|Economic collapse is better than bailouts
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Delray Beach, Florida
Stocks rallied yesterday. 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.
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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 politicians 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 lawn mower. 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 sub-prime 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. "
*** In a futile effort to prevent relatively small losses, the feds set us up for big ones. The New York Times:
President Obama on Saturday implored Congress to provide more aid to states and cities to blunt "the devastating economic impact of budget cuts" by local governments that imperil the jobs of teachers, the police, firefighters and other public employees.
And here is another related report from the Wall Street Journal:
In a letter to Democratic and Republican Congressional leaders, Mr. Obama said the "mounting employment crisis" in the states "could set back the pace of our economic recovery."
Mr. Obama had supported about $50 billion in aid initially - $25 billion for public employees, $23 billion of which would go for teachers' salaries, and $25 billion to offset states' increased costs for their share of Medicaid, the public health program for the poor, people with disabilities and many nursing home residents.
As the new head of the Illinois Department of Human Services, Michelle R.B. Saddler knew she would confront tough choices in preparing a budget that juggled rising needs for services with tumbling state revenue.
Yes, the bureaucrats are indispensable. At least they think so!
And more from Bloomberg:
But she wasn't prepared for the long list of mandates and governor's priorities that tied her hands. She wasn't supposed to eliminate services required by law or court order. She was to spare Medicaid-eligible services and food-stamp benefits. And she couldn't jeopardize residents' safety or well-being.
"What's left?" she said.
State-agency heads nationwide face similar dilemmas as they confront gaping budget deficits. Last month, Illinois lawmakers cobbled together partial remedies to a $13 billion deficit-nearly 50% of its expected general-fund revenue of $27.44 billion for the fiscal year beginning July 1.
Illinois agencies are bracing for deep spending cuts, and the cutting falls largely to people like Ms. Saddler, a cheerful 49-year-old who, in October, took over a department with 13,500 employees and a general-fund budget of about $4 billion.
Her agency serves two million Illinois residents, coordinating everything from drug and alcohol treatment to home aides for disabled people to food stamps. The state provides about a quarter of the services itself and contracts with private businesses for the rest.
Ms. Saddler estimated that budget shortfalls would cost the state a total of 6,220 private-sector jobs and some or all services for 178,500 people. "I'm concerned that we will see a real public-health crisis and a real public-safety crisis with these cuts," she said.
Spending cuts by state and local governments from New York to California may act as a drag on the economy into 2011, only the second time in more than a half century that such reductions have restricted growth for three consecutive years.
So there. That's what a collapse looks like. Without aid from the feds, the states will have to make cuts. If they make cuts thousands of people may die from massive public-health and public safety failures. Not only that, but the decline in state spending will affect the private sector too...resulting in an even worse slump!
States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama's $787 billion stimulus package starts to wind down.
State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010, said Mark Zandi, chief economist at Moody's Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.
"The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011," he said in an interview.
That impact will help convince Federal Reserve Chairman Ben S. Bernanke and his colleagues to keep the federal funds rate banks charge each other for overnight loans at zero to 0.25 percent through the end of this year, said John Lonski, chief economist at Moody's Capital Markets Group in New York.
What the hell. Bring it on!
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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