PIMCO's Common Sense

I never thought that PIMCO would vote for an inflationary Fed policy and monetizing long-term Treasury Debt. But Paul McCulley, in his "Global Central Bank Focus," has just done so, in a very perceptive and balanced speech to the Money Marketeers Club. McCulley points out the policy paradox we find ourselves in, with a need to greatly expand the nation's balance sheet through borrowing while the private economy is deleveraging with a vengeance. This has the Republicans and traditional conservatives predictably frothing at the mouth. The policy prescription also calls for vastly expanded temporary federal spending to fill the demand gap, again causing the GOP leadership to pull out what's left of their hair. As McCulley puts it, the Fed has placed itself at the service of fiscal policy, normally the province of the Congress.

He also deftly points out the difficulty of the Euro Zone, where the ECB has the power to conduct a unified monetary policy, but no unified political authority exists to exercise fiscal policy. As he puts it,

To be sure, the ECB (European Central Bank) has difficulty with the concept of QE [quantitative easing], in part because Euroland represents monetary union without political union and, thus, fiscal policy union. Put differently, if the ECB wants to be accommodative of more Keynesian fiscal policy stimulus, de facto monetizing it, what fiscal authority does the ECB call to cut the deal?

I thought this was great stuff. I have been a recent convert to reading Bill Gross, but I think I will start following Paul McCulley as well. We're all Keynesians now!