Thursday, April 1, 2010

Bill Gross on Escape From a Debt Crisis

It has not been easy to find a candid observation of the condition of many economies around the world, and the debt problems that are now strangling us, that has any glimmer of optimism. But optimism is beginning to shine through the rare crack in a pragmatist's armor. Here is a link to Bill Gross' recent Outlook where he writes on the possibility of Keynesian policy successfully replacing the loss of widely available private sector credit. IMHO, Bill Gross can be the essential pragmatist. There is a risk he may also feel the need to be political or simply self serving, so I take his words with a little caution.

"Even though the government’s fist has been successful to date in steadying the destabilizing forces of a delevering private market, investors are now questioning the staying power of public monetary and fiscal policies. 2010 promises to be the year of choosing “which government” can most successfully substitute the governments’ fist for Adam Smith’s invisible hand and for how long? Can individual countries escape a debt crisis by creating even more debt and riding another rocking horse winner? Can the global economy?

The answer, from a vigilante’s viewpoint is “yes,” but a conditional “yes.” There are many conditions and they vary from country to country, but basically it comes down to these:

1) Can a country issue its own currency and is it acceptable in global commerce?

2) Are a country’s initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?

3) Can a country’s central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis?"

Of course these have no clear answers. They will unfold unequally across the many economies having to wrestle with debt excesses. My challenge is to keep my senses alert to the changes occurring over the next many months. Read Gross's Outlook for more depth.