Rule by Rentiers by Krugman

The Decline of PIMCO Macro by Krugman

I first talked to the Pimco people in, I think, 1991, when I was asked (and paid) to talk to them about economic issues; don’t remember the subject. It was a striking experience, sartorially: I showed up in Newport Beach in my gray business suit, and they were all in casual shirts and slacks, some (as I remember it) with fashionable stubble.

Since then, of course, Pimco has continued to be a huge success; Bill Gross is without doubt a great investor. I have often found the economic analyses coming out of Pimco deeply enlightening. And in 2009-2010 the firm won big by betting, correctly, on interest rates staying low.

For the past year or so, however, Pimco seems to me to have been making less and less sense. Gross bet big on the idea that rates would spike when quantitative easing ends; I guess he has three weeks to be vindicated, but it sure doesn’t look like it. And the economic logic was all wrong. Now Mohamed El-Erian is claiming that inflation in China and Brazil is Bernanke’s fault; again, the economic logic is all wrong.

What’s strange about this is that nobody was better at laying out the logic of deleveraging and its consequences than Pimco’s Paul McCulley. But maybe that’s the explanation: McCulley has moved on.

Anyway, El-Erian’s latest sort of shocked me; it sounds as if he’s making up his own version of macroeconomics. And that’s not something you should do unless the existing models have failed -- which they haven’t.