It’s not too hard to understand why, if you happen to run the biggest bond fund on the planet and you find yourself in the middle of the biggest bond bubble the world has ever seen, you’d do whatever you could to keep bond prices from falling for as long as possible.
That’s why it shouldn’t have come as too big of a surprise yesterday at the Treasury Department’s Conference on the Future of Housing Finance to hear Pimco chief Bill Gross say that, not only should the nation’s mortgage market be nationalized (formalizing what everyone already understands to be true about U.S. mortgage debt – that the U.S. government is on the hook for a large portion of it), but that it might give the economy a little boost if billions more in taxpayer money were to be used to refinance all mortgages across this great land into low rate government loans.
While Bill was in Washington, Pimco’s Managing Director Paul McCulley was busy putting the finishing touches on his monthly commentary back in tony Newport Beach in which he argues that the central bank should take the governor off their printing press and let ‘er rip.
* When the economy suffers from Post Bubble Disorder, characterized by private sector deleveraging and a fat-tail risk of deflation, conventional monetary policy is not enough.
* In such circumstances, the central bank has a profound duty to act unconventionally, ballooning its balance sheet by monetizing assets, either government or private, or both.
* The central bank has a profound duty to meld itself with the fiscal authority, until the fat risk of deflation is eliminated.
There you have it. The unholy melding of mortgage finance, the central bank’s printing press, and the big spenders up on Capitol Hill in order to ward off deflation in a post-bubble world, all of which should keep the bond bubble fully inflated for some time.
The details of the “profound duty to act” are even more frightening:
First and foremost, for the monetary authority to monetize a fiscal expansion requires that the fiscal authority actually desire to pursue such an expansion. That should be easy. But surreally, Congress is presently wrapped around the austerity axle. I happen to think this is bad policy, very bad policy, but what I think matters for naught. Congress isn’t willing, and the Administration, which I think would be more amenable, doesn’t have the political capital to change Congress’ collective mind.
But that could change, if the risk of a return to recession continues to rise, spooking the equity market. A few thousand points of Dow might be what is needed to get the attention of Austerian legislators wanting to get re-elected! Am I forecasting that? Not yet, but the odds are rising, I think.
…
To generate increased growth in aggregate demand, some sector of the economy must be willing to pro-actively lever its balance sheet. And that must be the fiscal authority, if the private sector is intent on delevering. Yes, I know all about the perils of long-term fiscal unsustainability. But I also know that in the long run, we are all dead. I see no reason to die young from fiscal-orthodoxy-imposed anorexia.While the Fed has not sounded the horn on QE2 (Quantitative Easing), it has declared that the band will keep playing at the same volume on QE1. That decision was and is important, I think, not for any meaningful direct stimulative effect on the economy, but rather because it signals that the Fed is no longer on an exit strategy from QE1 – the unconventional, presumed to be temporary, has morphed into the conventional.
This is a profound change, because it means the intellectual and institutional hurdle for QE2 has been dramatically lowered. The textbook monetarists wrapped around the inflation axle of a bloated monetary base have been defeated: Money is as money does and the bloated monetary base ain’t doing anything, because the economy is in a liquidity trap of private sector delevering.
It is especially sweet that St. Louis Fed President James Bullard led the public charge for keeping the band playing at the same volume on QE1. When the head of the regional Fed bank with the greatest tradition of textbook monetarism helps re-write the textbook to reflect liquidity trap realities, it’s a good day, a very good day, in the macroeconomics neighborhood.
Sadly, he’s probably right about Dow 8,000 being seen as sufficient justification for kicking off a whole new round of quantitative easing, one that is likely to have about the same long-term impact as the first round.
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He does kinda have a point, though, with the “in the end we’re all dead” outlook. As I’ve said before, at the rate the democrats are printing and flushing money, they might as well eliminate taxes entirely: sure, it’ll lead the slightly more rapid destruction of the dollar, but as he said, “Yes, I know all about the perils of long-term fiscal unsustainability. But I also know that in the long run, we are all dead.” There’s no reason in my mind that American’s should continue to be burdened with complicated, high, and profoundly unfair tax schemes when the democrats are going to bankrupt the nation anyway stealing all the public money for their members, supporters, and socialization schemes. I, too, see no reason to die young from fiscal-orthodoxy-imposed anorexia.
Throw in blame to the illegal immigrants and you could host your own talk show.
Even a thinly veiled ad-hominem attack is still ad-hominem. Maybe it’d carry more weight if you could manage a coherent counter-argument.
“He does kinda have a point, though, with the “in the end we’re all dead” outlook”
Really? Does he?
In the end we may all be dead, but our children won’t.
If you were long a pile of bonds what would you be? Pimpco talks their book like no other.
Cynicism won’t fix the problems. Understanding will. PIMCO is perhaps finally listening to those that understand.
Perhaps if they finally lose that debt fear motive, they might sell that house short to you.
QE doesn’t work and doesn’t produce inflation. Read Koo.
Here is what I had to say to these comments:
This line of thought is workable if two things are true about you:
-You are already rich
-You are closer to the end than the beginning of your journey
I think it would be profoundly unfair if the government monetized effectively largely only PIMCO’s assets at nominal taxpayer expense (nominal, because we’ll never actually collect enough taxes to get out of the monetary death spiral the Democrats are helping solidify). If we’re hell-bent on destroying the currency anyway, why not make the process a bit more fair, and get rid of the whole “at taxpayer expense” soundbite problem at the same time, by just putting taxes on indefinite hold entirely. I’ll go on record and say that deflation will not be a problem at all once the government is clear that it’s only going to borrow more, and never pay off any debts with anything other than more borrowed/printed money; and if for some economic reason I can’t fathom I am wrong, we’ll have invented perpetual economic prosperity with unlimited government spending for free, and nobody will be complaining anyway. It’s a win-win!
Since currency is going to be destroyed. Buy more Gold.
I’ve maintained for a number of years now that the time to buy stocks will be when the Fed starts buying them directly. I don’t say it to many people because they look at me like I’m crazy. QE 1 was an attempt to raise asset prices (stocks, corporates, housing) by buying MBS and Treasuries in the hopes that the resulting cash would find its way into the “riskier” markets. I imagine that in the future the Fed will attempt to cut out the middleman (justified, of course, by the “irrationally low” prices for stocks, corporates, housing, etc.)
How can we get them to determine that the price of gold–and, more importantly, silver–is “irrationally low”?