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December 04, 2014 at 09:46 AM
Bond manager Bill Gross is warning that the likelihood is low policymakers will succeed in lifting the economy out of its “new normal” debt crisis — at least in his lifetime.
Indeed, the overall sense of discouragement reflected in his December investment outlook suggests a view that the “new normal” will miff future generations who will puzzle over our current policy failures.
Gross, 70, who has been writing about the new normal since the economic crisis, when he managed portfolios at PIMCO, has argued that it is theoretically possible to “solve a debt crisis by creating more debt.”
But doing so would require that initial conditions not be so onerous, that monetary and fiscal policy be coordinated and that private investors participate constructively.
In Gross’ analysis, we have come up short in all three of these requirements.
First of all, the unattractive environment that has prevailed in recent years — particularly the prevalence of unfavorable debt-to-GDP ratios — presents a formidable barrier to economic rejuvenation.
“It is difficult, for instance, to imagine Japan getting out of its quagmire of debt by simply creating more of it and buying 100% or more of the new and current supply,” writes Gross, adding that Greece and other weaker economies in Europe also faced a level of debt from which extrication would be quite difficult.
But add to massive debt the burdens of aging populations, the challenges of technological development and other growth-stunting factors that former Treasury secretary Larry Summers referred to as “secular stagnation,” and the “old normal” looks very hard to recover.
The second problem — that of monetary and fiscal policy coordination — is everywhere evident.
“It makes little sense, for instance, for Euroland to be running a tight fiscal policy resembling the balanced budget mandate of Germany, while at the same time initiating quantitative easing and negative interest rate monetary policies,” writes Gross, adding that the same contradictory phenomenon exists in Japan:
