Outside the Box

Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now

John Mauldin

October 4, 2011

The last Thoughts from the Frontline featured an interview of me by Kate Welling. I promised another interview she did with my friend Paul McCulley, who (warning) is a consummate Keynesian. For him (paraphrasing closely), prescribing austerity for the US is like putting an anexoric patient on a diet. While Paul and I are very good friends, we do not agree on what to do about the current morass. But this is Outside the Box, and the point is to have views that I don’t agree with. And Paul is nothing if not an articulate proponent of the neo-Keynesian view. The original publication of his interview in Kate’s letter drew some very pointed comments. Right up the OTB’s alley.

Kate Welling is simply the best at doing interviews and teasing out controversy, but her work is hard to for the average person to access, as it is now just for institutional clients. I have convinced her to break out of her shell and offer it to the retail world. She is working on the “details,” such as price, etc., but in the meantime you can go to

welling.weedenco.com and click on How to Subscribe (Individual Investors) and put in your email address and she will get the information back to you. I assume she will offer a free sample or so. Check it out.

And in the interview, Paul talks about what his new “gig” will be after PIMCO. He is working with David Kotok to launch the Global Interdependence Center Global Society of Fellows, a most worthy group and effort, which I heartily applaud. The GIC encourages the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. You can learn more at www.interdependence.org.

Tonight I am in Geneva and was hosted by Lord Alex Bridport, founder of one of the largest bond brokerage firms in Europe (if not the largest). I will report back Friday. It is an interesting time to be in the markets. OK, one tidbit. He confirmed that banks (and not just in Europe) are really as bad as they look. And with that note, have a good week!

Your going to be 62 in a few hours analyst,

John Mauldin, Editor
Outside the Box

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Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now

Is Paul McCulleyfeeling liberated by his retirement from Pimco? A mere glance at the accompanying likeness, drawn from a snapshot I took of him at "Kamp Kotok" (Cumberland Advisors’ annual Maine economic conference and fishing party) in early August says it all. Not that Paul has ever been one to…

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Barry Rose

Oct. 4, 2011, 9:42 a.m.

Paul has it wrong - generally speaking, debt is bad and huge debt is very bad.  Speaking from the framework of a credit manager, it has to be paid back, and is only good when the output of using OPM exceeds the cost of the debt.  That is not the case today, when an estimated govenment input of $1 yields .50 in economic output.  If WWII was so great for the economy, why haven’t the TWO wars we have been waging increase our economic output twofold?  Contrarian nonsense.

Andrew Purdy

Oct. 4, 2011, 7:51 a.m.

He does not seem to understand that the Tea Party is a reaction to ObamaCare, pure and simple, and is secondarily about a “stimulus” that was pure pork for Democratic groups. It is not about “austerity”, per se. If Obama had stuck to turning the economy around in his first term instead of playing old fashioned “To The Victor Belong The Spoils” politics, the Tea Party would never have happened.

robert hanley

Oct. 4, 2011, 5:38 a.m.

Common sense, accountability, simplicity are all missing from the solutions to the financial mess we are in.
We have too much of everything! Too many malls, houses, belongings, cars & big Government. 
Wealth & happiness is not having a lot stuff its quality of life, freedom from Government interference and confiscation and our health.
Real Estate is no longer a free market.  The Government owns/controls a huge chunk of it and Socialism is here. The bailout switched liability from the failed institutions to the tax payers and we have to accept the standard of living of U.S taxpayers is forever changed to a lower standard due to huge tax increases.
Dr. Ron Paul is one of the few in Government that understands the solutions of simplifying & restricting Government and restoring our freedoms. We need to stop interfering and waging wars around the world to stimulate our economy.  Take away the extended unemployment benefits and creativity and self determinism will rule. Take away the welfare and U.S. citizens will fill the jobs that the illegals are filling and they will go back home. Bring the troops home and have them spend their money here back with their family. Eliminate the tax code with all the subsidies and have a consumption tax.

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