BILL GROSS: THE FED IS ATTEMPTING PONZI FINANCE
27 October 2010 by Cullen Roche
16 Comments
In his latest monthly report Bill Gross says QE is unlikely to work and is essentially ponzi finance. Many of his comments appear contradictory, however. He says the bull market in bonds is over, however, the economy is stuck in a liquidity trap. He also says QE won’t work, but that it is inflationary. Attached is his commentary on CNBC this afternoon:
Gross now deserves to be lumped in with all the other champagne socialists that are eschewing their principles and getting in bed with the government, and in the process contradicting themselves over and over to protect their economic moats from impending economic disaster …just like Buffett, Munger, Paulson and all the others….
I used to have respect for this guy but now realize he talks out both sides of his mouth like all the rest.
Btw – watching Kudlow right now – cant tell you how balls deep all his guests are in believing QE to be the panacea they think it to be for the market…
It’s amazing how few people actually understand QE….
One of those guests wouldn’t happen to be the esteemed Donald Luskin, would it? How a man can be so wrong, for so long, and yet remain so pompous defies all logic. If he’s “balls deep” in the QE fan club I need to know. It might just be the tipping point to send me net short.
Luskin indeed – QE is inflationary and as such, gold $5k.
The other guest was Mike Holland – he jibber jabbers a lot and is a frequent Cnbc guest…God I wonder how people like him have amassed large asset management firms and prominence – but again, big believer in QE to make stocks go higher
Thanks Ferro. By the way, I completely agree with your thoughts on the privatization of profit and the socialization of loss.
“I’m not adverse to taking a loss”
Yeah, right.
QE is money creation; pure and simple.
New money is created to buy assets and this is inflationary.
QE CANNOT and WILL NOT help the real economy. It will only cause prices to rise due to the dilution of the money stock.
Bill Gross is a con artist and so is El Erian. Both these guys were talking about deflation and the ‘New Normal’ and now, they are warning about inflation!?
QE or money creation is inflation and those who think otherwise, do not understand the monetary system.
What if velocity decreases also? It might generate only a little bit of inflation and not prevent the real problem (actually make it worse as TPC justly remarked with margins contraction).
How can BG criticize the FED when they buy the bonds he dumps? Both, his letter and his cnbc appearence today are contradictory within and vis-a-vis.
I think there might be another unintended consequence of QE (though I haven’t seen it mentioned elsewhere, so kindly tell me if that means I’m wrong!):
When the government forces more short duration assets (money) into the private sector than the private sector “wants”, wouldn’t the private sector over the medium term shift a chunk of lending from bank loans (which create money) to other forms of lending (with no money creation), thus [partially] counteracting the increased money supply? This would be due to holders of bank deposits “outbidding” banks on lending to prospective borrowers with an offer of lower yields (via corporate bonds, securitized loan pools, Fannie and Freddie, peer-to-peer lending, etc…) Thus QE wouldn’t even have as lasting an impact on the money supply (and asset prices) as currently assumed.
If accurate, perhaps this means QE could even hurt banks by shrinking their loan books more quickly than would otherwise be the case, as yield-hungry depositors drive a refinancing out of bank loans into other forms of debt?
More detailed thoughts here, including a graph related to Japan’s QE that might be supportive of this idea:
http://www.thoughtofferings.com/2010/10/how-loanbond-choice-helps-private.html
TPC:
Help me understand your logic, and trust me I have followed your writings. But if the Fed Buys treasuries or mortgage securities from the open market (QE,) and holds them on their balance sheet, they are freeing up they money they pay for them to be deployed elsewhere in the economy. It does in fact create more free capital because the fed has taken over the liability of those bonds. The Fed doesn’t have to balance its books, or go to the tax payer. So help me understand why it doesn’t create more money?
QE definitely is inflationary, assets that has limited supplies like commodities will fly
short term probably won’t since it has been priced in now, but longer term will go much higher with continued QE
Nobody knows how it will go not even the FED. They are playing with fire.
To be honest, I am deeply skeptical of Bill Gross comments. He has heavy positions (one way or an other) in the market he comments on: it’s too damn tempting to use the press and catchy headlines to (try) push the market “the good way” on its bets… Bill is certainly not in the business of finding and saying the “truth” on anything, but rather on making money.
QE drives asset prices up…apart US bonds in theory no…yet psyscholgy enters in and stock climbs…so we have here a modest wealth effet which supposedly will create job…sigh..
His points about being more competitive than EM is nonsense…there is no way US will compete with EM
Overall a non sense talk..QE etc is like voodoo for this lady.