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Pimco's McCulley: I don't think the world's upside down

Central banks will be "exceedingly low" on short-term interest rates as markets emerge from a liquidity trap, Pimco chief economist Paul McCulley said on Thursday.

"I don't think the world is upside down," McCulley said of the current macroeconomic climate. McCulley, once a prominent portfolio manager at Pimco and a noted Fed watcher, rejoined the firm this week as its chief economist.

"It's a brand new regime. We are calling it here the new neutral," McCulley said in a "Street Signs" interview. "I love the phrase, I have been writing about it for 10 years."

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Investors should not fear any of the kind of catastrophic "Minsky moments" that fed the recent financial crisis, despite the reappearance of easy credit in the home mortgage markets, McCulley said.

McCulley is credited with inventing term "Minsky moment" to describe a sudden crash in asset values, usually following a period of extreme speculation using borrowed money. (Hyman Minsky was an economist whose theories on instability were considered radical in their day).

While he is not worried that easy monetary policy will bring about another catastrophic crash on par with the last one, he says investment managers should still keep their eyes peeled for trouble.

"Cyclically, animal spirits move from exuberance to doom," McCulley said, "and now we are getting a flavor of exuberance."

Tightening Fed policy will turn that cycle, and it could hurt.

But, inflation is not the factor it once was, and the economy has already experienced one big crash.

"We don't have to be worried about the Big One. We had the Big One, and you don't have another Big One after you have had the Minsky moment," he said.

Paul McCulley and Bill Gross.
CNBC
Paul McCulley and Bill Gross.

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On whether the European Central Bank will ease policy in the near future, McCulley said that the bank's conventional policy rate is already close to zero, but the bank could employ other policy methods to ease borrowing.

Pimco founder Bill Gross said the company has been investing in five-year US Treasuries, based on his firm's suspicion that the market is overestimating how much the Fed will raise short-term interest rates.

When asked if he has spoken recently to Mohammed El-Erian, who suddenly left the firm, Gross said they have not spoken recently, but they are on good terms. "Mohammed is doing his own thing," Gross said, "and he's associated with Allianz, which our parent, and we wish him well and assume he will do well."

Contact World Economy

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