Bill Gross: Stimulate Government Spending, Not Consumption

From PIMCO Managing Director Bill Gross's monthly market commentary for February 2008:

The $150 billion "return to sender" deficit plan advanced by Bush and the Congress, for instance, amounts to just 1% of GDP and is labeled temporary. It will be of marginal benefit to long-term prosperity. To understand why, consider that the productivity of our economy ultimately depends on its ability to 1) innovate, and 2) save and invest, and that there is little of either in this stimulus package. Some have even suggested – and with my somewhat grudging concession – that this package will help the Chinese economy more than ours... To provide a stable recovery path, government spending needs to fill the gap – not consumption. Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery. Assistance for homeowners? That too...

Approaches to monetary policy must change as well. 1% short rates were so effective 5 years ago that they not only bolstered demand but created a housing bubble of Frankensteinian proportions... My point is that Chairman Bernanke must recognize the reduced benefits and obvious dangers of a déjà vu trek to 1% short rates. Those yields produced 5% 30-year mortgage rates to the homeowner for a 2-3 month period in 2003 and they could do so again, but bubble creating, inflation inducing damage to the U.S. dollar would be the likely result now. ...

A well constructed, more than temporary, fiscal/monetary stimulus plan is what is required to rejuvenate a U.S. economy reeling from a low punch delivered by a private market economy gone too far. Its "Rosemary’s Baby" took the form of a shadow banking system based on leverage and the fateful conclusion that a finance-based economy alone can deliver prosperity. It cannot. As Keynes theorized and then [New York Times op-ed columnist Paul] Krugman affirmed, when private demand falters, it becomes the responsibility of government to fill the breech. Because it likely will not do so effectively until after a new Administration is elected in late 2008, the U.S. economy and its somewhat coupled global companion will sleepwalk for some time, and a resumption of prosperity, as we knew it, will be dependent on reforms of monetary and fiscal policy resembling the 1930s more than our past decade. Better late than never.

Comments

[flow5:]

Everybody flunked accounting:

Commercial Banks as a system don’t loan out anything. They create money when they make loans to or buy securities from the non-bank public.

Money creation is not self-regulating.

You can’t take money out of the banking system (only the FED can)

Savings transferred through the intermediaries never leave the CB system. The intermediaries are the customers of the CBs.

Savings held within the commercial banking system are lost to investment or to any other type of expenditure.

From the standpoint of the economy the banks shouldn’t pay for something they already have. Payments on Commercial bank savings raise all interest rates, induce disintermediation among the financial intermediaries, shrink real-gdp, & decrease CB profits.

"The withdrawal of deposits from our new age shadow banking system has frightening potential consequences because a thinly capitalized banking system is always at risk relative to its more conservative counterpart." Bill Gross

Gross is, of course, ignorant. Gross (and all Keynesians) don't recognize the difference between financial intermediaries & commercial banks.

To get the biggest bang for the buck for our non-bank problem is to get the money creating depository institutions out of the savings business. Why? Because the utilization of bank credit to finance real investment or government deficits does not constitute a utilization of savings, since bank financing is accomplished through the creation of new money.
Monetary policy seeks the attainment of our national economic objectives – a high and sustainable rate of economic growth, high employment, and reasonable price level stability, and the avoidance of chronic deficits (or surpluses) in our balance of payments, principally through the open-market device. Through this device, the day-to-day fluctuations in the volume of excess bank reserves are smoothed out at the level deemed appropriate by the authorities. Neither in the short-run nor over the longer term is the objective to achieve or maintain the volume of our means-of-payment money at any given level.

"We may assume, therefore, that the initial response of the monetary authorities to a shift from demand to time deposits/savings, ceteris paribus, is to effect a volume of sales in the open market sufficient to extinguish the excess reserves brought into being by this shift./ If, in due course, it is decided to maintain excess reserves at a higher level, that is, to follow an easier (or less restrictive) monetary policy, this is presumably undertaken to counteract recessionary tendencies in the economy.

This being so, it must be presumed that the growth of time deposits/savings could not induce a shift toward a relaxation of monetary restraints unless such growth has a dampening effect on the economy, a not unlikely possibility since savings held in the form of time deposits are lost to investment (and to any other type expenditure) so long as they are sol held. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have deleterious effects in our highly interdependent pecuniary economy.

Congress, the state legislatures, and our national and state monetary authorities, in the interest of the commercial banks, the financial intermediaries, and above all the interest of the community, should pursue every possible means for promoting the orderly and continues flow of monetary savings into real investment." Leland James Pritchard, Phd economics Chicago 1933, MS Statistics Syracuse 1932).

THAT IS, GET THE COMMERCIAL BANKS OUT OF THE SAVINGS BUSINESS. Why? because savings transfered to the financial intermediaries never leave the commercial banking system. Any why should commercial banks pay for something they already have? i.e. interest on savings deposits.

2008 Jan 29 02:12 PM