany's exports and industrial production contracting, its unsustainable credit-fueled expansion is coming to an end. The problem is that orthodox economics and conventional policy have nothing to offer except more of the private-sector leverage that got us into trouble in the first place.

LONDON – With recent data showing that German exports fell 5.8% from July to August, and that industrial production shrank by 4%, it has become clear that the country’s unsustainable credit-fueled expansion is ending. But frugal Germans typically do not see it that way. After all, German household and company debt has fallen as a share of GDP for 15 years, and public debt, too, is now on a downward path. “What credit-fueled expansion?” they might ask.

The answer lies in the reality of our interconnected global economy, which for decades has depended on unsustainable credit growth and now faces a severe debt overhang. Before the 2008 financial crisis hit, the ratio of private credit to GDP grew rapidly in many advanced economies – including the United States, the United Kingdom, and Spain. Those countries also ran current-account deficits, providing the demand that allowed China and Germany to enjoy export-led expansion.

Credit-driven growth enabled some countries to pay down public debt. The ratio of Irish and Spanish public debt to GDP, to cite two examples, fell significantly. But the overall advanced-economy debt/GDP ratio, including public and private debt, grew from 208% in 2001 to 236% by 2008. And total global debt rose from 162% of world GDP to 175%.

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