Martin Wolf has just written an article on FT: Why the Bundesbank is wrong questioning the arguments made by Jens Weidmann, president of the Bundesbank. (This speech: Rebalancing Europe).

This chart is interesting:

(click to enlarge)

Wolf says:

Arguably, the crucial step is to agree on the nature of the illness. On this, progress is now being achieved, at least among economists. It is widely accepted that the balance of payments is fundamental to any understanding of the present crisis. Indeed, the balance of payments may matter more in the eurozone than among economies not bound together in a currency union.

I am not sure how widely accepted or understood this is, but it’s exactly right!

(Also never mind the reference to Werner Sinn in the next line in the original article – although Sinn still had a point in spite of his rather painful analysis)

Unable to make a draft at the central bank, governments are left with less means of protecting themselves in case of failures. Hence nations in a currency union are more directly dependent on the external sector.

Then on Weidmann:

Alas, these remarks confuse productivity with competitiveness. Yet these are distinct: the US, for example, is more productive, but less competitive, than China. External competitiveness is relative. Moreover, at the global level, the adjustment must also be shared. Mr Weidmann knows this. As he says, “of course, surplus countries will eventually be affected as deficit countries adjust”. The question is by what mechanism.

[emphasis: mine]

Martin Wolf knows how economies as a whole work roughly and he has been emphasizing that the solution to the world’s problems lie with the creditor nations. Also, in 2004 he said that America is in a comfortable path to ruin!

So here’s an unsuccessful attempt to prove Martin Wolf doesn’t “get it” from Bill Mitchell: So near but so far … from comprehension. This was a critique of an article written by Martin Wolf where he showed that the creditor status of Japan is hugely helpful to its recovery in spite of having a huge public debt . . . Martin Wolf’s right in spite of Mitchell’s assertion that he is wrong 🙂