This Week with J. Mark Nickell & Co.

Economic growth—where we are, two possible trajectories for the intermediate term, and a “middle way” to stimulate growth that hugs neither ideological extreme.  Those are the questions we look at this week.

S&P 500 Posts Biggest Two-Day Gain Since January on Jobs.  175,000 jobs were created last month, an increase from April’s report of 149,000 jobs gained (as revised).  However, the jobless rate climbed 1/10 of a point to 7.6% as more Americans entered the labor force.  “The improvement in the labor market is a sign that companies are looking beyond fiscal restraint this quarter and are optimistic enough about the prospects for demand in the second half of the year.  At the same time, bigger job and wage gains are needed to move Fed policy makers closer to scaling back record monetary stimulus.”  Stocks rose, giving the S&P 500 its best two-day rally since January.

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New Normal … Morphing.  Once a year, PIMCO – the bond giant – hosts a “Secular Forum” where they invite global thought leaders and experienced practitioners to share their insights.  PIMCO uses this forum to crystallize a three-to-five year outlook for the global economy.  This year’s report—prepared by Mohamed A. El-Erian, who in my opinion, is one of the smartest and clearest thinkers in the investment world—describes the medium-term outlook as one of “stable disequilibrium,” with one of two contrasting outcomes for the U.S.  One path is that activist central bank policies buy time “to lessen the twin problems of deficient aggregate demand and structural impediments and by financing debt problems…” so that economies heal endogenously and politicians deliver on their policy responsibilities.  On the other hand, if growth fails to materialize over time, “reality will snatch back the returns from investors” that activist Fed policies have delivered as a “down payment on future growth.” Moreover, in the latter scenario, the economy “transitions to even lower growth that complicates the West’s (actual and potential) debt traps, causes financial instability, fuels greater social tensions,

[and] worsens political dysfunction…”  In summary, “growth is needed to overcome the current malaise.”

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Woody Brock’s Challenge to Krugman and the Keynesians.  To generate growth, polarizing choices confront policymakers.  On one side are Keynesians like Paul Krugman, advocates of aggressive spending to stimulate economic growth.  On the other side, deficit hawks argue for aggressive debt reduction.  A third side is proposed by Horace “Woody” Brock, where the U.S. borrows but spends wisely and develops new policy instruments to put the brakes on asset bubbles. As reported by Robert Veres,  Brock advocates that the “government should aggressively run deficits if the expected rate of return achieved by investing in public sector projects is higher than private sector projects…when conservatives argue with Krugman’s proposals, saying that the government is doing little more than larding our children’s future with more debt, Brock agrees with them.  “My view is: yes, we don’t need any more unproductive debt…we want to finance projects that will hire our children in the future and pay them back many times over…I want more debt, but of the good kind.”  Brock also advocates a set of policy instruments to restrain asset bubbles.

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J. Mark Nickell & Co.


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