The New Normal: Where the Government Plays a Significant Role in Controlling the Economy


The “old normal” is back. But the new normal is coming. And in the meantime, gold is on the move. What does it all mean?

The “old normal” is the way things were before they fall apart. Nearly everyone would like to believe that nothing has changed all that much since September of 2007. Sure, there was a massive stock market crash and a serious blow to confidence in the global financial system. But all of that is ancient history!

In the “old normal” view – preached by politicians left and right and amplified by a compliant media and a smarting financial industry – you should go back to doing what you were doing before. Have a short memory. Buy stocks automatically because they always go up. Get a mortgage and buy a house, perhaps even a second one. Spend money. The government will make more.

There are some key problems with the old normal. These problems were exposed in the last two years. But they are being swept under the proverbial rug of rising stock prices. Those problems include too much household debt, unaffordable house prices, and an entire economy geared to consumption over production.

But all that is changing, says Bill Gross of PIMCO. In his latest note to clients, Gross says we have entered a world of slower growth. This makes sense to us, given what we said earlier this week. The growth in the world’s GDP over the last twenty years has been boosted by cheap credit and cheap energy.

Those two forces accelerated the depletion of natural resources. And with cheap credit anyway, you saw the birth of securitisation and dervitisation, in which bundles of debts became tradeable assets, sold to investors by Wall Street firms (which then loaded up on these assets relative to equity with leverage, sowing the seeds of their own share price demise).

Gross says we are entering the era of DDR – deleveraging, deglobalisation, and re-regulation. He writes that, “All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years.”

“We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.”

If Gross is right, what does this mean for Australians? For starters, there is the danger that growing government deficits could push up interest rates. If Gross is right, larger government deficits could become a staple feature of the economy. If the Australian government insists on maintaining its stimulus measures, we’re pretty sure it will push interest rates up.

Treasury Secretary Ken Henry disagrees, probably. In a recent speech, Henry said that even though global capital flows between developing and industrialised countries were rebalancing in favour of the developing world, Australia might see a net increase in capital flows because it’s such a nice place to invest in. If that were the case, interest rates would remain low as global capital poured into Aussie assets, including the dollar and all that debt being sold by the Australian Office of Financial Management.

Maybe the Secretary is right. But yesterday’s trade figures would give us a bit of fright. Australia reported a$1.55 billion goods and services deficit in July. It was the highest deficit in the last 14 months and nearly three times the size of the June figure. But what does it really mean?

Well, it means the government stimulus kept people spending, whether it was good for them or not. This led to a 4% increase in imports and a decline in exports (in both volumes and dollar figures). There were two interesting nuggets in the data one big takeaway.

The first nugget is that capital goods imports were up by 5%. This isn’t a bad thing. If you can turn new capital goods into new production and profits and employment, it’s actually pretty good, although it does contribute to the deficit. The second nugget is that petroleum products imports were up by 21%.

Australia is well on its way to becoming a chronic net importer of refined fuels. When you couple this with declining domestic oil production, you get a country that is highly dependent on oil imports, which is not a good place to be. Here’s a thought: why not convert Aussie cars to LPG and use some of that massive new gas from Gorgon to power Aussie cars for the next 50 years?

The big takeaway is that the economy is achieving growth in the same “old normal” way, with consumer spending on imports exceeding the volume and value of Australia’s mineral and metal exports. It’s astounding. The “old normal” way of thinking is still firmly in place.

Gross says that, “Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.” But he points out that the slower growth might be better for some countries than others. Gross reached five “strategic conclusions” which you’ll find below.

  1. Global policy rates will remain low for extended periods of time.
  2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
  3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
  4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
  5. The [U.S.] dollar is vulnerable on a long-term basis.

There is some good news and some bad news in those conclusions for Australia. The good news? Gross reckons Asia-connected commodity producers are going to benefit from “future growth.” And the bad news?

We reckon there will be an interval between the old normal and the new normal. Call it the “new bad,” after the first bad of the last eighteen months. This “new bad” will see a second round of falling asset prices and lower growth as government stimulus plans falter and companies and households are forced to engage in more re-balancing of the balance sheet. And frankly, it looks like it’s starting this month.

Gold moved back up near US$1,000 overnight. This is one indication that risk-averse assets might start getting a bid again in the “new bad.” And we might even see another strange period of U.S. dollar strength on deep pessimism about global growth. But that is far too complicated to explain in the little space that’s left this Friday. So we’ll leave it to Monday! Until then…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. At last – a bullish view on the $USD – thats where the money is!

    Richo (the Second)
    September 4, 2009
  2. “Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.”

    So, Mr Gross says ‘leverage up!’, even though leverage could leave an investor with less than nothing?

    Government policy…now thats an interesting one. It is a bit tricky to shake hands with something so volatile.

    This totally reminds me of that over-quoted saying “the market can stay irrational for longer than you can stay solvent”. Perhaps this can apply to the Gov. too.

  3. Dan

    given your arguement that the new economics will have US punter save their money in a deleveraging ‘decade’, and if this savings ratio is to go to the 5-10% range, what would the P/E ratio be for the US stockmarket? As a reference the period from 1960 to 1985 saw US punters save about 8-10% of their take home pay, would not this 25 year period provide some evidence to give insight into the stockmarket levels for a period of time.

  4. It’s enough to make an AUD bullion bear bullish on gold prices in the short term – US stocks down, USD up, bullon prices up = AUD speculative bullion prices up a real lot. Lurch from asset clash to asset class trading like a “basket” seems to be the current mentality for both huge and tiny “investors” alike.

    Be careful of speculating on energy though I think – The US likes it’s oil and gas cheap and will pull some pretty big rabbits out of the hat to make that happen.

  5. I agree, Ned. Logically, Dan is right, but in practice what seems to be the high demand product might well have its price played with for political (maybe geo-political) reasons, to everyone’s surprise. Reading this article leaves me at a loss for good answers, because I can see how much of what Dan says can easily turn out to be incorrect (to the point of costing money if you follow it).

  6. The capital spending was front ended on the most generous tax break for same in history. Front ending makes for a bigger dip in the tail we are heading in to. Consumer goods inventories were sold off at firesale prices from the first tax cheques in Jan but it was the wholesalers and distributors that took the pain that was necessary to pay off bankers who had upped their commercial sector rates like never before, at some time replenishment imports had to bounce but on lower volumes Chinese factory prices are rising and wholesale-retail sector is reverting to cost+. But that did mean turnover and GDP looked fine. Shipping companies are waiting for peak season to kick in now but it will be a few more weeks before the trade can pass judgement on the import rebound and whether container rates can hold up. The services economy is critical and it hasn’t got anywhere near 50. We need to hope that Lindsay Tanner is committed to public service because we have few of his standing and backgound on either side of the house. It isn’t so much about the trade deficit, it is more the current account deficit that has him up at night like Curtin.

  7. I nearly bounced through the roof when I saw the latest GDP figure – But looking a bit more explained same – Stimulate to buy lots of overseas stuff to replace the hole left by export earnings. (Maybe we should send Mr Greenspan an email asking how that has turned out in his experience perhaps? Smile.)

    Lindsay Tanner? Yeh, he got my attention with this article:

  8. Australian economy in decline:

    “What growth? I don’t see any of it. These numbers are rigged.”

    Sydney downtown cab driver yesterday afternoon, talking about the recent GDP numbers. He heads to work at 4.30am, and has usually covered his fixed cost (car, radio, licence) by 6am. Not nowadays. He is lucky if he covers his costs at all, and often heads home with just $50 takings. There is no pickup in trade.

    “Business is not good. We sell 350 cups of coffee a day, down from over 500 last year.”

    Sydney downtown coffee shop. The owner puts it down to shorter working weeks, where office workers will do a 3-4 day week, not the 5 day week of a year ago. Yet they are still ’employed’, and as a result the shortfall in hours does not show up in the unemployment numbers.

    So anecdotally Australia is not looking good.

    The economy has benefitted from stimulus checks, which were spent on drinking, whoring, gambling, and buying new TVs. The mining sector has benefitted from Chinese restocking.

    Now where?

    Simon Winfield
    September 4, 2009
  9. Ned S – The GDP numbers are not fantastic and simply reflect money being pumped into the economy and the lagging impact of commodities exports holding up well. I have ranted on about Australia’s narrowly focused economy many times (e.g. but instead of throwing billions at trying to stimulate under-developed areas of our economy we will be left with a legacy of school halls, community centres and well insulated homes :)

  10. LNG is not the same as LPG.

  11. Have to agree that solar HWS rebates, solar electricity rebates, and home insulation rebates will do little to lift energy stocks, Greg. ;) Unemployment in resource-rich Canada has just reached 8.7%, despite its stimulus programs. At less than 6%, Australia is faring better than Canada, which appears to be ‘out-stimulating’ us! :)

    Biker Pete, Lunenburg, NS, Canada
    September 6, 2009
  12. Hi Biker Pete, Canada is taking hits because it has a larger manufacturing sector than Oz…not much can be done when demand for manufactured exports slump. The real figures to look at are per head GDP and the trade surplus. I think you will find Canada are ahead of us on both counts. Also it is not how much stimulus money is being tossed around that I look at, it is where it is being spent. If a nation will get long term benefits from government spending then I don’t have a problem with it, but if the money is being used to shore up voter support than I do.

    Greg Atkinson
    September 6, 2009
  13. Sorry the link I posted seems to point to the wrong place. Maybe this will work:

    Maybe DR can include a preview function for the comments area so we mugs can correct our blunders before we post? It might be okay for people who use an alias, but I feel very exposed (in the Della Bosca sense) here :)

    Greg Atkinson
    September 6, 2009
  14. just a back of the envelop analysis on P/E ratios and savings rate in USA – if we assume that the US citizens save between 5-10% of their incomes for a decade, and this was the average for 1960 -1985 before the stock marekt took off slowly at first then from 1995 kinda exponentially – the DOW P/E ratio average 15 over that period = so given some basic assumptions then one can assume that perhaps the DOW could average a P/E ratio of 15 for some time to come on average…again just back envelop analysis

  15. Rag, your basic assumption avoids the issue of having to concurrently pay down the overleveraged US citizen’s consumer debt and thats before he/she funds his/her govt’s huge debt tail & noncurrent healthcare & aging & unfunded / unaccrued social security. Essential stuff will cost US consumers more, unessential stuff & oversupplied items will deflate and there won’t be savings until a “real deal” makes debt as expensive as it always should have been. We won’t see the latter until after the great inflation event.

  16. OK – think one of the underlying assumptions was that the consumer could save – now this may not be money in the bank as such, but a reduction in spending and/ or repayment of debt of 5-10% of their wage per annum….or I may have not thought fully through the issue – but I figure after a while the stock market will settle down from the eearthquake it suffered in a equilibruim of between P/E ratios of 20 – 10 with an average of 15 over a certain time period [say 10 years] with the fiorst few years spent seeking this equilibrium level out

    as you would conclude trying to figure out a base level from where the stock market will settle/ average over the next decade and assumed P/E ratios can help with this analysis using savings ratio as the guideline

  17. The best way to damage anything is by government intervention.


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