Thursday, 30 June 2011

Why Bill Gross and PIMCO should stick with Treasuries

This is the advice I gave Bill Gross in March this year. He did not listen, and lost millions in the process. But that is not our problem: the "analysis" behind the ironic "advice" is what matters.

Report joseph belbruno | March 10 8:38am | Permalink

@ aufsteiger and others - Of all the matters discussed in connection with Euroland, and they are many as you can see from the comments below, the role of the "bond market" is fast becoming the most controversial. It had to do so, because the biggest outcome of the Great Financial Crisis was - and this is why I stressed this crucial sentence in Wolf's article right at the start of this thread - "when private lenders tighten the noose, notionally private debt tends to turn into public debt, as governments try to rescue imploding financial systems and sustain activity in collapsing economies". What does this mean, "notionally private debt"? Why the "notionally"?

Nowhere as in the study of "economics", except perhaps in philology (been reading too much Gadamer lately), is the use of "words" more deceiving (earlier I referred to Wittgenstein's "notion" that "ideas are like spectacles"). Especial care should be taken when we use words like "competition", "market", "money", even "credit" that is made up of bonds and other debt instruments. We need to go beyond the terminology - and its "legal" mystifications ("creditor", "debtor" - just as Kant smuggled in judges and accused in his ethics) - and peer into the heart of the realities involved.

As you know, the Freiburg School sought to define "the rules of competition". The problem is: if "competition" needs "rules" - why, then it is no longer "competition"! Then it is a game. Ah, but an "antagonistic" game - in other words, a "game" whose very aim is to bring "the game and its rules" to an end! Our friend Olaf below may well wish to reflect on this.

Now to "private" and "public" debt. It is inappropriate to write a chapter on these matters here (but I am for a book, and I am "smuggling" surreptitiously some "ideas" here - a little like Hegel who gave his lectures looking circumspectly around... "as if someone might understand"). But I will cut to the quick with a kind of riddle, just to imitate Bill Gross whose PIMCO fund just exited US treasuries.

I understand that there was a "golden" time when "private" money financed States. But now that States, even through the Fed in the US, have control of the money supply and - as a result of large budgets and deficits! - play such a large, nay, determinant role in "the economy", is it not rather the case that "private" debt has become "a function of" the institution that issues "public" debt - that is, the State? Which then is the dog and which is the tail? The answer ought to be obvious - for those who, like Bernanke, believe in "Rooseveltian resolve". So you might look forward to the next bout of quantitative easing. That is why "private debt" has become only "notionally private" - in reality it is as "public" as the State.

The reality remains that "bondholders" no longer call the shots - vi rerum! by force of things! And Gross may "exit" as much as he likes, but "you've got to be in it to win it!" When "private" debt exits the field, takes its ball from the pitch and refuses to play, then it has lost "the game"! Because "the rules" have changed, because "the goalposts" have been moved.  You might say, to ape Bill Clinton - "It's the State, stupid!" Regards to all.

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