US economy in a self-made vise
The US made the vise that's squeezing its economy.
The US put the economy into a vise by borrowing to fund bailouts. Now, it has to stop.
Photo illustration/Newscom/File
Stocks rallied Tuesday. The Dow rose 213 points. Gold went up too 鈥� plus $9. So many people are buying gold coins that the storage vaults are getting crowded, says a Bloomberg report.
But since we don鈥檛 trust the numbers anyway鈥et鈥檚 return to words.
Vise is a funny word. It looks like it should be pronounced like 鈥榲ies鈥欌�ut it is actually pronounced like 鈥榲ice.鈥�
Whatever. The New York Times says it has a grip on Congress.
On the one side, the pols are pressured to cut deficits. On the other, they are pushed to create jobs.
Of course, the TIMES misses the point. It makes it sound as though Congressmen were just innocent, well-meaning schmucks, trying to do their best to resolve conflicting pressures.
Not at all. They鈥檙e the ones who built the vise. On the one hand, they passed hugely expensive programs. They didn鈥檛 have the money to pay for all the boondoggles and bailouts, so they had to borrow. The deficits, in other words, are a problem they brought on themselves. The pressure to cut deficit spending is merely reality raising a boot with which to kick them in the derriere.
On the other side of the vise is the pressure to create jobs. The idea is preposterous flattery. Congress never actually created a single additional job in all its history. Jobs come from productive effort. From making things or providing services 鈥� at a profit. One person pays another to cut his lawn. Another pays a person to fix his teeth. Both the lawn mower and the dentist have jobs. The government, on the other hand, is a job destroyer. It takes away resources that might have been used to hire a dentist or buy a lawnmower. It can put people to work鈥ut only by taking away resources, and real jobs, from the wealth-producing economy.
If it wanted to, government could force everyone to work digging holes or counting each other. It could increase salaries and report 鈥榝ull employment.鈥� But no one would have a real job. And we鈥檇 all go broke.
American politicians are facing up to the phony challenge in a phony way. That is, they are pretending to create jobs. The Europeans, on the other hand, say they are cutting deficits. They have to; lenders said they wouldn鈥檛 give them any more money. As Nouriel Roubini put it, in the Old World, 鈥渁usterity is not optional.鈥�
Here at The Daily Reckoning, we鈥檙e with the Germans. The euro feds are beginning to correct a mistake, albeit dishonestly. Americans are just adding on a new one.
Neither Americans nor Europeans are happy with each other鈥檚 response. US Treasury Secretary accused the Europeans of threatening the 鈥榬ecovery鈥� by withdrawing demand at a critical juncture. He insinuated that if there were another Great Depression, it would be the Europeans鈥� fault. Claude Trichet, meanwhile, head of the European Central Bank, says it鈥檚 the American who are to blame. It was they who came up with subprime mortgages and it was they who permitted Wall Street鈥檚 reckless and greedy speculations.
At this point, most responsible journalists and economists would say something such as: 鈥渂oth sides should put aside their differences, work together and put the economy back in order.鈥� But you won鈥檛 get that kind of earnest drivel from us! It鈥檚 just mealy-mouthy nonsense. The Europeans should stop bailing out French and German banks (by guaranteeing the debts of Greece and the other PIGS). The Americans should stop trying to bail out everyone. Both should stop bailing and merely get out of the way so the economy can collapse if it wants to.
Dear readers may find our opinions too radical. Everyone else does. But the evidence shows that collapse is actually a good thing. Free market economies are remarkably robust. They don鈥檛 require the genius of politicians and bureaucrats in order to operate. And when they occasionally stumble and fall, it鈥檚 actually healthy for them. It鈥檚 how they shake off parasites. Bloomberg reports:
Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements.
Currency collapses are associated with permanent output losses of about 6 percent of GDP, on average, though the drop tends to appear beforehand, the Basel, Switzerland-based BIS said in its quarterly review yesterday.
鈥淭his suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation,鈥� Camilo E. Tovar wrote in the study. 鈥淭o gain a full understanding of the implications of currency collapses on economic activity it is important to carefully examine the full circle of events surrounding the episode.鈥�
The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, 鈥渕ore commonly in Africa than in Asia or Latin America,鈥� since 1960, Tovar said.
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