Gage

peak_dt	peak_va	gage_ht
1877-11	140000	34
6/17/1900	10600	13
4/21/1901	17400	18.4
5/19/1904	9180	10.3
3/10/1905	11700	11.8
3/28/1906	15200	13.55
4/17/1929	36400	19.13
10/23/1929	25600	16.33
4/5/1931	7560	8.28
2/4/1932	42500	20.4
8/24/1933	28000	17
3/28/1934	10000	10
1/22/1935	19200	14.2
3/18/1936	143000	34.2
4/27/1937	57000	23
10/29/1937	46600	21.15
2/4/1939	47700	21.4
5/31/1940	41000	20.11
4/6/1941	10600	10.15
5/23/1942	51000	22
10/16/1942	46000	21.09
5/8/1944	12100	11.1
9/19/1945	28800	17.15
1/8/1946	11000	10.5
3/15/1947	10200	9.95
4/15/1948	29400	17.35
6/18/1949	104000	29.85
9/13/1950	18900	14.14
12/8/1950	30400	17.65
4/28/1952	23900	15.85
3/26/1953	13500	11.8
3/2/1954	29200	17.31
8/19/1955	73400	25.55
3/15/1956	13000	11.51
4/6/1957	16100	12.98
5/6/1958	11300	10.64
6/3/1959	13300	11.67
5/9/1960	24500	16.7
2/19/1961	20600	14.7
3/22/1962	29200	17.27
3/20/1963	51900	22.15
3/6/1964	23500	15.45
1/24/1965	14800	11.9
2/14/1966	12200	10.53
3/8/1967	45500	21
3/24/1968	12100	10.64
3/26/1969	7900	8.09
4/24/1970	16500	12.67
5/31/1971	16600	12.74
6/23/1972	31500	17.87
10/6/1972	46100	21.11
12/27/1973	41300	20.16
3/20/1975	40500	20.34
10/19/1975	27900	17.32
10/10/1976	58300	23.42
3/15/1978	30700	18.1
2/26/1979	34200	19.17
5/1/1980	24000	16.07
6/11/1981	7700	8.16
3/21/1982	25400	16.55
4/25/1983	25900	16.71
2/15/1984	32800	18.63
6/1/1985	24400	16.2
11/5/1985	240000	44.22
4/17/1987	39300	19.18
5/7/1988	22000	14.67
3/7/1989	11700	10.61
5/30/1990	10700	10.08
3/24/1991	31500	17.38
4/22/1992	18000	13.15
4/17/1993	34500	18.26
2/10/1994	38500	19.19
1/16/1995	23300	14.94
9/7/1996	147000	34.98
11/9/1996	18500	13.78
3/21/1998	29200	18.09
3/18/1999	9160	8.59
2/20/2000	15000	11.89
3/22/2001	10800	9.7
4/23/2002	27700	17.49
9/20/2003	67500	24.7
11/20/2003	29000	18
3/29/2005	21400	14.99
6/28/2006	12100	10.42
4/16/2007	33200	19.5
3/5/2008	26300	16.93
5/5/2009	19000	13.9
3/14/2010	32700	19.37

Here is the file that shows the gage height for heavy rain years.

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Fwd: Where Are We Compared to Sept. 15, 2008? - John Mauldin's Outside the Box E-Letter

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Subject: Where Are We Compared to Sept. 15, 2008? - John Mauldin's Outside the Box E-Letter
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Missed Last Week's Article? Read It Here Where Are We Compared to Sept. 15, 2008? By John Mauldin | October 10, 2011 The developed world seems to be focused on Europe, and while the next crisis in indeed brewing there, we must not forget that Asia is a large part of the future and major contributor to world GDP. My friends at GaveKal are based in Hong Kong and have staff in most Asian countries or are in them on a regular basis, so I read their Asian views with interest. Today's Outside the Box is their latest Five Corners – Asia edition, where they look at China, Thailand, and Vietnam, as well as Asian growth, contrasting it to that of the "developed world." It is good for us to remember that not everything rotates around US politics or European sovereign debt. Our crises shall pass, and Asia will still be there and growing. And for what it's worth, my personal plan is to start visiting Asia a lot more in the future. It looks like I may be in Hong Kong in January, but more on that at some later point. Your feeling like some Chinese takeout analyst, John Mauldin, Editor Outside the Box JohnMauldin@2000wave.com

GaveKal Five Corners—Asia Where Are We Compared to Sept. 15, 2008? Joyce Poon, Cathy Holcombe, Gavin Bowring The extreme market movements seen recently in Asia are reminiscent of the dark period that hit the region in late 2008. Lehman's bankruptcy and the subsequent shock to global trade and demand showed that Asia's positive fundamentals can disappear in the blink of an eye if OECD economies go awry (see Daily—A Binary World after Fed's Latest Move). Yet the recovery from crisis also taught the world that Asia is capable of strong growth, even as Western growth remains weak (see chart below). While Asia is still cyclically tied to the developed world through webs of trade and financial linkages, the economic gravity has gradually shifted towards China, whose growth drivers remain solid and relatively immune to global demand. The Global Financial Crisis also encouraged portfolio rebalancing from the developed world towards emerging markets, in line with widening growth disparity between the two. According to EPFR Global, emerging market funds reported inflows of US$179bn in 2009 and 2010, 25% higher than the aggregate inflows in the five years prior to Lehman. Of course, portfolio rebalancing in emerging Asia is a tricky business, fraught with constraints on liquidity, fears of excess volatility, etc. which means that this rebalancing is not likely to happen in a straight line. But the groundwork has been laid for a different thinking on EM vs. DM allocation. Putting these together, the current sell-off can be seen as an opportunity, especially for markets which saw significant misalignment between performance and fundamentals. An example could be Hong Kong, which is now trading below the level of the day of the Lehman bust—similar to the markets which are at the epicenter of the current crisis (i.e., Europe and the US). This despite the fact that Hong Kong is able to capitalize on the strength of China's domestic economy and the ever-increasing cross-border financial integration. Excavators and Liquidity Squeezes in China The liquidity squeeze in China has placed a number of companies in very tenuous operating conditions, as reflected not just in rising bankruptcies, but in the abrupt changes in production. The recent sharp drop in excavator sales is a case in point: Broadly speaking, the chart above shows that heavy industries are facing macro headwinds. But the collapse in excavator sales since April does not just tell the story of slowing economic growth and tightening credit. It is also an example of what may be a pattern of Chinese companies making risky vendor-financing decisions in a bid to keep sales growth running high. This is particularly true in the machinery sector, which tends to have a higher accounts receivables-to-sales ratio than other industrial sectors in China. Easy financing terms can help companies win business and market share when investment growth is strong. However, it also means a reversal can be nasty. As the chart below indicates, the machinery sector's accounts receivables have grown faster than sales in recent quarters (something that has worried a lot of clients). Given the leverage in the system, a mild slowdown in demand coupled with tight funding conditions could easily end with a collapse in production, such as the one seen in the last five months of excavator production. In addition, railway builders are reportedly delaying payments amid safety inspections and funding freezes. As Janet noted in the latest DragonWeek, while there was a notable increase in the machinery sector's accounts receivables in June to August, according to the latest industrial survey, the rest of the industrial sector looks in healthier shape. However if Beijing continues to curb growth in shadow financing without balancing the impact with selective loosening policies, then we may see a lot more charts that look as jolting as the ones above. The "Defensive" Nature of China's Riskiest Sectors Among the growing concerns of a Chinese hard landing (not our core scenario), investors have shied away from what is conventionally believed to be the riskiest sectors—banks, property and (due to corruption and safety fears) rail. Ironically, however, in case of serious downturn in the Chinese economy, these are probably also the sectors that Beijing would feel the need to support aggressively—banks, real estate and property are sectors that have broad economic reach, and add to China's long-term structural growth story: • Financials:China's banks are trading at their lowest price-to-book values ever on fears of an explosion of non-performing loans—but would China really let its banks implode? History would indicate that the banks could be protected against an NPL crisis. In the past 12 years, China has transferred RMB5.5trn (US$860bn at today's rates) in bad loans to state-run asset management companies; in other words, they have repeatedly bailed them out. As Arthur pointed out in The Magic Debt-Shrinking Machine, bailouts makes sense from a macro-perspective at this stage of China's development, with a growth rate high enough to "amortize" bank losses over time. The costs of allowing a financial crisis would likely be higher. • Property:Investment currently makes up 47% of GDP in China—if there is a sharp slowdown, Beijing will need to boost investment in some way. Construction of housing is one quick and useful way to boost growth. And despite all the talk of empty high-rises and "ghost towns" etc., in China, the fact is that mass housing infrastructure is in need—much more so than upgrades are needed to China's impressive system of ports, airports, highways, etc. In addition to the 100mn new urban households that will be created over the next 20 year, the country has large potential demand for housing from existing urban households. Now one can argue that this is not a great comfort to commercial developers, since according to the current state-planning agenda, nearly half of all new supply in 2011-2015 will come from social housing. However the burden of social housing financing is mostly local—and if the commercial property market collapses, local governments will lose an important source of revenue. While we believe Beijing is eager to impose some pain on developers which have overleveraged and evaded austerity restrictions, if the going gets tough, then authorities will have to ease up the commercial property sector... • The railway sector: The current crackdown on railway sector corruption and bad practice happens to coincide with a tightening cycle. In the event of a hard landing, rail is another area that may get the green light again. This is because despite the many problems in the sector, there are genuine capacity shortages and real structural benefits that would come from moving forward with the country's RMB5trn long-term rail build-out program. China's intensity of rail use is double India's and more than a dozen times higher than the EU's. A World Bank study in 2008 estimated capacity shortages of 10-20% in both freight and passenger. That said, there is much uncertainty about which firms will benefit the most if the delays in rail are lifted. For example, will China lower its ambitions in terms of technology (e.g., high-speed trains)? And will the recent safety troubles lead to more or less participation of foreigners? Here we point readers to an interesting article in the WSJ, which reported that the signaling system used in the Wenzhou crash in July included some circuitry from Hitachi; however the Hitachi components had been installed by a Chinese company, and were "blackboxed" to prevent reverse-engineering and copying. More openness to foreign participation may have prevented this problem. Because we remain convinced that there will be no hard-landing in China, we believe the easing on the property and financial sector will come only gradually, and that companies in other sectors, such as consumer goods, will have an easier time of it in the next year. But the above sectors have the benefit of being ultimately defensive in a worst-case scenario—and because of their beaten-down valuations, they should rally as well if a "soft landing" consensus re-emerges—Heads I win, tails I don't lose. The Return of Thaksinomics With the Thaksin firmly behind the new Puea Thai (PT) government, facets of the former Prime Minister's management style, branded "Thaksinomics", have resurfaced. These policies emphasized less reliance on the export-led, cheap labor model, and tried to stimulate domestic demand and entrepreneurship, backed by state-directed credit schemes. While this helped Thailand achieve fast growth during Thaksin's rule from 2001-2006, we are less comfortable with the applicability of "Thaksinomics 2.0" in the current environment. Consumption spending powered growth for three years (see chart) under Thaksin, and this solidified Thailand's recovery from the 1997 crisis. However, some of the funding came through selling of partial stakes in state owned enterprises—a very messy process that saw perceived Thaksin cronies reaping outsized gains, and thus not likely to be repeated. Meanwhile, both private and public debt rose during this period; average household debt quadrupled between 2001- 2004. Today, the PT government is adopting a similar strategy, flooding the rural north with money to boost consumption and reward supporters. However: • This style of stimulus may not be as effective as in 2001. With unemployment at 0.5%, there is less scope for positive multiplier effects of stimulus without triggering inflation (see Five Corners). Meanwhile bank lending and property prices are not starting from lows as they were in 2001, and neither Thaksin nor the PT have the political clout to drive a centralized industrial policy. • Many pro-consumption policies have been hastily prepared and may be counterproductive. The rice pledging program has been heavily attacked both in theory (see Thailand Development Research Institute), and in practice (see allegationsof corruption and smuggling), particularly now that bad flooding has damaged 10% of the rice crop. Meanwhile some government programs are being scaled back or delayed, e.g. amendments to the first home scheme, civil service incomes, minimum wage law. • It may not solve lingering structural issues. This week, the central bank governor urged the government to save budgets for next year, saying Thailand's saturated economy was not in need of extra stimulus, and should focus instead on public investment (logistics, job training and energy efficiency) if the goal is to wean Thailand off its export dependence (see Bangkok Post). Indeed, in Thaksinomics 1.0, public investment-to-GDP declined from 8.5% to 6.5% and has not recovered since. And since Thaksin's first term in 2001, Thailand has become more, not less, dependent on exports, which went from 50% of GDP in 2000 to 65-70% by 2005, where they currently remain. The bottom line is that investors should not expect the same results of Thaksinomics this time. Financials and real estate may therefore be a better bet than outright consumer plays in the medium-term. Vietnam— Small Big Steps to Economic Reform Vietnam, once a magnet for investors, has been off the radar for a while, suffering from chronic inflation, a run on the currency and a deflating property bubble. There have been headline defaults at state-owned enterprises, which account for 50% of capital investment but only 15-20% of GDP and 5% of employment. SOEs accessed cheap financing and invested in sectors unrelated to core business, becoming huge conglomerates with self-financing arms that operated as slush funds. All this has triggered tremendous political pressure for the Communist Party to reform the economy or risk undermining its legitimacy, which explain recent moves: • According to official proclamations, SOEs no longer have cheaper costs of funding than the private sector, nor any implicit government guarantees or automatic subsidies. • SOEs are now limited to investing no more than 15% of paid-in cap on non-core businesses. This has already triggered a wave of divestments by SOEs. • Banks must now have a minimum capital of US$150mn (compared to no requirements previously), a capital adequacy ratio of 9% (previously 8%), liquidity ratios of a minimum 15% of liquid assets (compared to none previously). These reforms have been combined with a hawkish monetary policy and credit caps. Lending to the property sector has been squeezed, credit growth ordered to stay below +20% annually, lending rates hiked to 20-25%, and bank branch expansion curtailed. Currency reform is also key, because the (involuntary) –25% devaluation of the Dong since 2008 has exacerbated domestic inflation. Households actively shift between gold, Dollars and Dong to hedge their savings against currency shocks, and gold hoards in Vietnam are some 50% of GDP (gold stocks rose +25% YoY in 2010 alone), while private gold and USD savings amount to 65% of GDP. Since the last devaluation in February 2011, the VND has remained relatively stable. This is partly due to increased confidence on the back of reforms, and also because Hanoi launched a major crackdown on gold smuggling. Hanoi's reform and tightening program is now starting to show some results. Vietnam's investment-to-GDP fell from 45% in 1H10 to 38% in 1H11, while the SOE share of GDP has fallen from 43% to 34%. Credit and M2 growth has slowed substantially, as have imports, and there are solid expectations that inflation— currently one of Asia's highest—may have peaked (see chart on left). Policymakers have been willing to risk a fairly serious level of pain to achieve this—e.g., commercial property prices in Ho Chi Minh are roughly half the levels in 2007-08, while luxury apartment prices have fallen –15% since early 2011. While heavy SOE-sector debt will continue to be a structural threat to the economy, the improved macro management has helped support a more sustainable long-term course. And we have already witnessed short-term results. Vietnam's latest quarterly GDP growth was up +5.8% YoY, while in September exports rose +35.4% YoY and industrial production +12% YoY. With expectations that government policy easing may come in 2012, investors may yet bring their money back to this fundamentally promising market.

Copyright 2011 John Mauldin. All Rights Reserved.

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Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.JohnMauldin.com. Please write to johnmauldin@2000wave.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.JohnMauldin.com. To subscribe to John Mauldin's e-letter, please click here: http://www.frontlinethoughts.com/subscribe To change your email address, please click here: http://www.frontlinethoughts.com/change-address If you would ALSO like changes applied to the Mauldin Circle e-letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to wave@frontlinethoughts.com. To unsubscribe, please refer to the bottom of the email. 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Fwd: Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now - John Mauldin's Outside the Box E-Letter

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Missed Last Week's Article? Read It Here Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now By John Mauldin | October 3, 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 JohnMauldin@2000wave.com

listeningin Trapped Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now Is Paul McCulley feeling 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 hide his light — or his views — under a bushel basket. But his new life style clearly agrees with him. What just as clearly does NOT agree with the economic realm's leading disciple of Hyman Minskyare the incessant calls for fiscal austerity filling the airwaves. It's precisely the wrong response to the liquidity trap in which the economy is ensnared. Or, as Paul might, but didn't say, "Moral hazard be damned, the anorexic economy needs to be fed." Keep reading for what Paul DID tell me during an afternoon chat that was even better than the fishing. KMW How are you adjusting to all of your newfound leisure time in "retirement" — when you're not fishing, that is? Well, I've actually been doing quite a lot of fishing — but my retirement was no spur of the moment thing, either. It's not like I was unprepared to make adjustments. I knew you had been planning it for quite a while; had set up your foundation — There was a lot of strategic planning involved — I say that in a positive way, not in a wonkish one — about what my life would be after PIMCO — not that I wasn't ecstatic there. But I spent a good chunk of my life anticipating that my next stage would be in Washington, as a Fed governor. I came close, but that didn't happen. Anyway, I'm pursuing a very satisfying life now. I'm still very engaged intellectually. I've been a supporter, via my foundation, of the Global Interdependence Center for a number of years. I am good friends with David Kotok, the Chairman and CIO of Cumberland Advisors, and Bill Dunkelberg, the Chief Economist of The National Federation of Independent Business, who head the GIC. We sat down last year and developed a new wing, if you will, of the GIC called the Global Society of Fellows. I am the first fellow, my foundation has funded the endowment, and we're excited about doing new things there. I want to hear all about that. But first, let's talk about what's happening in this crazy economy. You started saying we're in a liquidity trap some time ago. Where are we in that process? I like how you ask the question as, "where are we in this liquidity trap" because that allows me to fine tune the diagnosis. Most of the marketplace, and the policy makers even more so, are still debating the diagnosis: Are we, or are we not, in a liquidity trap? To me, it's absolutely critical that this diagnosis is made correctly. Because if you conclude that you're in a liquidity trap — and I do unambiguously embrace that conclusion — it has profound implications for the right set of policies. It also has profound implications for how markets will discount the policies. What this means is that policy is not a matter of a large menu, encompassing, "Well, we might know we're in a liquidity trap and we also might not be in one, therefore we'll do – A little of this and a little of that— Right. There are clear-cut things that you do if you're in a liquidity trap. A liquidity trap is simply defined as when the private sector is in a deleveraging mode, or a de-risking mode, or an increasing savings mode — all of which you can also call deleveraging phenomena — because of enduring negative animal spirits caused by legacy issues associated with bubbles. In that scenario, the animal spirits of the private sector are not going to be revived by a reduction in interest rates because there is no demand. It's not the price of credit driving the deleveraging. It's "I took on too much debt during the bubble. I have negative equity in my home. I don't care what the price of credit is, I already have too much outstanding. I am paying down credit!" That can be entirely rational for an individual household. It can be rational for an individual firm. It can be rational for an individual country. However, in the aggregate, it begets the paradox of thrift. What is rational at the microlevel is irrational for the community, or at the macro level, and I'm amazed that this is not assumed as a given description of what we've got going on right now. The paradox of thrift and the liquidity trap are fellow travelers that are functionally intertwined. Could it be that people are confused because of all the attention paid to the liquidity the Fed has pumped into the system via quantitative easing — even though most of that only flowed into the most speculative and unproductive pockets in Wall Street? That could very well be the case. But that diversion of attention is unfortunate because it clouds people's vision of the larger picture, which is pretty straightforward. It's really textbook sort of stuff. My friend, [Nobel Laureate, Princeton Economics professor and New York Times columnist] Paul Krugman, has been writing a great deal about it recently. If the private sector is delevering and derisking and you're caught in the paradox of thrift, the public sector is supposed to go in the exact opposite direction. The exact opposite direction. You mean that cutting federal spending in a liquidity trap, like we're in, is absolutely counterproductive? Yes, it's ludicrous and I don't use that word too often. There's a large range of opinions about most issues, and rightfully so. But if you are in a liquidity trap and you are advocating frontloaded austerity— The Tea Party is really talking about killing the economy — Again, it's absolutely ludicrous. And if we need an example, we can just look across the pond and see what's going on in Euroland. Putting somebody who is suffering from anorexia on a diet doesn't make a lot of sense to me. But essentially that's what the austerity folks are preaching and that's what we've been grappling with here in the United States. Of course, the proponents of austerity are worried that this country's debt load is already too much for future generations to handle. "We have to go on a diet for our long-term well-being. The only question is how severe of a diet?" — That is the question being asked. As opposed to what we should be discussing, which is, "Gosh, we're talking about someone who is underweight here! Why do we need to be on a diet? Maybe we should have morefood!" Incredibly, to suggest such a thing is to be considered a heretic these days. Paul actually gets more wound up about it than I do. I enjoy reading him now with the luxury of doing it whenever I get around to it during the day. I just smile. Though on any given day, I have to admit to a bit of envy, from the standpoint of thinking Paul's piece was really good, but that if I were still in the arena, I could have upped his ante. But his is a really good ante, in just calling out the silliness. That's what worries me the most about the domestic economic scene — and the global economic scene, too — this presumption that seems to be in currency that government is the problem. Therefore, if we can simply reduce the government, the problem will go away. That is not the case at all, when the problem is actually the combination of a liquidity trap and the paradox of thrift. If you take the government out of the picture, you exacerbate the pre-existing conditions. Yet that seems to be where the body politic conceptually has gone. Are you implying that the Tea Party has been sold a bill of goods? Yes, they have. I mean, the historical parallel that a lot of us point to would be 1931, when Andrew Mellon said, essentially, liquidate, liquidate, liquidate and assets will be transferred to moral hands, and we'll live a more moral life. Until we starve to death. Right — but we will live a moral life. Mellon was quite the Austrian— Absolutely, that was in 1931. Then in 1937, when it looked like the economy might have been having "a decent" economic recovery, we decided to slap it in the face with monetary and fiscal policy tightening. And it only took World War II to lift us out of that extension of the Depression. Yes. What I mean is that the war in effect forced the application of the government's balance sheet to a deficiency of aggregate demand — and it worked. Some might call that Keynesianism, and I would. But you could describe it more simply by saying that the government's balance sheet — including the central bank's balance sheet (because the Fed was subordinate to the fiscal authority during WWII) — was used to stimulate aggregate demand. And it absolutely worked, although I don't think anyone would applaud going to war to accomplish that. However, it is interesting that after World War II the biggest concern in economic policy circles was that we would fall back into a depression because we were taking away all of the government demand, for the war machine. But what we found out was that this didn't necessarily have to be the case. Partly, the postwar recovery came about because of the infrastructure and the technologies, etc., that had been developed during the war. But another important ingredient after the war was the GI Bill. The GI Bill and the Marshall Plan basically saved the West. And they both used the government's balance sheet, I'll point out. My dad went to college on the GI Bill. He was one of the youngest WWII veterans — he's 85 now but he went into the service in '44. Same as mine. So he went to college on the GI Bill, bought his first house on the GI Bill — and he didn't consider either one of those to be welfare. No doubt, he thought he earned it. Yes, and the payoff to society of the Marshall Plan and the GI Bill were absolutely monstrous. The private sector simply can't internalize the rate of return on that sort of thing. So this presumption that somehow government investment is bad and private sector investment is good— Hold on, you're using the term "investment" and that's not politically correct. You're supposed to call it, "spending, waste and fraud." Okay, so my dad's education and the house that I grew up in were, what were those words? "Waste and fraud"? Yes, according to the conservative meme, it was "wanton government spending" allowing your family to live above your means. The argument that a family has to live within a budget and therefore so does the government, is so specious— Absolutely. The irony of all this is that I now hear my dad ranting and raving about "big government" at 85 years old— and it was big government that paid for his education and put him into his first home. The real notion that people have is that government is bad — unless it's helping me! That's clearly endemic and epidemic. My dad did the same, until he passed away. There obviously are a lot of inconsistencies that we have to deal with in a democratic society. But what really puzzles me is how the concept of public investment is being perceived as an oxymoron. That's just wrong. The notion that if we just would quit subsidizing idleness, that the unemployed would go to work, is another thing that is just ludicrous. I don't know a lot of people who want to be subsidized in idleness. Nor do I know a lot of who want to subsidize it. But there are just no jobs out there. There aren't jobs because we had a bubble in housing. We went from 2 million housing starts to half a million housing starts. The notion that you could monetize equity in your home with a second mortgage is an oxymoron. Nonetheless, we had a housing sector bubble and everything that goes with it. Actually, if housing starts were our only problem, that wouldn't be a big deal. But the house became the magic genie that made up for the fact that we've had stagnant real wages in our country for a long time — and then the genie died. The housing ATM is definitely busted! It ain't there anymore. And now, if you happen to have a factory job making boat trailers, you've got a problem. Because the guy who had been buying a boat trailer was able to buy it — and the boat that went on it — only because he took a second on his "appreciating" home. He could have never afforded a boat otherwise. Now most likely the guy at the trailer factory has lost his job because people can't buy boats in that fashion. That's reality. And we're not going to restimulate the housing market so that people can take out seconds to buy boats. Not when the problem is too much debt. That's true. It wouldn't make a lot of sense. We need to deleverage the private sector and we can do that without a depression if we are not afraid of levering the government sector. And from my perspective, there's no reason to be afraid because we have a huge output gap and the risk that public investment will overheat our economy is a risk that I'm more than happy to underwrite. Overheating of our economy and too few workers for available jobs would be very high-quality problems. So I'm not worried about overheating from an inflation perspective at all. What? Despite all the money that's been created? All the debt we're piling on future generations? Monetary claptrap! Money is as money does, as the famous economist Forrest Gump once sort of said. And it ain't doing nothing. So I don't worry about inflation and I don't worry about interest rates. In fact, the lower the interest rates go, the more I worry — because the easiest way to have super-low interest rates is to have a depression. Interest rates are low, but they're low in many respects for unhealthy reasons. There's absolutely no private-sector demand for credit and so there is no crowding out. I mean, that's the old textbook notion —you aren't supposed to want to add government debt because that supposedly would crowd private sector investment out of the market. But, excuse me, exactly what are we crowding out right now? Where is the evidence that the marketplace for credit is tight and that government borrowing is displacing private sector borrowing? There's zero evidence for it. Yet this "crowding out" dogma keeps being invoked when people claim that we can't have government deficits because they're going to crowd out private sector investment. God, I wish it were so, because that would mean that private sector investment was doing fine, just fine. And that we were going to overheat the labor market. As I said, that would be a very high-quality problem. What about the argument that our foreign creditors are going to stop lending to us? That's the notion that if we run deficits, the rest of the world will refuse to fund us. But we have a shortage of global aggregate demand and nobody wants their currency to go up. Therefore, the idea that we are going to suffer a buyer's strike for dollar-dominated debt is preposterous. China's sure making noises about wanting a new international reserve currency. Right, with their mercantilist economic model! If you're building a mercantilist economic model, by definition, you are piggy backing on somebody else's demand. Why would you even contemplate having freedom in your currency until you have sufficient homegrown demand to eat the fruits of your own production? You wouldn't. Therefore, I don't worry about that one, either. Essentially, the path that we're on right now is one of intellectual paralysis, born of inertia of dogma. Risk assets, including the equity market, have kind of figured it out. I don't want to get into details necessarily about day-by-day market moves because I don't do that anymore. But during that event at the end of July — that whole debt ceiling theater of the absurd — I was hearing that if we could just reduce uncertainty over the debt ceiling, we would have spontaneous combustion of animal spirits and all would be well with our economy. Excuse me! I didn't see any spontaneous combustion of animal spirits, when the deal was struck. What I heard were Wall Street's "capitalists" whining for more QE the next day. You saw the same thing that I did. It was what I dubbed a few years ago, a "reverse Ricardian notion." Ricardo doesn't work in reverse. Bill Gross [PIMCO founder and co-CIO] recently wrote about this in one of his monthlies: Just how many families sit around and say, "We have to cut back on our spending today because the out-years' government budget deficits are going up and our future taxes are going up?" That would be the reverse Ricardian notion in action. Likewise, if Ricardian equivalence operated on the household level, we'd hear people saying, "Well, they're cutting out-year government spending. That means our future tax liability is going to be lower, so we can spend more money today. Let's go out to Ponderosa for dinner." I just don't see that conversation happening, either. I would say average Americans don't know who Ricardo was. I would bet you're right. And reducing prospective government deficits years in the future is not going to get them back in Walmart (WMT), buying the large economy sizes, either. I don't think the average American spends a whole lot of time navel-gazing about the budget deficit in 2028. I just don't. No, but they get worried when they see noxious and nasty gridlock in DC, supposedly over deficits. Sure, to the extent that they had already-existing negative animal spirits, because they've got negative equity in their homes, the sorry spectacle in Washington probably exacerbated that. It certainly did not relieve their existing negative animal spirits. It turned, "Honey, we can't afford a vacation this year," into, "We can't afford a vacation for the rest of our lifetime!" We can exacerbate a bad situation with the notion that cutting future government debt is going to magically turn around the thinking of someone who has negative equity in his home. That is beyond comprehension to me. I actually spend a lot of time thinking about these things these days with the benefit of not having fiduciary responsibility for a large, large pile of somebody else's money. As a money manager, I was paid to have informed opinions about how the dealers should be dealing the cards. But I had to manage the money based upon the cards that I was playing with. I had to play the cards adroitly, even if I thought it was a silly game that the dealer was dealing. Whereas now, since the only cards that I'm working with are my own personal cards, I can actually feel — and do feel — liberated to say that the dealer is calling a lousygame! Because — I don't think it's a game that is productive. What's more, he's selling the game with hokum — and risk assets, including the equity market, are going to break the code. I can say that now without someone accusing me of talking my book, quite frankly, and that is liberating. It is wonderful to have the fiduciary responsibility for significant amounts of other people's money, but it is a very sobering experience of responsibility. It really, really is. Those who are good at it take that as a sacred responsibility and act accordingly. That's why our business is such a tough business from the standpoint of your physical health, mental health, etc. So not having that immediate fiduciary responsibility is liberating. A great weight off your shoulders, I would imagine. Definitely. I spent a great deal of time on macro issues during my money management career because that was the fountain from which money-making ideas flowed. But one of the things I want to take advantage of in my retirement is that I can spend a little more time analyzing the fountain as opposed to figuring out what size bottles to put the water in. So tell me, is there a way to address the housing problem within this liquidity trap? I think there is. It's been pretty clear cut for a long time that we need to reset the mortgages that are massively under water. This is sometimes known as "principal forgiveness" and the words are usually uttered with a pejorative lisp. But wouldn't that be terribly unfair to everyone who has faithfully made their mortgage payments? Yes, exactly. I can't argue with the proposition that it would be unfair. But the only way that I can respond is that life is not necessarily always fair. Indeed, sometimes foolishness is rewarded. It is — and as long as we hold to the existing pretense that a large chunk of our housing stock is worth the debt on it, we're going to be stuck in this liquidity trap. So the reason we're going to be stuck here is this issue of moral hazard. There's a reluctance to do anything because, you know, restriking mortgage terms would be letting people off the hook. There's a moral overtone that we can't deal with, so therefore we will just live with it. Actually, in that camp, you also have those who are genuine liquidationists. But society is not going to stand for the wholesale liquidation of 25 million families in America, so they're not going to follow the Mellon prescription. In other words, if you're not going to recast the mortgages to get rid of the negative equity, and you're not going to force people out of their homes and liquidate them, then the market gets stuck in suspended animation. And that's where we are. I'd like to think that for mortgages held by Fannie and Freddie, this should be pretty easy to deal with because we, the taxpayers, are already taking the credit risk on all of those mortgages. So to recast those, conceptually, is simply to recast the credit risk that we've already assumed. I mean, if I'm the taxpayer and we've lent you $100,000 to buy a house that's now worth $75,000, I'm nonetheless on the hook for the $100,000. Since your house is worth $75,000, this is an existing loss, whether I crystallize it or not. Conceptually, this should not be that big of a deal — but it is a huge deal. Because the banks, which the taxpayers have already bailed out, have been allowed to extend and pretend — Exactly. And I understand how the bank bailout — necessary as it was — left a sour taste. But putting families out on the curb doesn't make sense, so we're not going to take the Mellon route out of this liquidity trap; we're not going to have liquidation and more liquidation. But we're also not using the recasting of mortgages route, either. I'm clearly against the Mellon route, but if you're also not going to go the recasting route, then you've gotten yourself into a cul-de-sac, going around and around and around. Capitalism doesn't function in a culde-sac. It just doesn't. Folks don't have positive animal spirits when going around and around in a cul-de-sac. And especially when they're going around and around in a cul-de-sac and their political leaders are telling them they are in a roundabout. That makes me feel like I'm being lied to. "Sir, this is not a roundabout. I don't come out on the other side. This is a cul-de-sac. I go round and round and round." If our leaders could just see the significant difference between a roundabout and a cul-de-sac, we'd be making major intellectual progress in Washington — one of these days. First, you'll have to find an intellect or two on those environs. Touché. So I'm pessimistic. Why am I not shocked? But how pessimistic? Well, I don't think we're going to have an Armageddon outcome. I don't necessarily think we're even going to have another recession. We're just going to be stuck in a high-unemployment, low-ambition, discouraged economy for a long period of time — and that doesn't work well for capitalism, certainly, because that doesn't imply positive animal spirits. And it doesn't work well for the welfare, broadly defined, of our country, either. Our children are the first generation to face the reality that they will not be able to achieve as much as their parents did, as a generation. Certainly, I know that my grandparents' generation wanted more for their children — and their children could realistically expect that they'd do better. And our parents felt the same way. There was a sense that the future was limitless — and that's not the case anymore, I don't think. Or, to the extent that it still exists, that sense is very bifurcated in this society. The income distribution, the division between the "haves" and the "have nots" in our economy is as great as at any time in my 54 years. Greater, I'd venture, and I have a few years on you. Okay, greater. And I'm not a socialist by any stretch of the imagination. Therefore, I don't think that the notion of equal incomes is a valid idea at all. But I do believe that our country was founded and has prospered on the notion of equal opportunity. Hear, hear! And to say we have equal opportunity right now is to be speaking with forked tongue. That discourages me as a citizen. Let me be plain: My own circumstances are fine; my son's circumstances are fine. So I'm not talking in the particular. I'm talking as a citizen and it makes me discouraged going forward about the vibrancy of our economy and our society and I think the valuation of assets, including the damn stock market, is going to reflect that. The P/E level of the stock market is tied to a lot of things. But fundamentally it's tied to — and it's interesting that I used the word fundamentally there, because many people would think I am making a statement about behavioral economics here. But I do think that behavioral economics has a lot of fundamental truth to it. And I do think the stock market's multiple is tied to the notion of whether or not we have optimism about the future. If we do have optimism about the future, it can be a self-fulfilling optimism — if we believe we can, we can. That's what I'm not seeing out there on the horizon anymore. Let's go back to the equity market, where this is working in reverse. Defeatism is also self-feeding — and fiscal austerity in a liquidity trap, my favorite hobbyhorse these days, is defeatism on broad display, naked. It's really unfortunate. I'd be ecstatic to be able — a year from now — to look back and say that I underestimated the ability of our political system to transform itself. I would be ecstatic to reach that conclusion. Join the very large club. I'm not so sure how large it really is. That is another way of saying that I will be delighted to be proven wrong. You hear that all the time from people on Wall Street who are managing money or making explicit forecasts. They'll say, "This is my forecast and this is how I'm structuring my portfolio, but I would like to be wrong." Nonsense! Money managers have fiduciary responsibility and if you think that you're going to be wrong, then restructure your portfolio right now. Otherwise, you don't have credibility with me. Not if you've got billions of dollars riding on this viewpoint and you say "but I hope I'm going to be wrong"! In contrast, I have credibility in my forecast of enduring grinding pessimism on the part of the American people — because I don't have billions of somebody else's money on the line — and I really want that forecast to be wrong. I don't have a bet, that's my genuine wish as a citizen. But as an analytical person who has spent more than a little bit of time in this arena, I don't have an analytical basis for hoping that. I really don't. This whole sorry notion that we can achieve prosperity via austerity and its accompanying zero appreciation for the paradox of thrift, or the liquidity trap, drives me about as bonkers as it does Paul Krugman. And the fact that we both have beards now is not the reason! It's not a hippie-dippy notion, as, say, Rush Limbaugh, might proclaim? No, it has nothing to do with facial hair, and everything to do with appreciation for basic macroeconomic principles that we learned many, many years ago and that still endure. In my case, it has a lot to do with the fact that I've been the mantle carrier for [economic therorist] Hyman Minsky for so long — and Minsky essentially was a disciple of John Maynard Keynes. Krugman, of course, is Keynsian. So we don't start with the notion that government is inherently bad — and when we're in a liquidity trap, we pray that governments choose wisely. Austerity is a very good antidote to an overheated inflationary economy. But applying austerity to an economy trapped in a liquidity trap is probably not just an ineffectual idea but actually a toxic idea. And this is the antithesis of an overheated, inflationary economy, that's for sure. The big thing is here is that fiscal austerity can always give you a boost to the economy, if you can offset it with easy monetary policy. But if you can't — Then you're up the creek and you're a paddle short. When you look at episodes historically in which austerity has been a path to success, you find that universally, they have involved at least one of two things. One, you can have austerity with monetary policy ease that leads to a positive wealth effect and greater private sector demand in interest-rate-sensitive sectors, particularly housing. And/or — and I stress that because you can have both — you can have austerity that begets a weaker currency and so you can steal somebody else's demand. Only then does fiscal austerity work. But if you don't have the conditions in place to have those two countervailing offsets, then you're doing austerity for the sake of austerity — and you're starving an anorexic. You're saying fiscal austerity won't work. And the Fed is pushing on a string. But what's the likelihood of Bernanke coming forward and volunteering to get behind some big fiscal effort? The pols love skewering the Fed. That's true. Ben's in an incredibly difficult situation. I mean, I've been looking at his full range of academic and analytical work, and he is truly one smart dude. You can infer very logically that he can do the diagnosis. The issue is that the political climate is such that he can't do what he would do in the textbook. In fact, if you laid out our current set of conditions in an exam, he would know all the right answers. But he would have to deliver a "B" blue book, because an "A" blue book wouldn't be politically acceptable. It must be incredibly discouraging and frustrating for him to know that "the only way I can continue to be matriculated in this university called Washington, D.C. is to turn in 'B' blue books." Because Ben Bernanke has never turned in a "B" blue book in his entire lifetime! But he's being asked by the political system to do exactly that right now. One of the things that I think a lot about — and I think others do, too, because you often hear it said — is that Washington only comes to its senses when it has no other choice. Wasn't it Winston Churchill's famous contention that America ultimately can be trusted to make the right decisions — but only after exhausting all other possibilities? Nonetheless, intellectually, I have difficulty with the notion that you need to do something stupid in order to reach enlightenment. It just bothers me, intellectually. There must be a path to enlightenment besides the bitter experience of stupidity — Perhaps you expect too much of fellow humans— I hope not. I'd hate to have to see enlightenment as a fruit stupidity. But let's say that doctrine is correct, for the moment, anyway. If that is the truth, then let's see 3,000 points taken off of the Dow, in order to enlighten the stupid. Then Washington would respond. Nothing concentrates minds in Washington like 3,000 points in Dow — on the south side. Now, whether that really matters or doesn't matter is an open question. But it does tend to concentrate minds. We saw that in the first vote on the TARP bill — remember that one? Congress voted it down and then three days later, they passed it. The American public said, "Hell no, don't pass that bailout," but it didn't even take dropping 3,000 Dow points, for them to turnaround and say, "Okay, Harry, vote for it. I can't take this pain in my 401k anymore." So actually maybe I do understand the doctrine that enlightenment comes through stupidity — and maybe we need a little bit of that in this country right now, unfortunately. Well, if one thing's not in short supply — Yes, but let's not go there. We should close this interview on a note of optimism. Ask me a question I can give you an optimistic answer to. That's tough— You can ask me about fishing, about my plans for the next three months. Okay, so tell me what you're focusing on for the Global Interdependence Center — We are focused on creating content for the GIC. Isn't that kind of circular? Not really. The GIC has been around since 1976. Larry Klein [Nobel Laureate, founder of Wharton Econometric Forecasting Associates and emeritus professor of economics at the University of Pennsylvania] was one of the first people involved with it, along with one of the major banks in Pennsylvania. The organization, long most active in the Philadelphia area, has been a convener of conferences on global issues, especially free trade and international cooperation, for a long, long time. But we wanted to branch out from being a convener of conferences featuring international authorities to having conferences from time to time that spotlight original economic research produced by the fellows that I am going to ask to join the GIC's Society of Fellows. It doesn't mean that the existing mission of the GIC will not continue. We are going to expand it, by adding new conferences that are content driven, focusing on the original work of the Society of Fellows. The architecture we're working with now is that the fellows will partner with a rising-star academic in the economic or financial field or even some other academic field. What we are driving at is having gray bearded practitioners as fellows partnered up with rising-star young academics to write original papers on relevant topical issues that connect to global interdependence. In other words, the fellows will be not people who have the title as an honorific, they are expected to actually work. Actually do something? That's novel. Right. But we're planning on that framework producing a major paper from our fellows and their rising-star partners every two to three years. That's pretty ambitious. Yes, which is why I don't really have too much leisure time. We will have an annual event. Our first will be in Paris in March of next year. Not bad. I like your thinking on where to hold GIC conferences, by the way. Even if my expense account has only stretched to ones in Philly. Banques de France has graciously invited us. Christian Noyer, its governor, will personally be hosting this event. The first two papers, the inaugural papers kicking off the Society of Fellows output, if you will, will be presented at that time. I'm writing one of them. I should hope so, as the first fellow. And the soon-to-be-announced fellow No. 2 is writing the other. We don't anticipate getting beyond maybe 8 to 12 fellows over time because as I said, we expect it to be a job. "Job" is probably not the right word, but I'll use it anyway because being a fellow actually involves work. You keep insisting it's not just an honorific. That's because it's not a matter of having your name on the masthead of a piece of bond paper. Not that there's anything wrong with that, particularly. But we actually anticipate it over time becoming an active collaborative effort between people who really want to contribute at the fellow level and to collaborate with up-and-coming members of the academic community, such that being asked to participate will be a very attractive proposition for young academics. In addition to the prestige, there will be a very nice stipend involved for the academic. That should be an effective hook. Right, for young academics on the path toward tenure, a stipend matters. And so does publishing— They've got to publish. And what they'll be doing with the Society will be the kind of research that will get them noticed. We are effectively creating a new place for them to publish on topical issues along with prominent economic practitioners. I've found so many academics write to impress— Other academics— Exactly. So they take wonk and make it wonk squared. We're not going to be either wonk or wonk squared. Well, we may be wonk because I can't deny having some of that in my personality. Certainly, I bring some of that to the game, because I strongly believe if you don't have an analytical framework for analyzing a problem, maybe you should stop until you have one. It's a nasty habit of mine, one that's only been reinforced by my experiences over the last 30 years. I cannot tolerate — I don't have a lot of patience for those who have opinions and can't explain to you the framework from which they drew those conclusions. Whether I agree with you or don't agree with you, I can appreciate your analytical framework. But if you give me conclusions with no intellectual architecture, then I am less-than-satisfied — unless you're inspired by God. Spoken like a preacher's son. Well, that is a framework. But we're not walking in those shoes in economics. "It came to me while I was shaving this morning," is not something that constitutes an intellectual framework. "It came from a higher power," is a framework, I concede. But "it came to me while I was shaving this morning," doesn't quite do it for me. Anyway, we want to create an opportunity for young academics to get to have their day in the sun. It's going to be a oneyear assignment working with a fellow to produce the paper. We will have two – probably eventually three papers a year — but the inaugural year will be two. That's where the work for the fellows will come in, co-authoring papers with the academics at that rate. That's why I'm thinking in terms of appointing maybe nine fellows on a three-year rotation. So you can see it will be a significant commitment for our fellows to work with, mentor and learn from the young academic stars we choose to involve. And I stress learning from the academics! It sounds like it should be a brilliant opportunity for young academics to actually work with real world practitioners in economics and finance. It should be a two-way street. We want it over time to be recognized in academia and more generally as a great honor to be selected to work with GIC, quite frankly as a fellow, but even more importantly as an academic coauthor. That will only be a one-year assignment for the academics, but it will be a significant one. The payoff will be that they get to publish in a global forum with an established name in the business. That should be pretty attractive in itself, but when you add the notion of an all-expense-paid-trip to Paris and getting to hobnob with household names— Anyway, we want to institutionalize the selection process for both the fellows and the academics. For the fellows, it's easier. We want to be quite rigorous in designing how we pick the academic co-authors, so that we draw from a wide array of universities and colleges. Coauthors could be grad students working on their dissertations or young assistant professors looking for a fast track toward tenure. Obviously, we don't have a fully baked idea of their qualifications yet; we want to cast a wide net. Bill Dunkelberg and his wife, Sharon, are working on creating our co-author selection process now, because they both come from the academic arena. My idea is that we want to find the most promising young academics that nobody knows yet to be our co-authors. In effect, we want to create a prestigious competition over time. It's going to be fun. That said, in the first year, with me doing one paper and our soon-to-be-announced Fellow No. 2 doing the other, we will not be able to cast an enormously wide net for co-authors because we haven't institutionalized this process yet. How are you going to find them? Well, we're going to have to use a more informal selection process to find co-authors this time around because of our time constraints. I have not yet selected who is going to be my academic co-author, and neither has my fellow-to-be, but we are both searching on a bespoke basis to find our partners. I've been doing some sounding out of various people, whom I actually plan to visit since I have time. So I'll see who would be willing to work with this old gray-bearded guy. Can you give away the topics you are planning to write about? The topic I'm taking on is, Does Central Bank Independence — Does it exist? No, not quite. That's almost a metaphysical question; whether or not central bank independence exists. It shouldn't be, if you take the question literally, because the central bank is independent within the government. But it is not independent of the government. Anyway, the topic I'm taking on is, Does Central Bank Independence Interfere With Pursuing An Optimal Monetary/Fiscal Policy Mix In A Liquidity Trap? Gee, no controversy there. Well, a liquidity trap is what I think we're in. And the doctrine of central bank independence in many respects requires a temporary suspension when in a liquidity trap because, by definition, a liquidity trap is a place where monetary policy is ineffective. No argument, monetary policy seems to have met more than its match in this sorry economy. It's completely ineffective in a liquidity trap. I start with the presumption that if you religiously maintain central bank independence when you're in a liquidity trap you will get a sub-optimal monetary/fiscal policy mix. That's because if you want to increase aggregate demand and output in a liquidity trap, you have to do it with fiscal policy. You can't do it with monetary policy alone, so fiscal and monetary policymakers have to work together. I've been preaching this for quite some time. Actually, when I go back and read Ben Bernanke's work of a decade ago about Japan, it's clear that he has the same questions as I do about the sanctity of central bank independence in the context of a liquidity trap. But he's obviously in a different situation now because he actually is the head of an independent central bank. It's a very rich area for research, first, on a time series basis, looking at it over time — including during the period when we were on the gold standard, in which the gold standard could dominate fiscal policy and lead you into a liquidity trap, in other words, into a deflationary phenomena. Then we'll also be looking at it on a cross-sectional basis in various countries. We're going to try to pick topics you can look at historically and also across countries. That's what my academic co-author will be doing: A great deal of old-fashioned shoe-level work in the library. Although I guess "library" is an old-fashioned term now. Most academic research is in front of the computer these days. Back in the day, we literally had to go to a library. You're dating yourself. Have you decided what your fellow fellow will be writing about? His topic is "Are Central Banks Innocent Bystanders In Wealth and Income Distribution Outcomes?" Not too loaded a question. Almost universally, and I understand why. If I were an active central banker — which I'm not — but if I were, I would know the catechism, which holds that, yes, income inequality or wealth inequality matters for society. But that's not something that monetary policy can or should affect. It's the role of the democratic process to make societal decisions. So central banks understandably have a "What me, mon? It's not my job" attitude. So we'll be asking the heretical question, Are they innocent bystanders or not? But you notice, I'm not writing that paper. Our other fellow is doing that paper. Anyway, those are the two topics that will be presented in March in Paris by the GIC Society of Fellows. So you're trying to stir up a little trouble? I certainly hope for some reasoned debate. In fact, we are also working to select the discussants for the papers. We will do the program following the model where the authors formally present a paper, and then we'll probably have two discussants for each paper do a panel. We will try to be even-handed about having discussants who have opposing ideological perspectives but who are willing and capable of truly addressing the issue in the context of the paper. Good luck in finding those. Actually, they don't know it yet, but I've got a couple of guys and two women in mind, who will be getting phone calls from me at some juncture in the not-to-distant future to see if they're willing to participate. Really, an event next March seems a long way off to me, compared with the speed at which my whole work life operated. But I actually like this pace. I don't look at what I've been doing since I retired from PIMCO as leisure as such, but the pace of this work does give me time to let things unfold. I don't have to force an outcome. I don't have to decide on a discussant by noon on Monday. I have three or four people in mind and I'll give them a phone call and we'll chat about it. I don't have to reach a conclusion overnight. And that's kind of fun. I don't have to necessarily sum up how many decisions I made at the end of the day. Nor is anyone pressing you incessantly for explanations of why some market moved a couple of bips. Oh God, that I do not miss. I've done TV interviews a couple of times in the last few weeks. And I actually had to sit down beforehand and think a little bit about exactly how to do it again. I hadn't done any live TV in a talking-head framework for a while. So you had to practice your sound bites. Right. Especially when you've got 90 seconds and you're lucky enough to be asked to explain the global macro economy since WWII. No mean feat— I do it reasonably well, I think. What the talking-head line of work involves is essentially taking your framework of how the world works and putting whatever the most recent data or policy maneuver is into that context. Effectively expressing that as if on a bumper sticker or as a one-liner. I like that better than thinking of them as takeaways, which has a rather pejorative ring to me. Anyway, I can come up with talking-head bumper stickers when I'm required to do so, but I actually find now that I like being able to express myself in slightly more than 90 seconds. I guess you're not on Twitter. I'm not. I'm not on Facebook. I haven't got a BlackBerry and I still have an old-fashioned cell phone. And I thought I was a technophobe. I do have an automatic transmission on my motor vehicle, which is a Volkswagen by the way. A classic hippie-mobile — but you told me you're doing more walking than driving. Yes. I drive maybe 40 miles a week and I probably walk 60 miles a week. Walking is one of my new pleasures in retirement, not as a mode of transportation but as a mode of life. It's exercise as well as wonderful contemplative time. And I treasure that these days. It must be great to take walks without worrying about getting back for your next appointment. It is. There is only one exception to that. I still mind the clock on walks with Mohamed El-Erian [PIMCO's CEO and co-CIO]. He and I have walked on weekends, very early, usually at 5:30 or 6:30, for an hour or two for 10 years. We do it whenever we are both in the same time zone. Just because of the pace of our lives, we actually do have to think in terms of the time then — somebody's family is getting up and breakfast needs to be fixed. But those are delightful times with my dear friend Mohamed, even if we do have to be aware of the time on Sunday mornings. Especially when we were both working, the weekends were our only time to do anything with family. But in general, long walks are one of my new passions. Does your bunny go with you? Both my bunnies passed away. The second one, too? Sorry to hear that. Yes. Morgan LeFay, I had forever; she's the famous bunny, if you will. Then I had Bun-Bun for two years; she passed way of a heart attack on the 4th of July. I found out the hard way that animals are vulnerable to shock from firecracker noise. I didn't know that. I haven't gotten a new rabbit. But Morgan LeFay will be around for a long time. My charitable foundation carries her name, the Morgan LeFay Dreams Foundation, so she gets to write checks and that's kind of cool. Do you sign them "Morgan LeFay"? Actually I sign my name as president of the Morgan LeFay Dreams Foundation. But I've got to talk with my banker. I bet I could get checks made with a paw print on the left hand side just for fun. I would still have to sign them. I'll dare my banker to turn me down on that! They'll do anything for a fee. Touché. So your enthusiasms now are walking, fishing and your work with GIC? I am excited and optimistic — have a sense of boyish enthusiasm — about what I'm doing with the GIC. And I'm glad that I can experience boyish enthusiasm about something that matters; I will be even more involved in the next few months. Fishing has been great here in Maine. And it was fantastic in the Caribbean, where I've just spent a few months. I am looking forward to fishing again in Southern California because the tuna are coming up from Mexico soon. I can get on my fishing boat and catch yellow tail and dorado. I am really looking forward to deep sea fishing on the Moral Hazard, which is the name of my boat. No way! Actually, yes. My boat's name generates some funny stories from time to time, when I pull into harbors. People tend to think its name is a statement about activities onboard the boat! But it's simply a one-liner, stemming from my 30 years of working on Wall Street, the Moral Hazard. Sailors have such dirty minds — But it's a strictly moral boat. Did you take the Moral Hazard down to the Caribbean? I did not. I like going maybe 40 miles. My boat's only a 32-foot boat and also at the end of the journey, I have to clean it. In the Caribbean, on somebody else's, I didn't have to clean. That's what chartering is for. Absolutely. There is great pleasure in owning a boat and also great pleasure in chartering a boat, and I do both. I'm with you there. Thanks, Paul, and good luck fishing, for your young co-author, as well as tuna.

Copyright 2011 John Mauldin. All Rights Reserved.

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