The King speaks

It is wise in my experience to pay attention to what the bond markets are doing when trying to divine the future of equities and other assets. And when the king of the bond market speaks it pays to listen and try to understand.

As long as the political process is a popularity contest we can continue to get what we ask for in politics and the economy. The new normal is here, but the American people want that old normal. You know, the one where the economy grows 5% to 7% each year. The one where property values go up and prices at Walmart go down. That old normal where the stock market consistently makes 8% to 15% a year, more in the good years. That old normal where we were all young and strong and healthy and had a boundless optimism that helped that bubble to grow. DOH!

The old normal was not normal. The old normal that we wistfully long for was the result of years of declining interest rates and increased consumer consumption based on consumer debt. The stock market gains were the result of increased consumer debt combined with declining real wages for the workers and increased profit margins for corporations. The low inflation was due to the increased import of goods from the low wage parts of the world, combined with those countries loaning our money back to us and influencing currency values.

In other words, we borrowed to continue our lifestyle. And now we need to pay the money back. But so far the only debate we are having is over who is responsible for the debt and who has to pay it back. Those that advocated for low interest rates over the years are often those who have profited from the increased debt that resulted. But they say they were just good businessmen. They were smarter. Those who are left holding the bag should have known better. But the rich are few and the bagholders are many. And historically that is a situation that is ripe for tragedy.

That is why I advocate for higher taxes, balanced budgets, national health care and social security that everyone pays for. This leads to a net national savings that can be used in time of emergency. Kind of like funding FEMA.

Here is Bill Gross:

http://www.pimco.com/EN/Insights/Pages/Time-To-Vote.aspx