Gross: QE and financial repression have failed
PIMCO’s bond star looks at the 'real economy' of the US and why despite its failure the 'era of financial repression' is set to continue.
Markets
by Atholl Simpson on Nov 01, 2012 at 13:43
The looming US presidential election is leading many to reflect on the past four years and Bill Gross' latest investment outlook does exactly that, as he gives a scathing appraisal of efforts to re-launch the US economy.
The PIMCO bond star addresses the major issue for many US investors.
‘The biggest bet being wagered in financial markets these days is the bet on “financial repression,” “quantitative easing,” and the ultimate effect of both on the real economy. Of course even a genie couldn’t come up with a simple answer to that complex question.’
But Gross gives it his best shot and says the ultimate desired effect of each strategy may have looked good in theory, but in practice failed to deliver on many fronts.
Using the progress of the US’ net national savings - the amount of government, household and corporate savings that is left over after the existing investment stock is depreciated - over the past three years, the bond manager, who runs the world's largest mutual fund the $260 billion PIMCO Total Return , pointed out the figure has been negative and lower than it has been in modern history.
‘The last time this occurred was in the Great Depression.’
‘Aside from a little squiggle back close to 0% over the last year or so, there is no evidence that investment is being incented by quantitative easing.’
‘All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production.’
‘Admittedly, the chart shows this downward spiral has been underway for decades, but financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction.’
‘They have not. We have been using the lower interest rates to consume as opposed to invest.’
While critical of the Fed’s policies, he does come to the defence of its chairman Ben Bernanke saying he has received little help from the political elite in terms of cooperative fiscal stimulation.
‘They have all focused on re-electing themselves as opposed to constructively plotting a way forward.’
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2 comments so far. Why not have your say?
Banged to Rights
Nov 01, 2012 at 22:40
QE the low IQ policy.
report thisJohn Stirling
Nov 02, 2012 at 09:47
What was the alternative? Politically or economically? Once you have opened Pandora's box, let the genie of financial destruction out of the regulatory bottle, and whipped up the whirlwind all at the same time the historical answer would be a good solid war, millions dead, and a currency reboot.
I am quite pleased that our political leaders have tried a new approach - QE may be largely ineffective, and not have any obviously acceptable way around its rather glaring problems, but if we can get away with a decade of significant but not catastrophic economic woes and inflation then I'll consider it a win. Anything better than that would be a miracle.
It is easy to criticise the policy response to where we were - it was a rubbish response in many ways - but it is more difficult to come up with an alternative that is not only acceptable economically, but is credible when you look at how people have reacted throughout history.
Crashes happen, recoveries happen, bubbles happen, rinse and repeat. Even the mighty Bill Gross only criticises without saying what should have been done differently.
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