Pimco founder: weak demand a bigger problem than debt

I’ve been writing a lot lately about something that seems pretty obvious to me: weak demand is at the heart of our current economic woes, not the manufactured short-term debt “crisis” or even the very real long-term debt and deficit challenges.

Check out a piece in today’s Washington Post by Bill Gross, founder and co-chief investment officer of the investment management firm Pimco: America’s debt is not its biggest problem.

From the piece:

It is critical for politicians and investors alike to distinguish between cause and effect, disease and symptom. Washington has been operating the past few months under the assumption that the United States and our euro-zone economic trading partners are experiencing a debt crisis that must be resolved by exorcising excessive spending in the near term. To Republicans, and even many co-opted Democrats, the debate starts with spending cuts and how much must be done to appease voters and the markets, both now and in November, when the “Gang of Twelve” committee that resulted from the debt-ceiling deal potentially follows through with its mandate. [. . .]

[. . .]while our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.

Gross offers three long-term systemic trends that have helped reduce aggregate demand:

(1) Aging demographics, where boomers everywhere spend less, in contrast to their youth, as they approach retirement; babies, houses and second cars shift to the scrapbook of memories as opposed to future spending power.

(2) Globalization, where 2 billion new competitive workers from Asia and elsewhere take jobs and paychecks from complacent and ill-trained 40-somethings in developed markets.

(3) Technological innovation, where machines and robots displace human labor, resulting in corporate profits but declining wages.

We need to focus primarily on growth to overcome these contractionary forces. Gross writes: “Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.”

It’s well worth a read.