Guest post: Bill Gross: “Staying Rich in the New Normal”

Submitted by Edward Harrison of the site Credit Writedowns.

PIMCO’s founder Bill Gross is out with his latest monthly missive.  It makes for interesting reading, especially in regards to the captains of finance and their desire to stay rich using other people’s money.

I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400.

Gross goes on to reflect that the U.S. is not keeping pace with the rest of the world in terms of producing Forbes 400 wealth, the obvious takeaways being that the U.S. is declining relative to the rest of the world and this spells trouble for the megarich as much as it does for the average American.  Obviously, this has great significance for the fortunes of the U.S. government and its ability to stimulate the economy with deficit spending.  Gross was on record saying the sell-off in U.S. government paper was a direct result of doubts regarding the U.S. government’s solvency, something Willem Buiter is also analysing regarding the U.K. government.  Gross has this to say about the fortunes of the U.S. government (emphasis his):

To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations.

Later in this same piece, he opines that moving to a more balanced budget is certainly the way to end the increase in treasury yields and the prospect of enormous interest payments compounding annually to new breathtaking proportions.

The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don’t count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have.

But, as he suggests, trillion-dollar deficits ARE the new normal indeed.  Moving to eliminate these deficits too early as Tim Geithner suggests the Obama Administration wants to do risks a 1937 outcome.  See my post “Beware of deficit hawks” to see why Japan in the 1990s and the U.S. in the 1930s suffered prolonged depressions because of deficit hawkishness.

In the end, one can only conclude that the U.S. is indeed likely to deficit spend for a considerable period and that this is going to have negative effects on its credit rating and relative standing in the global economy.  A diminished future for America is an inevitability of having lived beyond its means for far too long.  Accepting this fact is likely to provide a better outcome than resisting it as the U.K. did when its tenure as king of the hill came to an end.

P.S. – you should notice I put this post under the categories "Banana republic’ and ‘Credit markets’


Staying Rich in the New Normal – Bill Gross, PIMCO

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Keenan

    Good post Ed.

    For those perhaps unfamiliar with Ernie Ford's Sixteen Tons

    So, even if one isn't rich, to preserve what little one may have, the buck isn't the place to save it.

  2. Mike

    America expects trillion dollar deficits with a "woe as me, what can you do?" attitude. We just accept that this is "normal" and expect other people/countries to foot the bill. A congress-critter with an "R" next to his name on CNBC yesterday said we have to cut the deficits so that by 2013 we will only have a deficit of ~$500B. I don't think this can continue. What happens if/when our credit line is pulled and we have to balance the budget ASAP?

  3. Robert

    a beautiful future ahead- so-

    where to put your dollars- or- what to convert your dollars to?

    that is the question

  4. frances snoot

    "You are aware that a question has arisen as to the right of the warden to the income which has been allotted to the wardenship. It has seemed to me that this 'right is not well made out', and I hesitate to incur the risk of taking an income to which my legal claim appear doubtful."-Septimus Harding, The Warden,1855 (Anthony Trollop)

    "It was only with the advent of capitalism and annual productivity gains that entrepeneurs, investors, and risk-takers with luck or pinpoint-timing could jump to the head of the pack and accumulate what came to be recognized as a fortune. Still, the negative connotions persist."-Bill Gross, 2009

    Negative connotions usually cling to amoral actions.

  5. "DoctoRx"

    Mr. Gross is as usual talking his book. Nothing he says should be taken as independent opinion, as Yves' comments are independent.

    PIMCO benefits big-time from massive government deficitis: it's just more inventory for them to market.

    What would be bad for PIMCO would be for good for America IMO: less and less debt as a % of GDP, till we got back to where we were in the 1950s.

  6. Stevie b.

    "A diminished future for America is an inevitability of having lived beyond its means for far too long."

    Exactly!! And not just for America, but the whole of the developed world. And just as well, cos were it even remotely possible, the world could not take another co-ordinated global boom at this juncture, so the developed world needs a meaningful pause anyway. And maybe "diminished" is a bit harsh. Most of us will still be a helluva lot better off than most in the developing world, so it wont be a diminished future – just a more realistic one. And after all, happiness is really just having a good sense of perspective.

  7. DownSouth

    You gotta give Bill Gross credit for one thing. He is one slick-talking dude, a master of sophistry. Surely no more self-serving argument has been made since Nero insisted that the Christians enjoyed being thrown to the lions because it permitted them to become martyrs.

    The ancien regime was a system where kings and popes wielded both political and economic power. Gross would have us believe that we now live in a “free, capitalistic” society where those who wield great economic power–people like him–have no more political power than someone, say, like me. It is only by “luck or pinpoint-timing,” he tells us, that someone like him can “jump to the head of the pack and accumulate what came to be recognized as a fortune.” Those armies of lobbyists, those untold millions of dollars in campaign contributions, those exorbitant salaries and bonuses lavished on ex-regulators, those public relations campaigns designed to misinform and confuse the public, none of those exist in Gross’s make-believe world. Nor do they have anything to do with his or his breed’s success.

    The ideology becomes manifest in his argument that "the U.S. is declining relative to the rest of the world and this spells trouble for the megarich as much as it does for the average American." This, at its very best, is a half-truth. For the plight of the megarich relative to average Americans will not depend so much on macroeconomics. Instead, it will depend upon who has political power. Under the right power distribution, the rich prosper even in an economy that stinks, while everybody else sinks into the abyss of povery. Take the case of Latin America for instance:

    Taking Latin America as a whole, between 1947 and 1973–the heyday of state developmentalism–per capita income rose 73 percent in real wages. In contrast, between 1980 and 1998–the heyday of free-market fundamentalism–median per capita income stagnated at 0 percent. By the end of the 1960s, 11 percent of Latin Americans were destitute, defined as those who live on today's equivalent of two dollars a day. By 1996, the total number of destitute grew a to a full third of the populaton. That's 165 million people…

    [Much of the wealth] passed into the hands of either multinational corporations or Latin America's "superbillionaires," a new class that had taken advantage of the dismantling of the state to grow spectacularly rich.

    In Mexico, even as the average real minimum wage plummeted, the number of billionaires, according to Forbes, increased from one in 1987 to thirteen in 1994 and then nearly doubled the next year to twenty-four.
    –Greg Grandin, Empire's Workshop

    Gross opines that the "obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured." But why wait? Why not now? There's a quite simple way to relieve much of the budgetary stress, and that is to make the megarich pay their fair share of the taxes. And the sooner we stop digging this deficit hole, the quicker we get out of it.

  8. Hugh

    For me, the whole upper echelons of the financial industry are quite simply financial terrorists. Now no doubt many would find this extreme. To them, I would say look at what Osama bin Laden and al Qaeda have managed to do in the way of damage to our country and then look what the Bill Grosses (fill in your own list of culprits here) have done. Yet look at the difference in response between the two. For the one, we start (or use as cover to start) expensive, senseless wars. For the others, we give them trillions, allow them to walk free, refuse to investigate them, and let them peddle their self-serving bombast from the 16th hole of whatever where they measure the state of the country only in how many billionaires have or have not joined their feudal ranks.

    As I assume

  9. Hugh

    Pardon the stray phrase at the end of my last comment.

    DownSouth, I agree Gross' prescription is pretty lame. It is completely empty to say that a balanced budget would be nice but we will be running massive deficits for as far as the eye can see. The real questions are how to sustain that deficit spending for as long as it is needed, how that money should be spent to put us on track for a more sustainable, more secure future, and if we can't sustain the spending (and borrowing), what our options are.

  10. asphaltjesus

    But, as he suggests, trillion-dollar deficits ARE the new normal indeed.

    This is where the deficit hawks chime in and offer your observation as living proof there is no consequences to running deficits. It's very difficult to argue with them.

    Switching gears, running deficits is clearly beneficial in every political process. Debt accelerates consolidating power.

    Whatever Bill observes as 'troubling' has been happening for over a decade at the level of mere American mortal. He's going to come to the rude awakening that he's running out of American customers to sell his book to when it is much too late.

    That's my crackpot rant of the day.

    A more useful question remains, what is a safe basket of currencies to convert my dollars?

  11. Stevie b.

    "A more useful question remains, what is a safe basket of currencies to convert my dollars?"

    There is no basket. All major currencies are basket cases in a race to the bottom. The £ got a head start, others are catching up and at the end of the day they'll all end up back where they sort-of started. Some sort of multi-year-out, half-hearted economic recovery may manifest itself via globally rising prices of raw resources, meaning we could end up with stagflation. I suppose very long-term the CAD and AUD might not go too far wrong?

  12. Hugh

    The EIA publishes its weekly stock numbers on oil and other petroleum products each Wednesday.

    or you can look at the raw numbers here:
    (Click on the Data 1 tag)

    This week analysts thought stocks would drop by some 2 million barrels. Instead they increased by 2.866 million.

    May 29, 2009 365.977 million bbls
    May 22, 2009 363.111

    That’s a 5 million bbls error which is huge. But it doesn’t begin to capture just how insane the oil market really is. This is the crude oil stock number from last year at this time.

    May 30, 2008 306.757 million

    We are currently carrying 59.22 million bbl more this year than last year. This is in large part due to the fact that the economy is doing so much worse this year. But that is rather the point. Supply is through the roof. The economy sucks, and the near oil crude future has doubled from its low of $30.28 which it hit on December 23, 2008 at the bottom of its collapse from the previous speculative binge, –or if you prefer the 2009 low, $34.03 on February 12, 2009.

    What this screams is manipulation. It is a subsidy for oil producers, a windfall for investment banks, and a hidden tax on already cash strapped American consumers.

    (Sorry, I was unsure where to put this but I thought it might be of interest.)

  13. Tortoise

    Edward Harrison: "A diminished future for America is an inevitability of having lived beyond its means for far too long."

    Please rephrase to read:

    "A diminished future for America is an inevitability of having exercised imperial hegemony for far too long."

  14. jerrydenim

    Maybe Bill Gross sees something coming down the pipe more long term ("decades") that I can not
    extrapolate based on observations of current trends, but where does he get off saying :

    "Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400."

    Now maybe I can see a situation where the whole of America outside of a tiny class of oligarchs is impoverished, employers stop offering retirement benefits and everyone's 401k has been seized by the government so the vast pools of capital the financial class has been feasting on drys up. The financial class is really no different from any other parasite that feeds on the blood of its host and if the dog runs out of blood the ticks will die. Ok maybe, but given the current economic environment it seems the only people who can get rich ARE STILL the one's playing with other people's money but now with the added benefit of a government guarantee. Socialized risk, privatized gains. I definitely consider taxpayer money "other people's money" and I would also consider free money from the Fed to fall in this category as well.

    Even more puzzling is Gross's prediction concerning government regulation and taxation. What f*#king regulation? The only thing I have witnessed over the last nine months is layers of consumer protections and regulatory controls being stripped away as Washington colludes with Wall Street criminals in an attempt to keep the dirty casino open. (i.e. FASB rule changes, PPIP, bailout conditions, no high profile prosecutions, etc.) As far as excessive taxation keeping people off of the

    Forbes 400? In what parallel dimension? I make about $75,000 a year and barely get to take home half of my pay check. If I were a hedge fund manager or leveraged buyout shark I could make billions of dollars a year by dismantling the real economy for personal gain and keep 85% of my earnings/plunder thanks to a tax loophole that Democrats haven't got the balls or the inclination to close in the three and a
    half years since they took control of Congress. Sure I agree the middle class is going to get taxed out of existence (If you think a single man living in a major US metropolitan area making $150,000 a year is the 'super-rich' I've got some real estate in Iraq I'd like to tell you about.) but Bill Gross thinks a 15% tax bracket for people like Steve Swartzman threatens America's presence on the Forbes 400? Some months back with all of the AIG bonus fervor
    raging you would have thought that a gesture like closing this loophole would have been a nice concession to the angry mobs,
    but no. If not this past winter when will the public outcry against the excesses of the financial classes be met with a modest demonstration of fairness and common decency? My answer: never, or least not under our current system of governance.

    Otherwise his observations appear to be right on, but then again if you're reading financial blogs
    like this one, you already know Mr. Gross has hardly done anything besides regurgitate the conventional wisdom of the day.

    The bit about the changing nature of wealth and the wealthy was surprisingly candid for a person
    benefiting so handsomely from government largess.

  15. Purple

    If it comes down to world dominance, or paying back foreign CB's – then Washington isn't going to pay its debt back. Nixon didn't ask permission when he left the gold standard either, which was abrogation of international agreements.

  16. Snoring Beagle

    Hugh, the oil manipulation and the effects it is going to have seem to be of no interest. I too share your view on what is going on.

    The Saudis have said they don't like excessive oil prices because they tend to lead to some sort of recession and a very low price later on.

    People don't seem to care that excessive oil and gasoline prices were a major player in the inability of the average homeowner to pay bills and mortgages.

    I want to see and learn just who, what where and how oil is being played, count me in.

  17. curious

    Re where to hide currencywise, do take note of Wisdom Tree's relatively new ETF, symbol CYB, that amounts to a synthetic money-market investment in Chinese renminbi. (Morgan Stanley has a remninbi-tracking ETN also, symbol CNY, if tax complexities and counterparty risk don't frighten you.)

    One hates to think of buying a currency with a decent chunk of one's savings only to have it crash and burn, but it really seems unlikely that the already too-cheap renminbi would be allowed by the Chinese government to become even more underpriced. To me that's the renminbi's big attraction.

    I'll grant though that it's not crystal clear how the pressures on them to revalue upward might evolve in a dollar crisis. (I keep reading mpettis and bsetster and hoping enlightenment just comes.)

  18. Richard Kline

    Broadly, that new normal is what I have been anticipating since July 07: this is where we were likely to arrive. It is possible that the new normal may indeed require a certain (large) amount of deficit spending to support employment for 2-5 years going forward. —But that's not where the bulk of present government spending is going, is it? The bulk of present expenditure, driving those $1Ts of debt, is puffery-fakery money to keep zombie banks from visibly rotting. Our present crisis remains a solvency crisis at the core of the credit system. Even if we take those zombies down, we will still be spending boocoop, but less than our present mega stealathon by the sometime investment banks. Care to comment on that, Bill?

    And regarding bringing US fiscal policy into order, this is always framed in some way as 'controlling spending.' There is, of course, the other half, raising revenue. Which is what we need to do. Taxing those mega wealthy to bring our fiscal situation closer to an orderly one is a priority for everyone except a) those megapolitans, and b) the politicians they have bought and paid for. Care to comment on THAT, Bill?

    We need more revenue. And not simply from a national VAT, totally regressive, and again sucking money out of the real economy where it circulates rather than the platinum and shadow economy where it corruscates. This has got to get on the political agenda, but for that to happen we've got to get some new politicians. I'm not betting on that happening in the next 2-5 years. So yeah, we've got a good shot at getting to 100% debt on US GDP per annum. Because the oligarchs in this country have no scruple about using sovereign debt to bail _themselves_ out. I mean why not: it's the other 98% who will be paying down that sovereign debt, not the oligarchs, right? . . . That's _THE_ problem, and until we fix that we haven't even begun to talk about enduring solutions.

  19. easystar

    1. I certainly don't see bankers becoming improverished. The million pounds bonus are already back. Until the general public knows how to manage their money (and stop giving it to under performing 401k/pension plan manager), I can't see banker's becoming 'poor'.

    Revenue – A Torbin tax might be in order – a say 0.0001% (1 in a millionth)tax on every single bank transaction. Also, the Irish bank card tax is a good one – $10 per year tax on each debit/credit card.

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