“Don’t bite the hand that feeds you,” is easier said than done. In fact, it’s happening right now here in the U.S. and abroad. Consumers aren’t consuming. Lack of consumption has driven companies like Linens-N-Things and Aloha Airlines out of business and others like Circuit City into bankruptcy.

No country feels the squeeze more than Germany. Don’t stop reading here thinking Germany’s fate is some far away fairy tale that doesn’t affect you. Chances are your 401(k) is down because you are not driving the ultimate driving machine (BMW) or drink bavarian beer.

When money is tight, price is more important than quality. “Made In Germany” has lost its luster. For the past five years, Germany has been the world’s leading exporter of goods in dollar terms, but the exporting juggernaut has lost its mojo.

Luxury-car maker BMW reported a 63% drop in its third-quarter earnings and will reduce output by 65,000 cars. The Munich-based car manufactorer has been hit particularly hard by the downturn since the U.S. is its single biggest market.

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As the pre-dominant European Union (EU) country, Germany enjoys a nearly 10% weighting in most diversified international ETFs such as the immensely popular iShares MSCI EAFE Index Fund (NYSEarca: EFA) or the SPDR S&P World ex-US ETF (AMEX: GWL).

Germany’s presence in European funds is as high as 27% in the Dow Jones Euro STOXX 50 ETF (NYSEarca: FEZ) and averages around 13% in funds like the Vanguard Europe ETF (AMEX: VGK). All in all, nearly 40 ETFs have an average exposure of 10% to Germany.

Germany’s average Hans (the equivalent of our average Joe) has been feeling the squeeze for years. Profits of exporting conglomerates like Siemens, Bayer, Volkswagen, Mercedes, Adidas, etc. have been masking the lack of “organic” growth within the borders. Exported goods accounted for 41% of Germany’s gross domestic product (GDP) last year, more than twice the rate in Britain and Japan and five times as much as in the U.S.

Chances are that this bear market will brutally reveal the consequences of Germany’s government to “tax the seed”. Taxing the seed, or the center for domestic growth, results in ripple effects that can’t stay hidden forever and eventually drowns the economy like a millstone around a swimmers neck.

1) The integration of previous communist East-Germany, initiated by the fall of the Berlin Wall in 1989, was followed by much frustration (from East-and West Germany), higher taxes and a stingier social system. German tax-payers are still paying the “Solidaritaetszuschlag”, a tax levied to support the rebuilding of East-Germany. The tax was supposed to sunset 10 years after its implementation but is still going strong at a rate of 5.5% of the income tax.

2) The end of the D-Mark (the German currency before the Euro) in 2002 not only marked the end of an era, it also marked the end of low prices. The Euro/D-Mark exchange rate was 2:1. For example, a carton of milk was two D-Marks or one Euro. While your paycheck was meticulously calculated (two D-Marks of income became one Euro), prices for everything else almost doubled, cutting purchasing power in half.

3) In 2007, the German Umsatz Steuer (equivalent to the US sales tax) was raised to 19% from 16%.

Germany’s DAX Index (30 largest companies) is down close to 40% and has fallen faster and harder than the Dow Jones (AMEX: DIA) or S&P 500 (AMEX: SPY). The two U.S. ETFs tracking the DAX are the iShares MSCI Germany (NYSEarca: EWG) and the NETS DAX Index Fund (NYSEarca: DAX).

The NETS DAX isn’t tracking the DAX as close as it should but has shown a recent performance edge. iShares’ EWG is based on the MSCI Germany Index, a slice of the MSCI EAFE Index.

In addition to the lack of domestic growth, Germany along with many other European countries is battling the same financial woes as the United States. Hype Real Estate Holding, a DAX component, now weighted with only 0.28%, is the German equivalent to AIG.

Among others, big bets on Iceland turned out to be costly misadventures for German financial institutions who had lent over $21 billion to Icelandic borrowers. That was well over a quarter of all foreign lending in Iceland, and about five times as much as Britain, the next largest creditor country.

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With over 2,000 financial institutions the domestic market is rather fragmented which has curbed profit margins for years and driven German banks to become increasingly active abroad.

Germany’s financial regulators are hoping that new accounting rules will boost earnings. The new rules would give banks and insurers more leeway in valuing certain assets. Crafty Germans think value and growth can be financially engineered.  They should know though, that modified accounting rules don’t tackle the root of the problem. If you have a leaky boat, you don’t get a bigger bucket, you patch the hole.

Back in 2002, Standard and Poor’s lowered the stock market’s price/earnings ratio across the board to make the market appear more reasonably valued. The “E” of P/E was changed from reported earnings to operating earnings, thus excluding “non-recurring” expenses. This financial manipulation has done no good, in fact the S&P 500 (AMEX: SPY) is down 20% since the beginning of 2002.

I guess the stock market will have to drop much further for institutions and investors to realize, there are no long-term short-cuts to sustainable growth. Unless we reach a level that provides a solid foundation to rebuild the economy, every rally will prove to have been based on shaky grounds.

The silver lining is there will be bounces along the way. Germany seems to be ready for just such a bounce. There might be a parallel between today and 2001. The DAX fell hard to reach its post 9/11 (2001) low and rallied 54% over the next 26 weeks.

The time to buy into the DAX has not come just yet. We’ll discuss this buying opportunity further in our members only ETF Profit Strategy Newsletter (issued by ETFguide.com - $149/year).