Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Depression Denial Syndrome Inflation Is Always around the Corner but Never Arrives

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Depression Denial Syndrome Inflation Is Always around the Corner but Never Arrives

Article excerpt

Last week, Bill Gross, the so-called bond king, abruptly left PIMCO, the big investment firm he had managed for decades. People were shocked but not exactly surprised; tales of internal troubles at PIMCO had been all over the papers. But why should you care?

The answer is that Mr. Gross' fall is a symptom of a malady that continues to afflict major decision-makers, public and private. Call it depression denial syndrome: the refusal to acknowledge that the rules are different in a persistently depressed economy.

Mr. Gross has a towering ego and is very difficult to work with - like a lot of financial players. But even the most lurid personality conflicts wouldn't have mattered if PIMCO had continued to do well. But it didn't, largely thanks to a spectacularly bad call Mr. Gross made in 2011. And here's the thing: Many other influential people made the same bad call - and are still making it, over and over again.

The story starts when the immense housing bubble popped. Spending on houses collapsed, and broader consumer spending took a hit as families that had borrowed heavily to buy houses saw the value of those homes plunge. Businesses cut back, too. Why add capacity in the face of weak consumer demand?

The result was an economy in which everyone wanted to save more and invest less. Since everyone can't do that at the same time, something else had to give - and two things gave.

First, the economy went into a slump, from which it has not fully emerged. Second, the government began running a deficit, as the economic downturn caused a sharp fall in revenue and a surge in safety net spending like food stamps and unemployment benefits.

We normally think of deficits as bad - government borrowing competes with private borrowing, driving up interest rates, hurting investment and setting the stage for higher inflation. But, since 2008, the economy has been awash in savings with no place to go. In this situation, government borrowing doesn't compete with private demand because the private sector doesn't want to spend. Since they aren't competing with the private sector, deficits needn't force up interest rates. …

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