“It is hard to avoid concluding that sooner or later we will have to turn the clock at least part of the way back.”

Paul Krugman

They say you’re only as old as you feel and I suppose there’s a bit of truth to it. Four years ago, when I turned the big 5-0, I decided that if I was going to clock another fifty and hit the century mark in April of 2044, that things were going to have to change. Two decades of pounding the pavement around Newport Bay had left me with a bad back and cartilageless knees, and it had gotten to the point where after my routine jogs, I was returning to the office looking like the Eveready bunny sans batteries. I was still going, but the remaining distance and time was likely the subject of heated debate up and down the PIMCO halls. What then, was an investment chieftain of international renown to do? How could I regain that snappy edge that boldly announced that I was a rabbit for the new millennium instead of a run down rodent holed up in the twentieth century? Well, make some changes of course - gulp vitamins, take yoga lessons, relax a little bit more at home with the fam. These things and more, I am happy to report, have succeeded in putting a snap back in my step that I hadn’t recognized since the day when I was seventeen years old and "Greedy Greta" Mueller suggested we go parking one late evening in the Los Altos hills.

Still, I must tell you that being as old as you feel is not all that its cracked up to be even if you’re walking like a teenager or hopping like the Eveready bunny. You’ve still got to wake up each morning and face your sagging jowls in the mirror and it’s during those moments that I realize that you’re also just as old as you look. Feeling good is one thing, but feeling good and looking good - well now there’s a combination to die for. And if you had to choose just one - well I am not so sure I wouldn’t go for the looks, because if you look good (which in this society means looking young) then you can’t be old. Take Eva Peron or Lenin for instance. Those people may be dead, but they’re not old. As Billy Crystal would say, "they look marvelous!"

The secret to that youthful glow, however, is just not that easy. There’s Rogaine for the guys and Retin A for the ladies, but after awhile you realize you’re fighting a losing battle with time and Mother Nature. At that point, and if you’re really serious about looking young, it’s time to call in the surgeons - spelled P L A S T I C, as in Michael Jackson. Now some of you may be shocked that I would even consider such a thing but - I must tell you that I owe my now thick healthy head of hair to a plastic surgeon who knitted my scalp back on one grisly morning thirty years ago after I had traveled through the windshield of my Nash Rambler and deposited the upper half of my head on the hood. If it worked then, why not now? Besides, whining little invalids think nothing of having their chests cracked open in a pathetic attempt to have a more youthful heart. Then they brag about their multiple bypasses for the next 20 years. If they can do it, then what’s a tiny little incision behind your ears to be ashamed of? Why is "lipo" considered to be a four-letter word? I say its time to feel good and look good. Aging boomers of the world unite. Throw off your chains, remove those wrinkles, suck out that fat. You’re never too old to look young. And trust me darlings, when you look young, you’ll look just marvelous. Just check out Eva. Who cares how she feels.

Well, Eva may look good but her beloved Argentina does not. Nor does Brazil, Venezuela, Colombia, China, Thailand, Malaysia and a host of other capitalistic wana-be’s that recently looked in the economic mirror and observed a bald spot and sagging eyelids instead of that exuberant glow of youth. While the United States seems to have found Ponce de Leon’s fountain, the rest of the world including almost all of the emerging nations appear to need a tummy tuck if not a full makeover. That could keep all the plastic surgeons in Newport Beach, or better yet, all the economists in the world busy for years. Many of them in fact - economists that is -have gotten to work and are now speculating and theorizing as to just what can be done to make global capitalism look young again. It was only two years ago that globalization seemed irreversible. Trade barriers were falling, companies were expanding, the world’s tallest buildings were being built in far off heretofore-unknown cities such as Kuala Lumpur. Adam Smith was on a roll. Then came Thailand, Russia, Brazil and the world’s politicians, financiers and economic thinkers began to question whether or not Karl Marx was not just a little bit right when he claimed that capitalism carried the seeds of its own destruction. If globalization were to continue to look good and feel good, they hinted, changes might have to be made.

Such was the warning of Paul Krugman, for instance when he wrote in the current issue of Foreign Affairs, that "we must heed the lessons of Depression economics lest we be forced to relearn them." To Krugman that means limiting capital flows to and from potentially unstable countries and reregulating financial markets in minor increments. To George Soros and C. Fred Bergsten, the director of the Institute for International Economics, it means shoring up the international system by providing a more meaningful lender of last resort, a super IMF that can stem any hint of a run with moral suasion or a gigantic check if need be. And to Jeffrey Sachs, that means pursuing free floating exchange rates so that a Thailand or a Brazil need never happen again in such a chaotic, freefalling way. Who to believe? In fact, should we even tinker with the system and can global capitalism just grow old gracefully, given enough time?

The ultimate choice between action and inaction depends significantly upon whether capitalism is a self-correcting mechanism in the short to intermediate term. Keynes long ago admitted that capitalistic economies straighten themselves out in the long run, but also proclaimed that in the long run we’re all dead. So it’s somewhere in that nebulous time zone of a decade or less that economic policy is primarily geared to, and global policy-makers with their host of solutions involving capital controls or lenders of last resort are tacitly implying by their recommendation that they do not believe the global economy can right itself anytime soon without a major facelift. Krugman out and out admits it with his warning of "depressionary economic policies" and Soros forecasts it in his new book, The Crisis of Global Capitalism . Is their economic mirror reflecting the proper image?

Krugman, it would seem, relies heavily on the Japanese example in suggesting the need for changes to the system. His "depressionary economics" refers of course to the near worldwide liquidity trap experienced in the 1930s, an example which Japan is close to emulating in 1999. While Japan is the world’s second largest economy and would play a part in any coordinated global turnaround, its plethora of problems is largely of its own making. Other Asian countries such as South Korea and Thailand seem to be experiencing recoveries far and beyond what Japan has been expecting for the past five years. To restrict capital flows and reregulate financial markets would seem to be rather major surgery for a global economy whose symptoms do not exactly resemble those of Japan.

Soros’ idea of a supra global agency with bigger checks and firepower than the IMF makes more sense, but it begs the question of what to do about moral hazard -the exuberance investors might get if they felt that all of their loans and investments were backed up by a global Uncle Sam. The fact is, in order to properly allocate capital, investors must understand that their funds are at risk. Russia, as tragic as it was, set the perfect example of what can happen to private lenders and stockholders who think that public agencies and governments stand behind each and every one of their trades. Once they know they don’t, then more cautious, conservative, and constructive investing should follow. Fewer Long Term Capital Management blowups will result.

Of all of the new age economists perhaps Jeffrey Sachs has the best idea, one that involves deregulation instead of reregulation. By allowing individual currencies to float freely without the artificial restrictions imposed by trading bands or currency boards, Sachs’ idea permits the capitalistic price system to work its magic. While individual countries would still have to maintain conservative fiscal and monetary policies in order to maintain relatively stable currencies, investors would know at any point in time that the price of trade or the price of investment was market based and not an artificial one.

Don’t misunderstand me. Despite the past several decades’ "free enterprise" blitz, long-term history has proved that there is a place for government in the marketplace. Pre-depression "laissez faire" economics in the U.S. were replaced in the thirties with policies and agencies that forced public disclosure of financial information, stabilized the banking system, and made it possible for credit to flow more evenly to all Americans who wanted to borrow. The Keynesian revolution, however, eventually led to government’s overreach in the 1960s and 70s with a maze of regulations and trade barriers that stultified commerce instead of encouraging it. But with the Thatcher and Reagan counter-revolution in the early 80s followed by the fall of the Iron Curtain, there seemed to be a new glow on the face of global capitalism, a face that Paul Krugman and George Soros now suggest must be partially transformed.

There is, however, perhaps more danger in action than in inaction. The global economy is mired in a several years/less than a decade long deflation brought about by over-investment financed with too much short term debt. Given what has occurred in Russia, the continuing deregulation of currencies, and if need be, additional monetary easing on the part of the U.S. and European central banks, there is a high probability that global economies in addition to the United States can return to recovery after several years time. To reregulate the system because things aren’t "lookin’ so good" right now would be a serious mistake. Besides, it might lead to further reregulations, which are currently being thought up such as trade barriers on steel, bananas, and a host of other imported goods. Given proper time for healing and a few additional tucks here and there, investors’ confidence and money should begin to flow back to emerging nations before, as Keynes would have phrased it "we’re all dead." With the exception of Sachs’ free float, I suggest no further surgery, and that we leave any additional incisions to the plastic surgeons in Newport Beach, not the economists. There are enough Eveready bunnies in this town to keep them occupied for years to come.

William H. Gross
Managing Director