Tuesday, December 11, 2012

Will A Negotiated Agreement on the Fiscal Cliff Fix Things?

While the dysfunction of the "fiscal cliff" negotiation crawls along like a slow-motion Titanic movie dubbed in some obscure foreign language, vaguely interested readers may want to check out this PIMCO analysis. PIMCO is a leading global bond trading firm and when its sages talk, people listen.

Bill Gross, PIMCO's CIO, offers a remarkably readable Beatle-esque analysis of the macroeconomic "headwinds" that are bedeviling the U.S. economy. While Mr. Gross' observations have important implications for the DMCB readers living on Main Street, they are particularly scary for the insurers on Wall Street (as well as their cousins on Not-For-Profit street).  That's because insurers rely on investments to supplement income. Sputtering bond returns in the insurers' portfolios could ultimately translate into even higher premium costs for their beneficiaries.

According to Mr. Gross:

1. Developed countries like the U.S are reducing their considerable debt and, like it or not, austerity will be part of the solution. In the meantime, there are compelling data that show that when a country's debt exceeds 90% of gross domestic product, it slows economic growth. The U.S. is now at 100%, which means the likelihood of using tax revenues to fix the debt will be blunted by years of a lackluster economy. Even if President Obama gets his way with the House Republicans, fixing the debt problem will take many years.

2. The fall of the Iron Curtain and the entry of China to the global economy added billions of consumers to the world market.  That impact is now waning.

3. "Technological unemployment" means machines, robotics and software are cheaper than full-time-equivalents (FTEs) on an assembly line. It's possible that that will lead to a "new normal" unemployment equilibrium of 7%

4. It's the 20 to 55 year age group that grows families, buys houses and grows companies. The U.S. population is aging, which means there will be greater savings and less consumption leading to lower economic growth.

The good news is that hydrocarbon energy will be getting cheaper, housing may finally be turning the corner and who knows when the "Next Big Thing" (think handhelds) will hit.

Depressing stuff, eh? The DMCB isn't the only one that's dismayed at all the doom and gloom.  Rather than turn to the Beatles for inspiration, the DMCB wonders if the current situation is being best summed up by the still-rockin' Rolling Stones. 

(By the way, the DMCB declines to link the actual music video. It's a horrid, misogynistic and antifeminist display of modern vulgarity that unnecessarily detracts from 1) a nifty chord progression and 2) the miracle that Keith Richards is still alive. Look no further for another window into the war on women.)


Gary M. Levin said...

My feelings exactly . why did you take it down?

Jaan Sidorov said...

Take what down?