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A Tale of Two Economies

Charles Dickens 'A Tale of Two Cities' begins with "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness."

Apparently Dickens was an economist. His quote describes perfectly the global economy and the current juxtaposition between the German and American economies.

The contrast between the two economies can be seen in the recent important economic news, which the mainstream American press pretty much ignored.

That news was the performance of the German economy and its vigorous rebound from the recession of last year. Germany's economy grew by 2.2% in the second quarter of 2010. That stands in stark contrast to the American economy which looks to be slipping back again.

The German economy's 2nd quarter growth translates to a 9.1% annual growth rate! This is emerging markets type of economic growth, which we normally see in countries like China and India. In addition, Germany's unemployment rate is now at the lowest level it has been in years - a 7.6% rate.

How did Germany accomplish this?

One key factor is that Germany is still an industrial powerhouse. Its industrial sector makes up about one-quarter of its total economy.

And it's not just an export story...German imports are also surging. German imports in June surged to a record 100 billion euros thanks to confident consumers.

Germany's industrial sector sold all sorts of manufactured goods to fast growing emerging economies such as China.

And speaking of China.....

In the United States, there is constant griping about China and how they don't compete fairly or buy American products,etc.

In Germany, policymakers are "worried" that German companies are selling too much to China and becoming dependent on Chinese demand.

Siemens is an example of a large German industrial company. It recently reported that its order backlog is the highest ever in its entire 163 year history! And much of that is thanks to China and other emerging markets.

Another factor in Germany's strong economic performance is that it was wise to ignore American economic "advice".

German leaders ignored American government leaders like Tim Geithner and American economists who all urged Germany to not work so darn hard, go on a spending spree and pile up debt like America in order to stimulate its economy.

However, instead Germany focused on the basics. It encouraged work and productivity and focused on making products that other nations around the world actually need and want. It did not focus it efforts on leisure activities or creating the latest 'cool' tech gadget.

The contrast between the two economic philosophies could not be sharper and neither are the economic results.

'The age of wisdom and the age of foolishness' indeed.

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