Germany becomes latest victim of Japanese Model

Germany has become the latest victim of the Japanese Model for handling a bank solvency led financial crisis as the Bundesbank announced that it had dramatically slashed growth forecasts.

As reported by the Guardian, it is very difficult to generate growth in an export oriented economy when the number of buyers keeps declining.

The reason for the decline is that more and more of the real global economy is being diverted to making debt service payments on the excess debt in the financial system.  This reduces the demand for goods.

The decline in the German economy is a direct result of the choice by policy makers to adopt the Japanese Model and protect bank book capital levels and banker bonuses at all costs.

Even today policy makers could reverse the decline in the German economy by adopting the Swedish Model for handling a bank solvency led financial crisis.  Under the Swedish Model, the banks recognize upfront the losses on the excess debt in the financial system.

The protects the real economy by ending the diversion of capital to debt service.  This capital is instead used in reinvestment and growth.

Germany, Europe's economic powerhouse, is rapidly losing steam, with the country's central bank slashing its growth forecasts for this year and next. 

The Bundesbank lowered its growth forecast for this year to 0.7% from the 1% it predicted in June. It cut its 2013 prediction even more sharply, to 0.4% from 1.6%, but is expecting growth to bounce back to 1.9% in 2014. 

The news shocked markets on Friday morning. "Investors have become accustomed to continuing woes in the eurozone periphery but Germany, Europe's largest economy, is considered the backbone of the shared currency zone and was previously viewed as the beacon of stability," said Lee McDarby of Investec.

The eurozone remains mired in recession and the Bundesbank's revisions came a day after the European Central Bank said it expected that to continue next year, cutting its 2013 forecast for the 17-nation bloc from 0.5% growth to a 0.3% decline. 

Germany's export-driven economy has been slowing amid falling orders from the eurozone. New figures showed on Friday that industrial production in Germany crashed by 2.6% in October. This meant that a contraction of its economy in the fourth quarter had become almost inevitable, economists said. 

Please note that it can be expected that the global economy will remain mired in a Japan-style economic slump so long as the Japanese Model and its related policies like austerity, zero interest rates, quantitative easing and bank bailouts are pursued.

Adopting the Swedish Model would trigger a rapid recovery.

So the question is:  how much damage to the real economy and the existing social contract do policy makers want to inflict on their citizens before they decide that the real economy and their citizens come ahead of the banks?