It’s the debt, stupid – Bill Gross edition
On Monday when I wrote Why Stimulus Is No Panacea, I mentioned that I had written two posts in the past entitled "It’s the debt, stupid" (read them here and here). Just as the Clintonites of 1992 pointed to the economy as the Elephant in the political room, Team Obama should have been pointing to the debt in 2008 and beyond. But they haven’t done so. Instead, they have been pointing to ‘aggregate demand’ as if stimulus would somehow turn a solvency crisis of too much debt into a liquidity crisis of too little something.
But they are wrong. 2008 was not 1992 and 2010 is not 1994. I know the Clintonites controlling economic policy in the Administration want to believe that. But it is simply a false analogy. Stimulus alone will not work because the U.S. private sector needs a debt restructuring. Too much consumption has been pulled forward and financed by too much debt. The result a horrible misallocation of productive investment to which we are now awakening. That necessarily means lower economic growth and lower income growth going forward – a situation which makes many debt contracts of yesteryear uneconomic. Debtors are simply too indebted to take on more.
And should the Federal Government continue to socialize these losses as they have done, we can be sure that a disproportionate amount of real resources will continue to be devoted to buying and selling houses or concocting financial products to sell to one another. And then perhaps the day of reckoning can be put off. Is that going to make the U.S. grow again?
Bill Gross recognizes the problem and comments on it in his latest monthly. He doesn’t see emerging markets ready yet to do the heavy lifting of consumption growth and that has him predicting slow growth at best for the foreseeable future. I have excerpted the part which I found most quotable below:
It is this lack of global aggregate demand – resulting from too much debt in parts of the global economy and not enough in others – that is the essence of the problem, which only economists with names beginning in R seem to understand (there is no R in PIMCO no matter how much I want to extend the metaphor, and yes, Paul _Rugman fits the description as well!). If policymakers could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable. They cannot. G-20 Toronto meetings aside, the world is caught up as it usually is in an “every nation for itself” mentality, with China taking its measured time to consume and the U.S. refusing to acknowledge its necessity to invest in goods for export.
Even if your last name doesn’t begin with R, the preceding explanation is all you need to know to explain what is happening to the markets, the global economy, and perhaps your own wobbly-legged standard of living in recent years. Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened. We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in “Chindia” and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it. Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead. Stop whispering (and start shouting) the words “New Normal” or perhaps begin to pronounce your last name with an RRRRRRRRRRRR. Our global economy, our use of debt, and our financial markets have changed – not our alphabet or dictionary.
As for ideas about how to make the transition without unnecessary hardship, that is really where policy makers should be focused rather than on the shorter-term talk about double dips. Businesses are pro-cyclical in orientation and since this has been a deep secular decline, we really shouldn’t be surprised if the private sector is more concerned with husbanding capital than re-investing in business. See Steve Waldman’s commentary on this score. First rate stuff.
Source: Alphabet Soup – Bill Gross, PIMCO Investment Outlook, July 2010