PIMCO manager Bill Gross’ “new normal” has found a home — and it’s not the tony Newport Beach environs of the asset manager’s headquarters in California but rather the grim post-industrial Allentown immortalized in the Billy Joel song.
In his December commentary letter to clients, Gross expands on the theme of his famous “new normal” speech about living in a time of deleveraging and reduced economic expectations.
Gross argues that the downshift in global demand increases global competition for a slice of the world’s smaller economic pie. “Economic growth is a delicate dance between production and finance and when a nation’s or family’s credit card gets maxed out, then demand/spending slows immeasurably,” he writes. It is this diminished demand that shuts down steel factories in Allentown and other developed world industrial centers.
The reason developed nations are losing the global competition stems from a policy response that emphasizes what is politically palatable, since “sacrifice” is not a vote winner, Gross argues. Extending the Bush tax cuts or inducing small business to hire are short-term stimulus measures that fail to address the longer-term challenge of boosting our competiveness.
When Chinese labor costs 10% of U.S. labor and the Chinese have also learned to copy and innovate like us, those jobs are not coming back to Allentown. While Gross grants that Fed chairman Ben Bernanke has correctly called for fiscal reform, Gross mocks a monetary policy that “takes Charles Ponzi one step further by purchasing the government’s own paper in a last gasp effort to support asset prices.”
Gross’ concluding point is that capital will increasingly flow to developing economies until developed nations return to the old-fashioned practices of improving the quantity and quality of goods produced. His imagery here is particularly stark, saying “the United States needs to make things not paper, but that is not likely unless we see a policy revolution in Washington, D.C.”
Gross has a proven knack for sparking debate with just the right metaphor. His “new normal” coinage has become a household word since the famed bond fund manager’s Morningstar address in June 2009. And the Allentown image is sure to resonate given today’s 9.8% unemployment rate.
His sharp points at times softened to more conventional rhetoric about “investments in infrastructure and 21st century education and research.” This, combined with criticisms of the policy responses of both Republicans and Democrats, was redolent of Ross Perot and had a bit of the whiff of a 2012 Gross presidential campaign. Nevertheless, even should he remain in the comfortable precincts of Newport Beach’s Harbor Island, his client letter furthers an important public debate for a nation increasingly anxious about the prospect of “killing time, filling out forms, standing in line.”