Economy revival? Bond barons say spending is the answer

June 24, 2011

When bond gurus speak, they don’t mince words.

The message from two influential bond traders is unambiguous: Instead of cutting government spending now, Congress should be spending to create jobs.

Employed people pay taxes, contribute to communities and buy homes, vehicles and appliances. This kind of stimulus is undeniable. Job creation is the ballgame now. Interest rates really can’t go any lower. The Fed did all it can do.

I know this runs counter to what you’re hearing from the Beltway and Tea Party circles, but the logic is simple: Without tackling long-term structural unemployment, there will be no broad economic revival. The middle-class could dip further into despair, feeding a millennial malaise that morphs into a depression.

Nearly lost in a week of relentless deficit yammering and President Obama’s Afghanistan withdrawal plan was a compelling commentary by Bill Gross, the leading bond fund manager by assets.

Starting out as a rant on why a college education isn’t worth the price — a view reflected in this column a few weeks ago — Gross eventually gets to the point. Cutting government spending alone will not create jobs.

“But fiscal balance alone will not likely produce 20 million jobs over the next decade,” Gross writes, “government must take a leading role in job creation.”

Wait a minute. Why is a free-market guy like Bill Gross, manager of the largest bond fund management firm, talking like FDR, whom he lauds for creation of the Civilian Conservation Corps and other job programs?

“The golden days are over, and it’s time our school and jobs ‘daze’ comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall Street as opposed to Main Street.”

One of Gross’s prominent peers, Jeffrey Gundlach of Doubleline Capital, said he’s also deeply concerned about long-term unemployment.

Gundlach estimates total unemployment, including those who’ve stopped looking for work, to be around 20 percent. In a speech before the Innovative Alternative Strategies Conference in Chicago on June 21, he derided the “cubist” collage of government programs that haven’t worked in boosting employment: TARP, QEII, tax cuts, bank bailouts and increased government borrowing.

While predicting that the government will raise its debt ceiling, Gundlach, a former bond fund manager of the year, is pessimistic that the housing market will recover soon, further damaging something “that’s too central to the psyche of the middle class.” Gundlach, however, was less forthcoming than Gross on how government spending could create jobs.

Deep in Gross’s “Investment Outlook,” though, is a call for creating a federal infrastructure bank to repair roads, bridges, water plants and other needed improvements across the country. He also hints at “green economy” measures: “Clean/green energy investments also come to mind, most of which require government funding and a government thrust in order to create millions of jobs.”

So are bond mavens like Gross coming from left field? Where’s the money going to come from when even Senators like Kent Conrad (D-N.D.) are calling for $4 trillion in federal spending cuts?.

Entitlement reform is a horrible buzzword, but becomes more meaningful if you consider that making more income subject to Social Security and Medicare taxes would be a partial fiscal solution. Benefit cuts make no sense when the social safety net is so flimsy as it is.

Then there’s the obscene amount of money Congress is spending on three wars and the post-9/11 “war on terror,” which has already cost American taxpayers $2 trillion over the past decade. The Afghan-Iraq conflicts are $1 trillion fiascoes.

The $113 billion alone earmarked for Afghanistan in 2011 could go a long way toward ending the jobless malaise. If this money was diverted to domestic spending, the liberal Center for American Progress Action fund estimates that would employ more than 5 million teachers, police officers and firefighters, among other social benefits.

Peace means funding jobs in infrastructure that will stimulate the economy. President Obama suggested as much in his Afghan withdrawal speech on June 22.

“We must unleash innovation that creates new jobs and industries, while living within our means,” the president said. “We must rebuild our infrastructure and find new and clean sources of energy.”

The bond market mavens indirectly endorsed what President Obama had to say before he even said it. Maybe the markets may not be right about what’s happening to the economy, but its keenest observers can often say what the politicians are sheepishly avoiding.

18 comments

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We desperately need to create jobs and we desperately need to reduce the amount of carbon deposited into the atmosphere. So let’s do both without creating a government program and create the infrastructure of the future at the same time.

Take the smart grid down to the light bulb level with a base of self connecting and self healing networks with information and control that supports a new industry of electricity services that replaces and re-fashions these services to most efficiently uses electricity as it starts to shut down coal-fired power plants.

The meaning of electricity would change as every watt is fully optimized while retaining the quality of service provision.

By the end of this century, electricity consumption will be reduced by 90% from today’s levels. Lets get started by creating a floating new public derivative called the Carbo that represents proven electricity demand displacement. From LED stop lights, to built-in refrigerators that use cold winter air to provide refrigeration services, to ground source heading and cooling systems to rooms that turn themselves off when nobody is present to new tech test beds on site, not in the lab with micro-grid technology that is so intuitive, anybody can imagine how to save a few watts. Let’s innovate down at the micro level. It’s coming. Let’s be the first to get there.

Posted by RichPatterson | Report as abusive

The best way to do that would be to raise interest rates, that way the millions of older Americans living off of their savings could start spending money again!

Posted by minipaws | Report as abusive

Scale down Irag and Afganistan first. Drill, Drill and Drill for oil in the US using incentives to make it more profitable to drill and stop the outflow of money. Fix the infrastructure. Create many jobs through renewable energy and invest in University research. Soon we will have tax receipts again and interest rates will increase creating more wealth for seniors and bank profitability. Also, depending on the local market, provide tax abatements and incentives in invest in living in the our cities including doing tear downs in blighted areas where there are more houses than people to buy them.

Posted by bmerk | Report as abusive

You’re crazy, spending will only make us that much more in debt. There is no easy way out of Obama’s spend-a-thon, we have to buckle down and PAY DOWN the debt. Obama caused this nightmare, we should make his sorry butt pay it all back. Nov 2012 we finish the job.

Posted by rtk | Report as abusive

Yes we’ve been spending and jobs are being created all over the world. A couple more QEs down the road our kids will have a clear choice for their future – become a BRIC citizen. They’ll get 15% raises every year and avoid paying 80%, if not more, into taxes.
Spend on, baby, spend…

Posted by Whatsgoingon | Report as abusive

As long as we have the same 2 party’s we now have controlling things, NOTHING will get any better!!!

Posted by Radical_1 | Report as abusive

Well, if those two guys think that, they should be talking to people in Congress about it. Money talks.

Posted by Bob9999 | Report as abusive

Good article. If you cut government spending, you will cut jobs. If you cut the size of government, you will have more unemployed. Yes, lets get out of the wars around the world. Let’s close the loopholes (gain revenue). Those that promote the “trickle down” theory are as 19th Century as Herbert Hoover. Corporations and those that run them will only give jobs to Chinese and other people who work for nothing and are working in 19th Century or worse conditions. To get healthy again, Americans need to have jobs.

Posted by neahkahnie | Report as abusive

Even if they were honest in their desire to do what’s right by the American PEOPLE, as opposed to the post-national corporate titans who own the US Government, Obama and the Democrats still completely lack the spine to stand for anything that the Republicans oppose.

We have entered the age of austerity and the age of a structural depression that will make the 1930s look like a gilded era of hyper-growth.

Until we the people are calf-deep in blood in the streets with the heads of the thieves on pikes, absolutely nothing is going to change.

Posted by JackMack | Report as abusive

I’m not a big fan of government overspending, but it’s insane to bring in an austerity budget that will hurt people when the economy is still hurting and the housing market is creamed. The deficit can be cut over time. Let’s get people back to work, educate our children and take care of the needy.

Posted by johnwasik | Report as abusive

The ONLY way to jobs and wealth is higher wages. High wages mean purchases, which means building more stuff, which means building factories and hiring workers and paying MORE wages. That is what history shows works and it is the ONLY thing that works. Low wage jobs keeps purchases down, keeps businesses down and kills wealth and standards of living. It’s universal. Raise wages and we’ll see a boom in business and jobs.

Posted by robert1234 | Report as abusive

I’ve never heard so much Green Bull in my life coming from one person(Mr. RichPatterson) in a long time. This guy must have have been on a green bendor.
His grand vision also seems to be a really good way for giving the government much more control of one’s live (Take the smart grid down to the light bulb level in one’s house).

Posted by jorge62 | Report as abusive

“Center for American Progress Action Fund estimates that would employ more than 5 million teachers, police officers and firefighters, among other social benefits”.

Whoever these people are who call themselves the center for “Progress”, they want government to do more of what it already does and waste billions on civil servants. No doubt the teachers, police and firefighters unions fund that center.

Obama’s stimulus didn’t do more than prevent some people from taking a drop in their standards of living. And they all want a lavish standard of living: big houses, vacations, a few cars and health care, dental plans and pension plans. They are some of the best jobs in town. I have a retired Aunt who was a former school teacher and she lives in a mega house. She had a very comfortable settlement with the CT school system from which she received an early retirement. None of these people want a drop in their very demanding standards of living.

I live in a small town where the 3/4 of the property tax bill is eaten up by the school system. The police take another big chunk. They are now trying to reorganize to provide a “quality education” whatever that is at the moment, because they are in danger of loosing their accreditation. They have spent millions during the past 20 years building new facilities but the teaching staff is a very confused and incompetent lot. They have perhaps 1500 students (the population base of the 3 towns who use the system is around ten thousand, so that’s a guess) in the entire K through 12 system and spend in excess of 12 million annually (but that was a few years ago, it would be more now). Usually it seems to mean they want more computers. Educational improvement may mean nothing more to them now that “look it up online” and give the students a passing grade so the grade averages don’t look so bad or more of them don’t drop out. They are part of the same teachers union that balked at standardized testing.

Throwing more money at education, police and firefighters is like throwing the money at the wars. People, who know, know where to find the biggest government spigots and chomp down on them for all they are worth and all three unions do that. And even now they still want their raises.

This government cannot be the main employer of the country or it will be a parasite that drains the life out of the rest of the beast and its currency is already turning to waste paper. The world in Roosevelt’s era was used to being worked to death as well, and that is something we tend to forget. A lot of men died building those hydroelectric dams during the 30′s. There was no such thing as OSHA in their day.

The next thing I expect to read is the need for another war to flush even more money down the drain. Otherwise all that careful bracketing of Iran will be just another waste of money. You know that’s what was really at the “strategic” core of the past ten years.

BTW – there have been no articles anywhere in the mainstream press about the accounting for the two wars. Just how slimy and crooked has the billing for those wars been? We hear a lot about the excesses of Wall Street. Is it considered “unpatriotic” to question the financial accounting of the Pentagon? We’re all supposed to be so grateful for “our freedoms” so called? All I’ve noticed during the last ten years is a loss of it.

At the bulb guy – I’ve been using energy saving light bulbs for years and burn with word to heat a small house. I’ve been living green for years and didn’t really believe in the “movement”. I also worked out of my house and didn’t commute. That is the “greenest” thing anyone can do.

Posted by paintcan | Report as abusive

Do we all agree that our public infrastructure is in need of repair and modernization? Good. Can we also agree that unemployment for youth ages 16-24 is unacceptably high at over 20 percent? Alright then, let’s start proposing solutions. Brainstorming is a great start regardless of how we view somebody elses opinion. We all know that doing nothing is a lousy option. My two cents, for now, is that it would be worth revisiting the past to see how FDR was able to fund the Civilian Conservation Corps despite the Great Depression. That program was very successful and only ended because WWII dictated that our young men were needed elsewhere. Could we do something similar today to turn a large percentage of our unemployed youth into a large volunteer labor pool available to work for the private sector companies that win government contracts to rebuild our nations infrastructure?

Posted by changeling | Report as abusive

Job One Should Have Been Job One! Not ramming a bunch of new rules and regulations down our throats and screwing up healthcare!

Posted by Motoman69 | Report as abusive

Just read an artical which makes the best sense I have heard for the US situation, try it.

http://blogs.reuters.com/reuters-wealth/ 2011/06/24/economy-revival-bond-barons-s ay-spending-is-the-answer/

the first link is brilliant.

Posted by Tommyuk | Report as abusive

Open letter to an economically limping society: Those who have great savings: Spend. Those who have been spending beyond their means: Save.

Posted by fish71 | Report as abusive

@minipaws. Raising rates might well be useful, but for a reason unrelated to yours and inconsistent with current economic dogma. In a global market, money gravitates to that place where it can earn the greatest return and risks … currently, the cheap dollar makes the U.S. a lousy place to invest.

Posted by SanPa | Report as abusive