Despite the insistence in some quarters that “We’re in recovery!” somehow it just doesn’t feel that way. We’re sluggish. We’re employed, most of us, but not moving onward and upward like we did in the past. Is this the “new normal” or can something be done to reinvigorate our business and personal finance outlook?
According to one financial company executive, what this economy needs is a massive infusion of gold. This novel recommendation originates from an unexpected source: Pacific Investment Management Company (PIMCO) Executive Vice President and Portfolio Manager, Harley Bassman.
PIMCO is an investment management firm that’s built its more than 1.5 trillion dollars in assets through the effort of co-founder and former Chief Investment Officer, Bill Gross, commonly known in financial circles as the “Bond King.” So how would such a company, with bond investments as a vital part of its core assets, come to recommend gold as a solution to our economy’s problem?
Our nation’s principal economic problem right now, according to Bassman, is deflation. So far, so good. Many professional observers agree with him. But how is gold the solution?
We have to appreciate that any economy needs a certain amount of inflation for economic growth, so businesses can invest, and give their workers wage increases. Our Fed has decided on a current two-percent goal for our own economy’s inflation. Hoping to stimulate at least some inflation, the central bank recently raised rates from a range of a quarter to a half percent with, at least in the original plan, the possibility of subsequent raises.
But Bassman feels last December’s rate increase hasn’t done anything for the economy. Nor has round after round of Quantitative Easing (QE). And, if we go by the recent experience of several European countries, as well as Japan, negative interest rates won’t work either. Like the economies of the rest of the world, the U.S. economy remains mired in deflation. According to PIMCO’s Bassman, it’s going to take gold to get us out of our fix.
In his amusing, nonetheless serious piece “Rumpelstiltskin at the Fed,” Bassman proposes the Fed buy gold – all gold – yours, mine, and every ounce it can squeeze from the country’s coffers. And it should do so at a very high price – maybe even a colossal five thousand dollars per ounce. If this sounds familiar, you’ll recognize the proposal as a replay of Executive Order 6102, popularly known as the Gold Confiscation Act, issued by President Franklin D. Roosevelt in 1933.
Bassman’s thinking is once the Fed buys the nation’s gold; it will automatically devalue the dollar and, in turn, throw us into inflation. This scenario becomes clear once we remember that with inflation too much currency chases too few goods. In other words, when prices rise, the dollar will buy fewer goods and services.
If you think his proposal is outlandish, Bassman would answer back the scheme worked the first time, under President Roosevelt:
“Over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.”
There you have it, one professional’s gold solution to our economy’s problem. Bassman also suggests in his piece that it’s likely no one will take him seriously. That’s probably his self-deprecating way of navigating a political minefield even before he encounters one. But I find two circumstances about the writing of this blog piece more astonishing even than the piece itself.
First, Bassman’s title at PIMCO is “Portfolio Manager, Convexity Products.” While that sounds like it could be anything from a jazzy new toothpaste to an airline, according to Investopedia it’s a somewhat abstruse property of bond products. But notwithstanding the complexity of convexity, bonds and gold typically compete for investors’ dollars when it comes to investing in a safe haven asset. You have to admire Bassman for breaking ranks.
Also interesting: roughly two weeks ago PIMCO hired former Fed Chair Ben Bernanke as a senior advisor. Since Bernanke was one of the leading proponents of QE, which Bassman takes to task as a Fed policy that hasn’t worked, I’d love to be a fly on the wall at the next meeting attended by these two financial warriors.
That said, unfortunately you and I can’t affect Fed policy or stop deflation. What we can do however, is take control of our own savings, with the understanding that even experts like Bassman don’t see a quick route out of the economic doldrums we’re stuck in. But ironically, while even such a high-powered, high profile financial mover and shaker can’t make the government decide to invest in gold, you can do it today. If Bassman ever gets his way, you’ll win big. Even if he doesn’t get his way, you’ll still win big.