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Bogle: Economy Needs Time to Heal

Christine Benz

Christine Benz: Jack, I wanted to talk to you about Treasuries in particular. You mentioned the fairly low yields currently. They have been going even lower recently, and I know some bond market participants have argued that Treasuries are in a little bit of a bubble and that people should downplay them as a percentage of your fixed-income portfolio. What's your take on that issue?

Jack Bogle: Who knows the answer to that? I mean, certainly I wouldn't pretend to know, and I don't think those that are saying it's going to happen, really know. If we have a flight to safety, Treasuries are going to be very strong performers. I think that maybe a year and a half ago, and don't hold me to the exact date, but that 10-year Treasury was over 3%. Now it stands at 2.2% or 2.3%. So, there has been a decent amount of appreciation in Treasuries and in intermediate Treasuries, and in the long Treasuries, as well. That doesn't go on forever, but it does establish what your return will be.

And if you buy that bond today and hold it for a decade, that yield is a pretty good indication of your return. I don't worry so much about the speculative side because basically to buy that intermediate-term Treasury at a 2.3% yield, you are striking a bargain. I am willing to accept a 2.3% yield essentially for the next 10 years.

I don't see that that's a bubble kind of thing. If the yield goes to 1%, and it goes way up or goes to 4%, and it goes way down, you are still going to get your 2%. That's just going to be reflected in the price of the bond until as it gradually gets back to its maturity value. So, a bubble would be a little bit strong for me when you are talking about Treasury bonds.

Benz: So with the Standard & Poor's downgrade, we've kind of alluded to it. The market apparently thought it was kind of a non-event; Treasuries rallied as we have been discussing. What's your take on S&P's move there?

Bogle: Well, first, S&P was citing the obvious. I don't think anybody should have been surprised. People have been talking about pressure on the U.S. down the road. It's just a question of how far down you look, and I think honestly the S&P is a commercial business and trying to make a profit for itself. I had said a few years back that S&P was kind of the gang that couldn't shoot straight. It had no idea how to rate mortgage-backed securities, and today S&P is the oracle on the world's financial affairs.

Well, I don't know how that happened quite so quickly. I don't have that much confidence in S&P, but I do think the firm is pointing in the right direction. It is the only one of the rating agencies that has done the downgrade so far, and maybe that's courageous and maybe it's dumb. But we are in a world where there aren't a lot of easy answers, and we see simple headlines in newspapers. We blame the week's volatility--and it has been an extraordinarily volatility this week--on one or two events that we know about. But as I look at it, we've known about these things all along, that is the deep financial trouble that the U.S. is facing in the long run, which is what's leading to that downgrade and the even deeper financial trouble that the European Union finds itself in.

And it's the fact that we're in a recession, or not in a recession but moving toward a recession and getting nowhere near the growth that the Federal Reserve predicted as recently as a year ago. Consumers just are saving more money rather than taking money out of their savings, out of their real estate as they did before 2008, and it doesn't take much genius to figure that consumers are going to take something like $5 trillion out of the real estate and spend it. That goes into consumer spending in our GDP, and that has to be paid back. That's going to be, instead of $5 trillion of additional spending, $5 trillion of less spending over an extended period. So, none of this is really I don't think all that complicated, but of course we have a loss of confidence in consumers under those circumstances.

Benz: Jack, you mentioned flagging growth. I am wondering if there is anything you think policymakers can do at this point given that the toolkit is looking pretty depleted for stoking growth.

Bogle: Well, certainly the toolkit is pretty empty, but there are things that can be done and should be done. I would be in favor of increasing and restoring longer-term unemployment insurance for a longer time period. I would be in favor of encouraging investment by small business. I think we can take a look at some of the more onerous regulations of business, particularly small business. I think we can look at a lot of areas of the tax code that seems to discourage investment, and if there is some intelligent way to do it, and golly, these things are totally complicated. But if we could encourage our corporations which have all that money overseas to repatriate it to the U.S. and invest it here, that's not easy to do as you can't tell them what to do with it, you can just give them the tax break. But those kinds of thing are at the margin. They won't alleviate the problem, but sooner or later the economy has to take care of itself and just work things out. And this is going to take time to work out.

You don't get over what we have been through in the housing market and the excess borrowing--first excess borrowing by consumers and then excess borrowing by the governments, plural, state and local as well as federal--now, you don't get over that overnight. So, we are just in a period I think of kind of slogging through it and not expecting too much and doing as much as we can to keep our own corner of the world. Whatever we do for a living, and whatever we do as a family in terms of spending; we just have to keep that going and try and keep our optimism up even when the days are dark as they surely are.