This post has to do with Global Economics and our financial future. That’s both YOURS and MINE. It deals with an interview done by a Kate Welling talking with Paul McCulley, the recently retired director of PIMCO.

You may have heard of PIMCO. It is a global investment solution provider, headquartered in Newport Beach, CA. They were founded in 1971 and today have some $1.342 Trillion in assets under management. Believe me, you don’t reach that level unless you are really good at what you do. They have more than 1800 professionals located in 10 countries across the world. Obviously, someone selected to run such a company has a full understanding of global economics.

When I read this interview, which is a long one, I again understood that, as a nation, we are sufficiently paralyzed, stuck in neutral, and likely to stay that way for a long time. The last time this happened, as per Mr. McCulley, it took World War II to get us out of it. God help us if we can’t find a different approach this time.

If you have followed my posts, you’ve heard me try to help folks understand the distinction between micro-economics and macro-economics. Here’s a key comment from the interview with Mr. McCulley:

… A liquidity trap is simply defined as when the private sector ( ie “non-government) 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 individualb 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.

This idea has huge implications for our upcoming national elections. Even if you can’t finish the read, however far you get will help you understand where we are going. Read the rest of the interview HERE.