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By Ronald Fink
Bill Gross's November letter to shareholders takes the Federal Reserve to task for hollowing out the productive capacity of the U.S. economy.
In the letter, Gross, chairman of bond fund management firm Pimco, observed that prices of stocks, bonds, commercial real estate and other financial assets have grown by an average of 1.3 percent a year more than GDP has since 1960, thanks to the Fed's monetary policies. Such a reality, he argues, has eroded the capacity of the U.S. to produce valuable goods and services. Additionally, he noted the gap between asset prices and GDP amounted to 100 percent over the entire period.
Not that the U.S. is alone here.
"The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades," Gross wrote. He insisted that keeping interest rates low in the face of asset price appreciation has led to a situation where "you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce." As a result, Gross continued, "We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds."
Gross was joined in such criticism on Wednesday by Steve Randy Waldman on his website Interfluidity.
Wrote Waldman: "By the middle 2000s, the credit economy was the air we breathed, and conventional wisdom held (and continues to hold) that economic growth and credit expansion are synonymous."
Gross, however, noted that policymakers cannot now raise interest rates without jeopardizing GDP growth. "The virus has infected far too many parts of the economy's body, for far too long, to go cold turkey," he wrote.
But while Gross suggested policymakers could find no way out of the predicament, Waldman insisted they had to find one. "We need to build a system where changes in asset prices reflect the quality of real economic decisions," he wrote.
How exactly? Waldman didn't say.
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