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Ben Bernanke Vindicates Bill Gross on ‘New Normal’

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PIMCO’s concept of “new normal,” predicated on the belief that global growth and investment returns will be far lower moving forward than in the recent past, continues to generate controversy. Some analysts are now proclaiming Gross right, and pointing to Fed Chairman Ben Bernanke’s comments Tuesday as proof.

PIMCO, based in Newport Beach, Calif., first used the phrase in 2009, forecasting a period of lower-than-average economic growth for the foreseeable future. Analysts and economists soon began using the term as high unemployment in the United States and the sovereign debt crisis in Europe became more apparent. Writing in the Financial Times in July of that year, PIMCO CEO Mohamed El-Erian posed the following question:

“What happens if unemployment stays above 10% for an extended period?”

As El-Erian noted, “disruptions in our economy until now have been mainly influenced by large-scale anomalies in the financial system. But double-digit unemployment is a large and very angry black swan, and the reactionary policy implications (protectionism, another round of stimulus) aren’t promising.”

“Think of this [unemployment] as yet another illustration of the fact that the U.S. economy is on a bumpy journey to a new normal,” he wrote. “The longer this reality is denied, the greater will be the cost to society of restoring economic stability.”

ken fisherOther high-profile money managers and government officials were quick to disagree. Legendary Legg Mason manager Bill Miller said it wasn’t to be believed, and Ken Fisher (left) explicitly called the concept “idiotic” at Forbes’ Global CEO Conference in Sydney, Australia, last September.

“We are chimpanzees with no memory,” Fisher said. “The next 10 years are going to be just as good as the 1990s. The problems in this current environment we think are so different, and so new and so unique. It’s the same stupid old normal we’ve always had. We’ve got a great future.”

But in the wake of Tuesday’s announcement that Federal Reserve plans to keep rates in a “very low range” for the next two years, as well as a June 22 announcement that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate for an extended period,” PIMCO’s El-Erian is taking a victory lap, albeit a subdued one given market volatility and the recent downgrade.

“A lot of the new normal characteristics have played out,” El-Erian said in an interview with Bloomberg Tuesday. “Some people confused new normal with fatalism, but the intention was the opposite. There was the hope that policy makers would recognize that there are structural responses they needed to embark on.”

Bloomberg notes that BlackRock co-founder Larry Fink, who in January said he didn’t believe in the “new normal,” is forecasting growth of 1% to 2% for much of the decade.

“It’s pretty amazing that the Fed will be exceptionally low until 2013,” Jason Rogan, director of U.S. government trading at Guggenheim Partners, told Bloomberg. “They are telling you that we are in a stage of Japanese-like growth,” referring to Japan’s “lost decade” of low-to-flat GDP growth the country experienced for much of the 1990s.


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