This is Close to Being The Crux

Bill Gross

By REUTERS
Published: June 30, 2008
Filed at 12:07 p.m. ET
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NEW YORK (Reuters) - Longer-term U.S. Treasury bond yields have bottomed and will steadily rise because of inflation pressures as the U.S. economy clambers out of the current downturn, the manager of the world's biggest bond fund wrote on Monday.
"Intermediate and long-term yields on government bonds have already bottomed and will gradually rise" during the term of the next president, due to start in January, wrote Bill Gross, chief investment officer of Pacific Investment Management Co., or PIMCO, in his monthly "Investment Outlook" letter for July.
The benchmark 10-year Treasury note's yield, which moves inversely to its price, dipped to 3.285 percent in January, the lowest since 2003, on signs of a weakening economy and escalating credit market strains.
But since then, surging commodity prices and rising inflation expectations have pushed the 10-year yield up by about one percentage point, to above 4.30 percent last week.
Over time, current negative real interest rates, the Federal Reserve's extraordinary liquidity provisions to the banking system and the government's fiscal stimulus measures should promote reflation, Gross said.
"This economy will need an additional jolt of $500 billion or so of government spending real quick," he wrote.
This month's investment outlook letter was addressed to Democratic White House hopeful Barack Obama, as if he had been elected.
The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.
"You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions," he wrote. "Your administration will produce this nation's first trillion dollar deficit."
Foreign central banks and private investors may not continue to buy Treasuries at the same rate as in previous years a trend that has kept Treasury yields lower than they would otherwise be. Absent these low interest rates to aid the economy, "what you need now is fiscal spending and lots of it," Gross wrote.
The housing market's decline will continue, he forecast.
By January, U.S. home prices will have fallen nearly another 10 percent, "and our Japanese-style property deflation will be in full stride," Gross wrote.
Japan's real estate markets crashed in the early 1990s and have yet to fully recover.
"Dear President Obama," the letter began. "You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans," Gross wrote. "He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love."
(Reporting by John Parry; Editing by Dan Grebler)

Also The Very Crux

new_york_times:http://www.nytimes.com/2008/06/30/opinion/30krugman.html

By PAUL KRUGMAN
Published: June 30, 2008
It’s feeling a lot like 1992 right now. It’s also feeling a lot like 1980. But which parallel is closer? Is Barack Obama going to be a Ronald Reagan of the left, a president who fundamentally changes the country’s direction? Or will he be just another Bill Clinton?


Current polls — not horse-race polls, which are notoriously uninformative until later in the campaign, but polls gauging the public mood — are strikingly similar to those in both 1980 and 1992, years in which an overwhelming majority of Americans were dissatisfied with the country’s direction.
So the odds are that this will be a “change” election — which means that it’s very much Mr. Obama’s election to lose. But if he wins, how much change will he actually deliver?
Reagan, for better or worse — I’d say for worse, but that’s another discussion — brought a lot of change. He ran as an unabashed conservative, with a clear ideological agenda. And he had enormous success in getting that agenda implemented. He had his failures, most notably on Social Security, which he tried to dismantle but ended up strengthening. But America at the end of the Reagan years was not the same country it was when he took office.
Bill Clinton also ran as a candidate of change, but it was much less clear what kind of change he was offering. He portrayed himself as someone who transcended the traditional liberal-conservative divide, proposing “a government that offers more empowerment and less entitlement.” The economic plan he announced during the campaign was something of a hodgepodge: higher taxes on the rich, lower taxes for the middle class, public investment in things like high-speed rail, health care reform without specifics.
We all know what happened next. The Clinton administration achieved a number of significant successes, from the revitalization of veterans’ health care and federal emergency management to the expansion of the Earned Income Tax Credit and health insurance for children. But the big picture is summed up by the title of a new book by the historian Sean Wilentz: “The Age of Reagan: A history, 1974-2008.”
So whom does Mr. Obama resemble more? At this point, he’s definitely looking Clintonesque.
Like Mr. Clinton, Mr. Obama portrays himself as transcending traditional divides. Near the end of last week’s “unity” event with Hillary Clinton, he declared that “the choice in this election is not between left or right, it’s not between liberal or conservative, it’s between the past and the future.” Oh-kay.
Mr. Obama’s economic plan also looks remarkably like the Clinton 1992 plan: a mixture of higher taxes on the rich, tax breaks for the middle class and public investment (this time with a focus on alternative energy).
Sometimes the Clinton-Obama echoes are almost scary. During his speech accepting the nomination, Mr. Clinton led the audience in a chant of “We can do it!” Remind you of anything?
Just to be clear, we could — and still might — do a lot worse than a rerun of the Clinton years. But Mr. Obama’s most fervent supporters expect much more.
Progressive activists, in particular, overwhelmingly supported Mr. Obama during the Democratic primary even though his policy positions, particularly on health care, were often to the right of his rivals’. In effect, they convinced themselves that he was a transformational figure behind a centrist facade.
They may have had it backward.
Mr. Obama looks even more centrist now than he did before wrapping up the nomination. Most notably, he has outraged many progressives by supporting a wiretapping bill that, among other things, grants immunity to telecom companies for any illegal acts they may have undertaken at the Bush administration’s behest.
The candidate’s defenders argue that he’s just being pragmatic — that he needs to do whatever it takes to win, and win big, so that he has the power to effect major change. But critics argue that by engaging in the same “triangulation and poll-driven politics” he denounced during the primary, Mr. Obama actually hurts his election prospects, because voters prefer candidates who take firm stands.
In any case, what about after the election? The Reagan-Clinton comparison suggests that a candidate who runs on a clear agenda is more likely to achieve fundamental change than a candidate who runs on the promise of change but isn’t too clear about what that change would involve.
Of course, there’s always the possibility that Mr. Obama really is a centrist, after all.
One thing is clear: for Democrats, winning this election should be the easy part. Everything is going their way: sky-high gas prices, a weak economy and a deeply unpopular president. The real question is whether they will take advantage of this once-in-a-generation chance to change the country’s direction. And that’s mainly up to Mr. Obama.