Bill Gross really used to get it and most likely still does, but his recent fund performance has been lackluster to say the least. But still let's look at what he had to say in 2007.
He finds that short term rates need to be 100 basis points or more below estimated forward GDP growth to be supportive of the economy. Since he sees a 4% GDP growth, he sees 3% short term rates as necessary. A big question mark is whether individuals will “take the bait” and buy homes when short-term rates go down. He does not address whether he expects long rates and mortgages to fall, or whether he simply expects improved economic growth from lower short-term rates to resolve into house buyer confidence to buy at current mortgage rates, which really aren’t very high at around 6%
How did Bernanke do? Was his fed funds rate 1% below NGDP growth?
Ouch, maybe we should us a policy tool that doesn’t stop at zero.
Or perhaps he needed some more Rooseveltain resolve, from his 2002 speech:
A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
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