Interesting PIMCO Proposal

[powayseller]

PIMCO’s Sr VP along with a Managing Director urges the “U.S. Federal Reserve to adopt a Japan-style zero interest rate policy (ZIRP) as a remedy for global imbalances that threaten the well-being of not only the U.S. economy but economies around the world.”

They believe fiscal policy needs to direct capital to investment, and away from asset-price inflation.
“Fiscal policy should be aimed at deterring investment in non-productive financial assets and increasing productive capital spending and domestic employment.”

“We need more engineers and fewer real estate agents.”

Their point about China is what I’ve been thinking too. As the US heads into recession, China’s stock market will go down too.
“The global economy is going through a similar upheaval today and the growing imbalances will ultimately lead to extreme global economic hardship over the next two decades if not corrected. History suggests that this hardship will be concentrated in debtor nations, however creditor nations dependent on debtor-nation aggregate demand will suffer just the same. The U.S. is the world’s largest debtor nation today, with China the world’s largest creditor.”

[synchro]

Can you say “economic crackpot”? It naively assumes that foreign countries won’t react or take countermeasures to what the authors proposed US to do. For one thing, you can kiss the US dollar goodbye, and say hello to hyperinflation.

That this kind of nonsense comes out of a big financial institution like PIMCO is scary.

[powayseller]

I don’t really understand if this is a good idea or not, but I am sure that its implementation would benefit PIMCO’s business!

If our interest rates were reduced to zero, who would buy Treasuries? Who would invest in CDs? Who would bother saving?

They do make a good point about the effect of rising interest rates on the account deficit. The interest rate on 12-month Treasuries increased from 1% to 4% in the last 2 years. We have increased by 30% the interest payments on the national debt, to $270 billion! This year it is estimated to be $370 billion! Does anyone else see this as a problem?

Instead of printing money, the government is increasing the money supply by auctioning off huge amounts of Treasuries, which cost us $370 billion to service. There is a huge cost to inflating the money supply.

I also want to note that the Fed doesn’t seem to understand the difference between monetary and price inflation. Adding to the money supply by auctioning off Treasuries causes monetary inflation. Increasing commodity prices cause price inflation. The Fed sees the cost of higher oil working through to prices and raises the interest rates to control inflation. But, higher prices already act to temper spending. Now the consumer is hit with a double whammy: he already cut back on spending because gas is higher, and goods made with copper/gold/oil are more expensive, and then the Fed comes along and raises interest rates to slow capital spending and increase the cost of servicing consumer debt, so he gets a double whammy. Raising interest rates to lessen the effect of rising gas prices is the wrong thing to do. Why doesn’t the Fed distinuish between these 2 types of inflation?

Next, I wonder how the Fed could possibly stop raising rates, when any anticipation of a stop in further hikes is decreasing the value of the dollar already.

[powayseller]

Rich, what do you think about my comments about price vs monetary inflation? I got this from my brilliant brother, and it makes sense, but have never read about inflation separatd into 2 components before.

[powayseller]

If the Fed sees rising commodity prices as inflationary, because they’ll increase producer prices, manufacturing costs, and ultimately show up in the CPI, then the recent rise in gold, copper, oil, silver, etc. would be considered inflationary and a reason for further tightening.

But the rising prices will in and of themselves lower consumer spending, as consumer goods rise in cost. There is no need for the Fed to tighten. Furthermore, even if they tighten, would that have any effect at all on gas and commodity prices? Demand is dampened already by the fact of the higher prices.

It seems the commodity and oil prices are going up independent of monetary supply, since their prices are rising in other currencies too. Excess demand is causing the prices to rise, not inflation.

So if price inflation can exist outside of monetary inflation, why does the Fed look only at CPI?

If they are causing inflation by issuing more bonds, why don’t they stop issuing so many bonds? It seems in my simple reasoning that the government is the cause of the inflation, but then take it out on the consumer by raising interest rates. Then the government has to service higher debt. Does this even make sense?

[Jim Brubaker]

Powayseller: I think the “make sense part” has to to with two things; Fiscal policy and Monetary policy.

Greenspan gave the Japanese economy a free ride on our T-bills for several years. Japans 0% interest rate made it advantageous to invest in the US market (T-bill = No Risk). Now fast forward to now, and 15 rate increases and the 30 year bond rate jumped only 1/2 a point? Its not suppose to work that way. Quite possibly, they are pushing on a string.

Now take Fisical policy, the war in Iran, the budget,the aging baby boomers health care, Social Security that is not funded and you get a real mess.

Congress is saying “Drinks for everyone,” and the Fed is saying “Whoa.” This might sound biased (take it for what its worth) your congressman wants to get reelected, facing reality could kibosh that.

With the two conflicting operators Monetary vs Fiscal, there is no-one out there that can run any sort of cohesive coalition.

My answer; No, it makes no sense.

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