James Pethokoukis

Politics and policy from inside Washington

Bill Gross: America’s dark economic future … Happy Independence Day!

Jul 2, 2009 13:50 UTC

Pimco bond guru — and occasional White House economic adviser –  Bill Gross paints a really depressing economic future

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.  … And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%.  … As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model. …

If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.


P.S. Gross was aggressive & determinedly stepped into what would appear to be an extremely illiquid P.P.I.P investment but at the same time is critiqueing Yale’s “illiquid” investments. What’s his basis? How does he validate and measure the investment opportunity? Would he recommend that Yale abandon it’s plan & lobby to buy PPIP’s?

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The face of fear

Jun 29, 2009 18:26 UTC

Scott Grannis, the Calafia Beach Pundit, think market fears have ebbed, but they may not return to previous low levels:

Some of the lost ground may not be recoverable, however, and that would be the portion attributable to misguided policy actions of the Bush administration (e.g., the Paulson/Geither bailouts), and the Obama administration (e.g., the $800 billion stimulus package, the Chrysler takeover, the trillion-dollar-deficits budget, and more recently the cap and trade bill, all of which were rammed through with the mantra “there’s no time to look at the details, just vote yes”). These policy actions all share two dreadful features: they dramatically expand the scope and power of government, and they promise a significant increase in future tax burdens. And that, in turn, means that the future growth prospects of the U.S. economy have been diminished. Profits will be less than they otherwise might have been, and living standards will be less than they otherwise might have been


The real fear is not only in Government spending and rush to actions, but also in the growth of police agencies within the Government. For all you “head in the sand ostriches” may I recommend that you read “The Bridge and Andau” by Michener. It is my fear that we are going down the same path as the nation of Hungary.

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America, don’t let this happen to you!

Jun 29, 2009 14:46 UTC

Stick with me on this. The WSJ outlines three economic options for Germany, whose trade-based economy has fallen nearly 7 percent during the past four quarters: 1) do nothing and wait for the global economy to pick up; 2) increase domestic consumption via higher union wages; 3) innovate!

This is a choice bit:

The third option would be to foster entrepreneurship in new sectors, to supplement Germany’s traditional strengths in cars and engineering.  …  ”Somebody created a comparative advantage in machinery and BMWs in the 1960s, but nobody has created anything much since,” says Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. German public policy and the country’s state-dominated banking system focus on rewarding existing companies rather than new ones, Mr. Posen says. … But Germany is second last in the number of business start-ups among 18 advanced economies surveyed by the Global Entrepreneurship Monitor, an international research project.  … A recent study by consultants McKinsey & Co. says Germany could double its average economic growth to 3% a year if it got serious about new industries, from research-led sectors to services for the growing number of elderly consumers. Without such an effort, German living standards will decline relative to other advanced economies, the report warns.

My spin: Perhaps the key part of the article was when Posen pointed out that the nation’s state-dominated banking system tends to reward existing players, not startups.  This is why it is so important to get Uncle Sam out of the U.S banking system ASAP.  American economic policies must also be graded as to whether they enterpreneurial innnovation and competitiveness. It’s not just green energy, gang!

Breaking the U.S. economy’s viscious cycle …

Jun 26, 2009 16:34 UTC

From the great David Goldman:

The negative multiplier occasioned by the retrenching of consumers (lower spending, more unemployment, lower incomes, lower spending in a vicious cycle) is stronger than the Keynesian multiplier from government spending (more government boondoggles for construction unions, more spending).

There are ways to break the vicious cycle:

1) encourage entrepreneurs to dive in and take risks

2) encourage foreign investors to put more money into the US economy

3) attract skilled and talented immigrants who bring in human capital.

The trouble is that entrepreneurs at this stage of the cycle appear as vultures, speculating in human misery, buying foreclosed houses and distressed bonds. … Alternative number two would work if the US government allowed the Chinese and others to come in as partners and buy significant parts of the US economy at discounted prices. That’s not going to happen, either, for the same stupid political reasons. … Alternative number three isn’t even on the agenda.

That means we are stuck in a vicious cycle in which the recession lasts indefinitely, equities chop sideways forever, and the Obama administration sets the stage for a potential dollar collapse some time down the road.

My spin:  If you are looking for a second “stimulus package,” one that would address these points, particularly #1 would be helpful. A pro-entrepreneur package …

More evidence ‘stimulus’ doesn’t work too well

Jun 26, 2009 14:25 UTC

From Action Economics (bold is mine):

Today’s U.S. reports revealed a bigger May income boost than we assumed from recent stimulus legislation, but a lower service consumption trajectory nevertheless, to leave a remarkable surge in the savings rate and a slightly weaker trajectory for aggregate demand as we approach mid-year.  We also saw a small upward bump in the Michigan sentiment index in June as the various confidence measures post gains from Q4-Q1 lows, though confidence remains remarkably lean. The soaring savings rate shows that households are still bracing for the worst despite improving market conditions, as they hoard distributed stimulus benefits and hence truncate some of the “stimulative” effects.


I’m squirrelling away my extra $13/week to pay for my share of the carbon tax pass throughs. That way I only need to come up with an additional 842.23 through the year for those offsets.

Can a VAT be right around the corner? Thank you Sir, may I have another?

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Here is what’s wrong …

Jun 26, 2009 13:58 UTC

From IHS Global: “Reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers. Wages and salaries were down in May, and have fallen in four out of five months this year. And higher gasoline prices are biting into spending power.”


$4/gallon gas crushed disposable income starting summer ’08. That was the match which touched this firestorm. In addtion to the expansion of CRA courtesy of Barney Frank in the early 90s; OPEC deserve much of the credit these past 15 months.

I’m sure you’d agree unless you’re also convinced of the Geo Soros conspiracy to demolish the US economy to drive Bush out of office.

Posted by Hank Reardon | Report as abusive

Housing bottoming?

Jun 24, 2009 15:41 UTC

From RDQ Economics:

New and existing home sales, housing starts, building permits, and homebuilder sentiment all appear consistent with the picture of a bottoming out in housing activity, albeit at very low levels.  It seems likely that the drag from housing on GDP growth in the second half of the year will be significantly smaller than the average subtraction of 1.0% point per quarter over the last three years.

Me: Less of a drag on GDP, sure. But no rising home prices …


Hey, I appreciate your constant search for the pony in the rooom full of horse poop. Might be a bit premature.

Good news, bad news

Jun 23, 2009 16:04 UTC

Hey, this is good:

The quarterly CEO Economic Outlook Index rebounded to 18.5 in the second quarter from a record low of negative 5 in the first quarter.

But this isn’t:

But it was still the third-lowest reading in the survey’s six-year history. A reading below 50 means CEOs expect economic contraction rather than growth.

Credit card meltdown?

Jun 22, 2009 19:19 UTC

Some doom and gloom from David Wyss of S&P via the NYPost:

David Wyss, S&P’s chief economist said banks should brace for a plastic meltdown as credit-card losses track the unemployment figures almost exactly. “Credit-card losses, on average, are equal to the unemployment rate plus about 5 percent,” he said, noting his estimates that the nationwide jobless rate could rise as high as 12.5 percent by 2011.

“If one more thing goes wrong, say oil goes over $100 a barrel, or the banks have to deal with another big hit like the commercial real-estate market dropping substantially, unemployment could continue to rise through 2011,” Wyss said.