US Economy and its Political System Has Become More Rigid and Costly

Et tu, Angela?

Yes, dear reader, even our heroine, Angela Merkel, is joining the fools' parade. In a front-page feature in yesterday's International Herald Tribune we learn that Ms. Merkel is bringing Germany in line with the rest of the world - by increasing the public deficit to over 6% of GDP.

"Germany chooses growth over paying debt," says the misleading headline.

But 6% is only half the US level...and the UK is nearing 15%!

The raw news: the Dow fell 93 points yesterday. Gold held above $1,100. There's no sign of panic. But we keep our Crash Alert flag flying anyway; you never know.

We're in Rome...actually in the airport...on our way back to London. Alitalia offered the best deal to Buenos Aires. But the plane was a disappointment. The food was good; the hostesses were pretty; but the seats in business class didn't fully recline. After the first 10 hours, we were very uncomfortable. And pity the poor folks in economy!

But if you want to be an "international man," as our friend Doug Casey termed it, you have put up with some inconvenience. Why would you want to be an "international man?" As another old friend, Marc Faber, observes, it pays to travel. You get a broader perspective. And you realize that many things your compatriots take for granted others take for absurd. "The more you look, the more you see," is our dictum.

One thing Americans take for granted is that they will always be the richest, most successful people on earth. They think that because that is what they have always known. The US economy became the biggest in the world before 1900. Americans had just what it took to become the richest people on the planet. They worked hard. They saved their money. They had little government interference. They had the industrial revolution at their backs...and nothing in their way. And they had a dollar that was 'as good as gold.' By the time the baby boomers were born the US had such a big lead over the rest of the world, it seemed like nothing could stop it. Free enterprise guaranteed new innovations and new wealth. Democracy guaranteed a political system that would adapt to the needs of the evolving economy.

But nothing lasts forever. As it matured, the US economy and its political system became more and more rigid and more and more costly, with handouts and bailouts...at every level. Large companies are protected. Millions of people are encouraged not to work. The whole financial industry is dipped in honey. And the whole population is urged not to save, but to spend. Why bother to save for retirement; there's Social Security. Why bother to save for health care emergencies; there's the government's new overhaul of the medical system! Why bother to save at all; the government has fixed short-term rates so low you get nothing for your trouble.

On our travels what we notice is that there are a lot of smart people in the world. And they're all sweating, striving, and angling to get ahead. You never know who will win the race, but you can be sure that no one will stay in the lead forever.

"US Wages Out of Balance," says The New York Times. It is pointing out the obvious. Americans are paid too much, compared to other people in the world who work just as hard and who now - thanks largely to the feds - have as much or more capital than we do.

Wages in the US will come down - probably thanks to unemployment and inflation. So will US living standards compared to the rest of the world.

Meanwhile...back to Angela...

Generations of German central bankers learned their lesson. They saw what happened when hyperinflation ran wild in the '20s. The middle class was wiped out in a matter of days. People lost faith, not only in the Deutsche Mark, but in Germany itself...and in all the old values. The next thing they knew, the Chancellor was wearing a silly uniform and they were on the road to Hell.

More recently, the last generation of German central bankers worried about the euro. They had no doubt about themselves. They had the backbone to protect their new currency. But what about the Italians? And the Greeks? And the Irish?

Well, they can fret no more. Now, the German deficit is higher than the Italian deficit.

Why would they do such a thing? They have the usual poppycock explanations - countercyclical spending, the need to maintain social services as tax revenues fall, the need to bailout the East, (see below) etc. But the real reason is that the old German economists are dead. One of the last of them was our colleague Kurt Richebächer.

Every time we saw him, Kurt would complain about American and English economists.

"Ya...you Anglo-Saxon economists are ruining the world," he would say. Kurt had no truck with Keynesianism. Or monetarism. Or any other of the fads in economics. Besides, he had lived through Germany's hyperinflation, the rise of National Socialism, WWII, partition, and finally, reunion. He knew that there were no free lunches...no easy fixes...and no panaceas. He knew too that people who promised miracles were dangerous frauds. Wealth is created by work...saving...innovation...investment...and perseverance. There are no miracles. No short cuts.

While wealth is created by work and saving, it is destroyed by consumption and debt. When you borrow money, you have to pay it back. Then, you must draw down your wealth...reduce your living standard...and cut into the capital you laid away in years past. You can try to squirm and dodge...but you just make the situation worse.

Kurt was right.

But now Kurt is dead. A new generation of economists has taken over. Born after the war, they know hard times only from movies and history books. They haven't forgotten the old truths; they never learned them. Instead, they probably did their training at Harvard or Chicago...and studied nonsense...such as the Efficient Market Hypothesis and Modern Portfolio Theory.

They think the key to prosperity is spending. Consumers spend until they can't go on. Then it's up to the government. That's why the Germans are running such a high deficit. The think they need to keep up spending - at all costs - in order to boost the economy. As Kurt used to point out, it makes no sense theoretically...and there's no evidence that it works in practice either. Every time governments have intervened with large dollops of countercyclical spending they have made a mess of things...either by stimulating the private sector to further acts of reckless insolvency...or by blocking the process of correction.

It's all claptrap. Angela, you should be ashamed of yourself.

Bill Bonner
for The Daily Reckoning Australia

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