Bill Gross, who was recently rated second as investor with most wisdom (behind Buffet), thinks that the developed world will not be going back to normal soon. In fact he calls the upcoming state a "new normal".
A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model.
Apart from warning about a lost decade similar to the Japanese one (which in fact has lasted more than a decade), Gross points out that financial stimulus is not same as real economy stimulus. He says that US government will be more involved in boosting consumer confidence by creating more jobs and putting money in their hands, most likely at lower efficiency than private enterprises. The trouble is - there is only a limit where fiscal deficit can go and the world is already abandoning the dollar from its reserve currency status.
Managing an economy purely from financial or economic point of view will never be enough. If you are representing people, you better listen to what they want. And most people fortunately or unfortunately, do not want change in jobs, salaries or skills at the speed of paper trade on electronic exchanges. Unemployment is sticky (takes longer time for rise/fall) and hence politically & socially dangerous if people start losing patience (see KAL's cartoon). Potential crisis lies in illiquidity of votes rather than capital.
Amazing how everything in economics finally ends up in some issue related to behaviour.
Related articles on The Economist:
- America’s public debt – Tomorrow’s burden, trouble in slow motion
- The long climb
- Unrepentant bears - You cannot print your way out of money
Update: Krugman argues for more stimulus starting from same line of stickiness of unemployment.
