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The point is to seek the return of capital not the return on capital. Stretching for additional yield may not be a fruitful endeavor. If you have to choose between a security that yields 3 percent versus one that yields 4, you might think "I'll take the 4 percent." But that's not enough. You need to look at the volatility. If the 4 percent security drops 30 percent in price, then you're burned. Q: Pimco is widely credited with popularizing the idea that we're in a "new normal." Can you explain it in layman's terms? A: It's the idea of seven years of abundance and seven years of famine. We had years of debt built up at the household level to buy homes, cars and other things. Now consumers are having to pay down their debts because they have too much relative to their incomes. Banks have had a similar situation. The deleveraging, this process of paying down debt, has shifted from the private sector to the public sector. You see this with the layoffs of teachers and other government workers. You'll see this more forcefully in 2013 when the federal government's automatic spending cuts kick in. There's going to be fiscal austerity that harms economic growth. It'll get worse. It's playing out already in Europe. Q: Given all this austerity, do you expect interest rates to stay low? A: Short-term interest rates aren't going anywhere. The 10-year Treasury yield is normally tied closely to the nominal gross domestic product. But the forecast for now is that conditions won't change much. And there's still a flight to safety seen very clearly in this week's Treasury auctions where demand has been extraordinary. I guess that leaves us in the 2 percent range for the 10-year (To put that in context, the 10-year Treasury rate started the year at 3.33 percent and traded at 1.85 percent on Friday). Q: This is depressing. The new normal isn't the old normal yet, it's going to be with us for a while? A: We're just in the early stages, in the very beginning of a long process. Look at Europe. People are up in arms about changes to benefits and services and public sector employment. It's the transformation of the century, really. The public sector is set to shrink globally. It takes many years. But the final product is a much less risky financial system.
[Associated
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