Bill Gross calls out Bernanke

[explanade]

Says QE and the zero interest rate has caused tepid growth:

Pimco's Gross Skewers Bernanke: You're Part of the Problem

He concedes that fiscal failure isn't helping, he claims the inability to get a decent return may be hampering investment, job creation, etc.

So making the cost of capital historically low is making it less likely for corporations to invest? It's not the lack of aggregate demand but the fact that money is cheap?

Could this rant have something to do with the fact that zero interest rates have suppressed yields in the fixed-income business from which PIMCO makes its money?

 

[jon-nyc]

You're exactly right. I don't know why anyone pays attention to him, all he ever does is talk his book.

 

[Gatordoc50]

The low rates are killing the economy. But the Fed is concerned with making the banks healthy. As a side note, does anyone really believe that the Fed won't leak rate hikes to the banks/ financial institutions? You don't give them a trillion dollars and then surprise them with rate increases. Lol

 

[Buckeye]

The low rates are killing the economy. But the Fed is concerned with making the banks healthy. As a side note, does anyone really believe that the Fed won't leak rate hikes to the banks/ financial institutions? You don't give them a trillion dollars and then surprise them with rate increases. Lol

Why are low rates killing the economy? Affecting demand for people depending on interest for their income? Seems like low rates would be a boon to investment for all sizes of businesses and anyone having to incur debt to generate demand.

 

[Gatordoc50]

Why are low rates killing the economy? Affecting demand for people depending on interest for their income? Seems like low rates would be a boon to investment for all sizes of businesses and anyone having to incur debt to generate demand.

We've had near zero rates for a long time with very low growth. So, debt and low interest doesn't equal growth. Interest income is income, it spends just like earned income. If you had a million dollars with 8% treasuries as in 1990, you could buy a Cadillac or send your 2 kids to an Ivy league school on the interest from the investment every year. With todays interest rate environment, you would need about 56 million to do the same. It's an extreme example that exposes how ridiculous the return is for loaning someone money. And for identical risk. In fact, I would argue with greater risk.

 

[MichaelB]

Why are low rates killing the economy? Affecting demand for people depending on interest for their income? Seems like low rates would be a boon to investment for all sizes of businesses and anyone having to incur debt to generate demand.

Exactly. Also very helpful for households staying current on underwater mortgages. explanade, in the OP, does make a good point. Life is tougher for Bill Gross and PIMCO.

 

[GrayHare]

Rather than lending much, the megabanks are merely redepositing with the Fed most of the debt monetization. Consequently much of QE is not getting into the economy. Until that changes, the recovery will remain sluggish.

 

[Buckeye]

We've had near zero rates for a long time with very low growth.

Does the fact they both happened at the same time prove that one is caused by the other? Data?

I don't have any data to back up my opinion but it seems like wage earners and corporate and small business investment are more of a factor in the economy than those living and spending off the proceeds of low interest rates.

 

[Buckeye]

Rather than lending much, the megabanks are merely redepositing with the Fed most of the debt monetization. Consequently much of QE is not getting into the economy. Until that changes, the recovery will remain sluggish.

Tell me more about why low interest rates drive the banks to make this choice? I'm not being facetious. It seems to me that it would be very easy for banks to make even more profit by lending at low rates on homes, cars, and business expansions rather than re-depositing it with the Fed.

Are their decisions due to the complete lack of risk? They are not doing their job if they are making the lowest profit with no risk. Even I could do that!

 

[GrayHare]

Tell me more about why low interest rates drive the banks to make this choice? I'm not being facetious. It seems to me that it would be very easy for banks to make even more profit by lending at low rates on homes, cars, and business expansions rather than re-depositing it with the Fed.

Are their decisions due to the complete lack of risk? They are not doing their job if they are making the lowest profit with no risk. Even I could do that!

I suspect megabanks are overreacting to increased loan scrutiny since the meltdown. "If you're not gonna let us make any loan we want, we won't make any loans at all. So there!"

 

[Gatordoc50]

Does the fact they both happened at the same time prove that one is caused by the other? Data?

I don't have any data to back up my opinion but it seems like wage earners and corporate and small business investment are more of a factor in the economy than those living and spending off the proceeds of low interest rates.

Its cheaper to borrow a fixed amount of money these days, that's for sure. But what are you going to purchase with that cheaper rate? Inflated assets, that's what. And if your lucky enough to make a profit, the taxes on that profit are increasing or at least very uncertain. I'm pretty sure that tax reform made permanent and fair would be a much larger driver of investment than interest rates.

 

[haha]

Opinions on this are just a political litmus test, free marketers vs. statists. If you have been here awhile, you pretty much know everyone's opinion. So I'll save the libs from having to refute my ideas, and just pass.

Ha

 

[Gatordoc50]

Opinions on this are just a political litmus test, free marketers vs. statists. If you have been here a while, and not completely asleep at the switch, you pretty much know everyone's opinion. So I'll save the libs from having to refute my ideas, and just pass.

Ha

Well then to take the politics out let me offer this. If ones neighbor wanted to borrow 100k for 30 years at 3% taxable and they were guaranteed that they would get paid back, would they loan it? I wouldn't. In fact, nobody would. And nobody is. The average holding period for 20+ treasuries is a few weeks. All this debt is being day traded. At some point the music stops and someone is left holding these securities. Get the interest rate up to 6% from its current .14% and you've got plenty of people ready to finance public debt. Anyway, I guess I agree with Bill.

 

[explanade]

Tepid growth may be in spite of low rates, not because of them. It's still the aftermath of the financial crisis.

US is growing better than other industrialized economies, which BTW are dealing with higher rates.

 

[clifp]

Well then to take the politics out let me offer this. If ones neighbor wanted to borrow 100k for 30 years at 3% taxable and they were guaranteed that they would get paid back, would they loan it? I wouldn't. In fact, nobody would. And nobody is. The average holding period for 20+ treasuries is a few weeks. All this debt is being day traded. At some point the music stops and someone is left holding these securities. Get the interest rate up to 6% from its current .14% and you've got plenty of people ready to finance public debt. Anyway, I guess I agree with Bill.

I agree. There is a decent chance I'll be alive in 30 years, so the question isn't just academic for me. At 3% I have no desire what so ever to give anybody my money for 30 years. Especially because so much of the debt, allows the borrower to refinance (e.g. mortgage and most corporate bonds) if rates drop, but I am stuck if rates raise. Now at 6%, even if I think inflation will be 3% I more than happy to move 30% of money into these bonds to provide a base retirement income. (I would have actually done so back in 2000 when TIPS bonds were yielding 3.5%+ if I could have found 30 year bonds).

At first approximation the only people willing to loan money at the current rates for 30 years, are Fannie and Freddie for mortgages and the Fed for treasuries (and also mortgages), and lesser extent the Chinese government/state owned business for their own political reasons.

Now there is plenty of activity, but it is a game of musical chairs. We really don't have anything approaching a real market for bonds in this country. The government is pulling the strings.

Sure Gross is talking his book, it doesn't mean he is wrong.

 

[explanade]

So you think institutions aren't willing to lend capital because of low rates, rather than there's no demand for loans because there's no demand for the products which would be made with that capital?

You can hang on to your money because the rates are low but those low rates are still better than no return at all hanging onto your money.

 

[Texas Proud]

So you think institutions aren't willing to lend capital because of low rates, rather than there's no demand for loans because there's no demand for the products which would be made with that capital?

You can hang on to your money because the rates are low but those low rates are still better than no return at all hanging onto your money.

Actually there is demand for loans.... the problem is they are not high rated loans... there are a lot of small firms that lend money at a high rate... they are not banks, so do not have a regulator looking at them all the time...

 

[DallasGuy]

I know I'm just one person on fixed income and perhaps people on fixed income are a smaller part of the economy compared to the rest of the economy, but low interest rates are "costing" the government in 2 ways (in my case). It's preventing me from making a higher return on my savings and thus paying higher taxes. It's also going to cost the government next year when I apply for Obamacare and get a much larger tax credit because my income is lower compared to if I was getting a higher return on my fixed income investments. I just wonder how many other people are out there in a similar situation. It can't be an insignificant number.

Also, I would probably spend more money if my income was higher.

 

[haha]

Tepid growth may be in spite of low rates, not because of them. It's still the aftermath of the financial crisis.

US is growing better than other industrialized economies, which BTW are dealing with higher rates.

Is China not an industrialized economy? Who'd a thunk it?

Ha

 

[HFWR]

We've had near zero rates for a long time with very low growth. So, debt and low interest doesn't equal growth. Interest income is income, it spends just like earned income. If you had a million dollars with 8% treasuries as in 1990, you could buy a Cadillac or send your 2 kids to an Ivy league school on the interest from the investment every year. With today's interest rate environment, you would need about 56 million to do the same. It's an extreme example that exposes how ridiculous the return is for loaning someone money. And for identical risk. In fact, I would argue with greater risk.

FWIW, the real return under your 1990 scenario would have been 2-3%...

 

[Gatordoc50]

FWIW, the real return under your 1990 scenario would have been 2-3%...

And it's negative 1 or 2 now. From a personal perspective. If I'm making 57 times current rates, I'm not worried about the price of milk.

 

[HFWR]

And it's negative 1 or 2 now. From a personal perspective. If I'm making 57 times current rates, I'm not worried about the price of milk.

Inflation is around 2%, and the 10yr Treasury is slightly above 2%, so near zero real, arguments about how inflation is calculated not included...

As it pertains to me and FIRE, I refinanced my mortgage late last year to take advantage of the low rates, and I only keep a small chunk of my portfolio in "cash".

 

[Gatordoc50]

Inflation is around 2%, and the 10yr Treasury is slightly above 2%, so near zero real, arguments about how inflation is calculated not included...

As it pertains to me and FIRE, I refinanced my mortgage late last year to take advantage of the low rates, and I only keep a small chunk of my portfolio in "cash".

I was comparing 1 year rates just to make a historical point. .14 today vs 6 to 8 in the nineties. But if we look at the average one year rate of about 3.5 and compare it to today at .14, that's still a big difference. Using my original example, it would take 25 million dollars to generate the same interest income today as 1 million would in average times. I've gotta think that can't be good for the economy.

 

[audreyh1]

I know I'm just one person on fixed income and perhaps people on fixed income are a smaller part of the economy compared to the rest of the economy, but low interest rates are "costing" the government in 2 ways (in my case). It's preventing me from making a higher return on my savings and thus paying higher taxes. It's also going to cost the government next year when I apply for Obamacare and get a much larger tax credit because my income is lower compared to if I was getting a higher return on my fixed income investments. I just wonder how many other people are out there in a similar situation. It can't be an insignificant number.

Also, I would probably spend more money if my income was higher.

I suspect low interest rates help the government far more in keeping down borrowing costs than from taxes paid on interest income.

 

[Gatordoc50]

I suspect low interest rates help the government far more in keeping down borrowing costs than from taxes paid on interest income.

The interest income received from the securities owned is turned over to the treasury. So, the higher the yield, the higher the income for the treasury. An increase in rates would logically reduce the value of the Feds treasury portfolio, but the Fed doesn't pay anything for the debt in the first place. It merely issues credits. The debt owed by us to us is irrelevant.