US economy in a self-made vise

The US made the vise that's squeezing its economy.

Stocks rallied Tuesday. The Dow rose 213 points. Gold went up too – plus $9. So many people are buying gold coins that the storage vaults are getting crowded, says a Bloomberg report.

But since we don’t trust the numbers anyway…let’s return to words.

Vise is a funny word. It looks like it should be pronounced like ‘vies’…but it is actually pronounced like ‘vice.’

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’re the ones who built the vise. On the one hand, they passed hugely expensive programs. They didn’t 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 – 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…but 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 ‘full employment.’ But no one would have a real job. And we’d 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’t give them any more money. As Nouriel Roubini put it, in the Old World, “austerity is not optional.”

Here at The Daily Reckoning, we’re 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’s response. US Treasury Secretary accused the Europeans of threatening the ‘recovery’ by withdrawing demand at a critical juncture. He insinuated that if there were another Great Depression, it would be the Europeans’ fault. Claude Trichet, meanwhile, head of the European Central Bank, says it’s the American who are to blame. It was they who came up with subprime mortgages and it was they who permitted Wall Street’s reckless and greedy speculations.

At this point, most responsible journalists and economists would say something such as: “both sides should put aside their differences, work together and put the economy back in order.” But you won’t get that kind of earnest drivel from us! It’s 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’t require the genius of politicians and bureaucrats in order to operate. And when they occasionally stumble and fall, it’s actually healthy for them. It’s 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.

“This suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation,” Camilo E. Tovar wrote in the study. “To 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.”

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, “more commonly in Africa than in Asia or Latin America,” since 1960, Tovar said.

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