Bill Gross: “Staying Rich in the New Normal”
PIMCO’s founder Bill Gross is out with his latest monthly missive. It makes for interesting reading, especiallyregarding the captains of finance and their desire to stay rich using other people’s money.
I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400.
Gross goes on to reflect that the U.S. is not keeping pace with the rest of the world in terms of producing Forbes 400 wealth, the obvious takeaways being that the U.S. is declining relative to the rest of the world and this spells trouble for the megarich as much as it does for the average American. Obviously, this has great significance for the fortunes of the U.S. government and its ability to stimulate the economy with deficit spending. Gross was on record saying the sell-off in U.S. government paper was a direct result of doubts regarding the U.S. government’s solvency, something Willem Buiter is also analysing regarding the U.K. government. Gross has this to say about the fortunes of the U.S. government (emphasis his):
To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations.
Later in this same piece, he opines that moving to a more balanced budget is certainly the way to end the increase in treasury yields and the prospect of enormous interest payments compounding annually to new breathtaking proportions.
The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don’t count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have.
But, as he suggests, trillion-dollar deficits ARE the new normal indeed. Moving to eliminate these deficits too early as Tim Geithner suggests the Obama Administration wants to do risks a 1937 outcome. See my post “Beware of deficit hawks” to see why Japan in the 1990s and the U.S. in the 1930s suffered prolonged depressions because of deficit hawkishness.
In the end, one can only conclude that the U.S. is indeed likely to deficit spend for a considerable period and that this is going to have negative effects on its credit rating and relative standing in the global economy. A diminished future for America is an inevitability of having lived beyond its means for far too long. Accepting this fact is likely to provide a better outcome than resisting it as the U.K. did when its tenure as king of the hill came to an end.
Staying Rich in the New Normal – Bill Gross, PIMCO