PIMCO Chairman Bill Gross
A failure of both politics and policy in the United States is threatening an era of financial repression that spells the end of the "cult of equity" in the world's biggest economy.
That's the view from Pacific Investment Management Co. Chairman Bill Gross in his iconic monthly investment outlook bulletin for the world's biggest bond fund manager. Castigating the low interest rate and quantitative easing policies of Fed Chairman Ben Bernanke and the intransigence of both Republican and Democratic lawmakers, Gross says this month's Presidential elections will do little to slow the inexorable decline of the US economy.
"What kind of choice do we have when we pull the lever," Gross asks. "If monetary policy has shown its impotent limits, can we now trust Washington to constructively reverse a downward slide in our net national savings rate? I suspect not. I doubt if either Obama, Romney, or many of their economic advisors even know what the definition is, let alone how to reverse it."
Gross outlines the basics of what he calls "financial repression" - the result of what he says is a failure of Bernanke's multi-trillion programme of quantitative easing and the Fed's near-zero interest rate policy.
Combined, Gross argues, the two Fed pillars are enticing Americans to spend rather than save, citing the single-basis point interest rate returned to most money-market accounts. Noting that $10,000 earns just $1 in annual interest, Gross compares that to the sum of $25 needed in 1958 to generate the same amount.
"In the past three years of quantitative easing and financial repression, can we see a noticeable effect on investment as opposed to consumption? Is the Bernanke model working or is the $9,975 being spent on consumption," Gross asks, rhetorically.
Following up that question, Gross cites the historic decline in the US' net national savings rate, which has fallen steadily since its mid-1970s peak.
"Over the past three years, our net national savings rate has been negative, and lower than it has ever been in modern history. The last time this occurred was in the Great Depression," he says. 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."
If spending trumps investment in zero interest rate world, Gross argues, sustainable economic growth is impossible and the temporary 2 percent advances will give way to another potential recession.
"To be fair, Ben Bernanke has been operating with one arm behind his back and has been calling for cooperative stimulation from the fiscal side of this government. He has received little response - not from Democrats, not from Republicans. They have all focused on re-electing themselves as opposed to constructively plotting a way forward."
"If growth cannot be boosted by monetary policy, and fiscal policy is in the hands of a plutocracy more concerned about immediate profits as opposed to long-term vitality, then no Genie ... with a magic clock can make a difference. If, therefore, real economic growth is stunted in the United States and globally,then portfolio strategies should acknowledge bite-sized future returns and the growing risk that the negative consequences of misguided monetary and fiscal policy might lead to disruptive financial markets at some future point."
Newport Beach, California-based PIMCO, a unit of Allianz SE, manages around $1.82tn in assets. It's benchmark Total Return Fund manages around $278bn, around 20 percent of which are US Treasuries, and has gained around 12 percent over the past year, according to data compiled by Bloomberg.
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