Bill Gross slams politicians and QE2 'Ponzi scheme'
With mid-term elections and the second round of quantitative easing looming in the US next week, Pimco chief Bill Gross says that voters and investors are going to 'get what they deserve.'
In his latest investment outlook, the manager of the world's biggest fund says he agrees with commentators who say the US has 'two bankrupt political parties which are bankrupting the country'.
'Democrat or Republican, Elephant or Donkey, nothing much ever seems to change,' Gross writes. 'Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it, or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home.'
'Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.'
Furthermore, on Wednesday, the day after the elections, the government will announce its renewed commitment to quantitative easing - or 'writing checks' as Pimco founder Gross calls it.
'Not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity,' Gross says.
'If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity,' he adds.
He says the US is now in a 'liquidity trap,' where interest rates or trillions of dollars of QE2 asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
'Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.'
Gross also returns to a parallel he made almost two years ago, when he described the entire US economy as Ponzi scheme, saying that QE2 is an extension of this and that there has 'never been a Ponzi scheme so brazen'.
'Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the US has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever.