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I think this is an interesting piece that you might find interesting
if you can read past the first three paragraphs.

Michael


Investment Outlook
Bill Gross | August 2010

Privates Eye

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I write this month to condemn the inventor of the electronic “seeing
eye” toilet. Yes, that’s right, I’m talking toilets here, doo-doo-
stuff, some of which I hopefully won’t step in myself over the next
few paragraphs. I know there must be more substantive and less
objectionable topics to bring before you, but I have a sense that many
of you join me in spirit if not common experience and so I devote this
month’s Outlook to another trivial snippet emphasizing our joint
humanity and sense of loss due to the recent disappearance of the hand
flusher.

I don’t know where it is located exactly, but there’s an electronic
eye in the plumbing of public toilets these days that can sense when
you get up and down (or is it down and up) and are finally finished
with your “business,” if you get my drift. My doctor says a proctology
exam is a necessary evil but cameras in toilets? Never having seen
myself from this particular angle, it is particularly embarrassing to
turn over the assignment to a camera and in effect say, “Snap away –
see anything that doesn’t look right?” I figure if there’s an eye
there, then there could also be a little voice that says, “Have a
seat,” which of course I do, usually with much haste and a sense that
I’d better get on with it before I attract a crowd.

It’s after the dirty deed is complete, however, that the real intrigue
begins. Does it flush or doesn’t it? Only the computer chip knows for
sure. Sometimes, though, after the paperwork has been filed, pants
pulled up and an attempted getaway initiated – nothing happens. No
flush. Well, what is one to do in such circumstances? You can’t just
leave it there, you know. Sometimes when the toilet’s plugged and
there’s no plunger like in European bathrooms, you can get out of
there quick with conscience in tact, but only, of course, after
checking to see that there’s no one else in the restroom who might be
able to testify against you in court for being a non-flusher. With
electronic eye toilets, however, the conscience is never clear and so
you wave your hand in front of the camera, hoping to convince it by
the breaking of light waves that someone really has used the toilet
and that somehow it just forgot, or maybe the deposit was so minuscule
that it just didn’t merit a flush. Hello in there! Having failed to
trick it, however, the next step is to look for that little button in
the back that you supposedly push in an emergency – sort of like a
“break glass in case of fire” toilet equivalent. But think of all the
billions of germs! At least with an old handle you could kick it with
your shoe, hold up your arms like a doctor scrubbing for surgery and
make an exit looking like you’re auditioning for a part on ER. Finally
I suppose you head for the door, all the while listening for the
flush, the flush, that beautiful sound of the flush. I could have done
it myself, you know, with a lot less hassle. Which is why I support a
retreat to the old days, (not the backyard outhouse), but the good old-
fashioned hand flusher. One push, and presto – you’re good to go!

I really do have a serious message this month, an adjunct to the New
Normal that will likely impact growth and financial markets for years
to come. Our New Normal, to repeat ad nauseam, is predicated upon
deleveraging, reregulation and deglobalization, all of which promote
slower economic growth and lower inflation in developed economies
while substantially bypassing emerging market countries that have more
favorable initial conditions. In recent months, Mohamed El-Erian has
added a developing corollary that emphasizes the lack of an
appropriate policy response to what is a structural as opposed to a
cyclical development, and you should read his frequently published op-
eds for a more thorough analysis as well as those written by Jeffrey
Sachs and others who are constructively suggesting a way back to the
old normal.

That return journey will be all the more difficult to accomplish,
however, because of demographics, an influence that much like gravity
is hard to see but whose effect is all too powerful. Demographics – or
in this case population growth – is so long term in its influence that
economists and observers are inclined to explain the functioning of
economic society without ever factoring in the essential part that it
plays in growth. Production depends upon people, not only in the
actual process, but because of the final demand that justifies its
existence. The more and more consumers, the more and more need for
things to be produced. I will go so far as to say that not only growth
but capitalism itself may be in part dependent on a growing
population.Our modern era of capitalism over the past several
centuries has never known a period of time in which population
declined or grew less than 1% a year. Currently, the globe is adding
over 77 million people a year at a pace of 1.15% annually, but
slowing. Still, that’s 77 million more mouths to feed, 77 million more
pairs of shoes to make, 77 million more little economic units of
demand – houses, furniture, cars, roads, oil – more, more, more.
Capitalism, I would assert, thrives on more, more, and more, but not
so well when there is less or an expectation of less. This is not the
Malthusian thesis, which maintained that at some point the world would
run out of food to satisfy a growing population; it is an assertion
that capitalism depends upon final demand and that if there ever comes
a time when population growth slows, then the world’s most efficient
economic system will be tested. If anything, my thesis is anti-
Malthusian in its assertion that there will always be enough
production to satisfy a growing population, but perhaps not enough new
people to sustain growing production.

Observers will point out, as shown in the following chart, that global
population growth rates have been declining since 1970 with no
apparent ill effects. True, until 2008, I suppose. The fact is that
since the 1970s we have never really experienced a secular period
during which the private market could effectively run on its own
engine without artificial asset price stimulation. The lack of
population growth was likely a significant factor in the leveraging of
the developed world’s financial systems and the ballooning of total
government and private debt as a percentage of GDP from 150% to over
300% in the United States, for example. Lacking an accelerating
population base, all developed countries promoted the financing of
more and more consumption per capita in order to maintain existing GDP
growth rates. Finally, in the U.S., with consumption at 70% of GDP and
a household sector deeply in debt, there was nowhere to go but down.
Similar conditions exist in most developed economies.


The danger today, as opposed to prior deleveraging cycles, is that the
deleveraging is being attempted into the headwinds of a structural
demographic downwave as opposed to a decade of substantial population
growth. Japan is the modern-day example of what deleveraging in the
face of a slowing and now negatively growing population can do. Prior
deleveraging periods such as what the U.S. and European economies
experienced in the 1930s exhibited a similar demographic with the
lowest levels of fertility in the 20th century and extremely low
population growth. Things did not go well then. Today’s developed
economies almost assuredly offer substantially less population growth
than the 1.5% rate experienced over the prior 50 years. Even when
viewed from a total global economy perspective, population growth over
the next 10–20 years will barely exceed 1%.

The preceding analysis does not even begin to discuss the aging of
this slower-growing population base itself. Japan, Germany, Italy and
of course the United States, with its boomers moving toward their 60s,
are getting older year after year. Even China with their previous one
baby policy faces a similar demographic. And while older people spend
a larger percentage of their income – that is, they save less and
eventually dissave – the fact is that they spend far fewer dollars per
capita than their younger counterparts. No new homes, fewer vacations,
less emphasis on conspicuous consumption and no new cars every few
years. Healthcare is their primary concern. These aging trends present
a one-two negative punch to our New Normal thesis over the next 5–10
years: fewer new consumers in terms of total population, and a growing
number of older ones who don’t spend as much money. The combined
effect will slow economic growth more than otherwise.

PIMCO’s continuing New Normal thesis of deleveraging, reregulation and
deglobalization produces structural headwinds that lead to lower
economic growth as well as half-sized asset returns when compared to
historical averages. The New Normal will not be aided nor abetted by a
slower-growing population nor by cyclical policy errors that thrust
Keynesian consumption remedies on a declining consumer base. Current
deficit spending that seeks to maintain an artificially high
percentage of consumer spending can be compared to flushing money down
an economic toilet. Far better to create and mimic other government
industrial policies aimed at infrastructure, clean energy, more
relevant education and less costly healthcare services. Until we do,
policymakers will continue to wave their hands in front of the
electronic eye – waiting for the flush, waiting for the flush, waiting
for the flush, with very little success. Try another way, Washington.
El-Erian, Sachs and other 21st century policy thinkers have a better
way to push the handle.

William H. Gross
Managing Director