As a follow-up to last week's missive on the case for further fiscal spending as made by Larry Summers (which provoked some heated responses from readers!), I was pleasantly surprised to read Bill Gross of Pimco making a similar case. Bill Gross is a bond manager, and fiscal spending in anathema to bond investors and Wall Street bankers as it usually implies increasing interest rates which typically has an adverse affect on a variety of asset prices. Mr. Gross also highlighted the dire state of projected long-term finances of the US in a previous newsletter, so it is interesting to understand where he is coming from as he argues for more fiscal spending now and to focus on the long-term debt issue at a later stage. To summarise:
-The 2012 elections will be "fought on the battlefield of job creation". A 9.1% unemployment rate, which almost doubles if you include part-time and discouraged workers, does not create a well disposed electorate.
-Over the last 10 years, only 1.8 million jobs have been created while the workforce has grown by over 15 million. America's focus on services and hi tech sectors, and neglect of its manufacturing sector, has severely constrained its ability to create jobs.
-Over the past several decades, America's excessive reliance on financial assets to create wealth (and jobs) at the cost of an erosion of its manufacturing base, has finally led to a situation where the U.S. is "untrained, underinvested and overindebted" compared to its major competitors.
-Both the Democrats and Republicans have no credible plan on increasing employment – but both make claims that balancing the budget will, mystifyingly, create 20 million jobs over the next 10 years.
-Fiscal prudence is a long-term requirement for a stable and steady economy, but if implemented too quickly could be a death-blow to a still fragile economy.
-The roots of this false notion of fiscal conservatism equating to economic and job growth lie in the theories of David Ricardo developed in the early 19th century - which belong to the trash bin of theories aimed at academics rather than practical reality.
-Solutions to address the jobs issue should include long-term elements like education and skill-based training geared towards the "middle" than "hitech" , and more emphasis on science and math relative to the liberal arts. (He also makes some interesting observations on the state of college education in the US and questions whether it is worth the time and cost).
-The government needs to take the lead role in job creation – the private sector cannot take up this crucial role in the short-term as long as it is much cheaper to produce overseas with access to much labour.
-An infrastructure bank to fund reconstruction projects would be a productive use of deficit funds and a "true investment in our future".
-As the late economist and expert on financial crises Hyman Minsky noted so presciently years ago – "Big Government, should become the employer of last resort in a crisis, offering a job to anyone who wants one" .
An insightful piece which focuses on what will be the key issue as we move into 2012 – the lack of job growth in the US. With the economy growing at less than 3%, job creation will continue to be a challenge and will increase pressure on the Obama administration to provide more/continued stimulus – both on the fiscal and monetary front. The government should temporarily play a bigger role in the economy now to boost employment and growth, which would actually lay the groundwork for reducing fiscal imbalances in later years. As Professor Krugman has noted repeatedly in his columns- the US is in a zero-interest rate liquidity trap and conventional policies and frameworks to address issues like jobs and economic growth are unlikely to work– so now is not the time to "pay homage to some long defunct economist"!
I had noted the opportunity in purchasing Greece debt a few weeks ago, with short-term yields now over 30% and 5 year yields approaching 20% the opportunity continues to be attractive. The manager John Hussman made an interesting observation in his recent newsletter, that current market yields are implying a 100% chance of Greek default by mid-2013. This presents an attractive short-term investment (but risky!) opportunity as market sentiment possibly shifts over the next month or so– it is very unlikely that Greece will be allowed to default now as the contagion effects on the European financial system would make Lehman 2008 seem like a walk in the park! The long dated bonds (due 2037) are trading in the early 40s and likely present the best price appreciation potential.
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