Bill Gross: my intention is to alert you on QE

Quantitative easing may have been for the greater good but the global economy has yet to foot the bill and consequences of this bold action, says Pimco bond star Bill Gross.

In his latest market comment the manager of the world’s largest mutual fund, the $242 billion PIMCO Total Return bond fund, says that while Fed chairman Bernanke was aware of the risks of QE and maintaining low interest rates, he justified it claiming there was 'greater good at play, which is the health and recovery of the U.S. economy'.

'My goal in this Investment Outlook is not to pick a “doggie bone” with the chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began.

'My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences'

Gross says he is not the only one to share this view as Credit Suisse’s latest 2012 outlook devoted part of its report to specifics of zero-based money with historical comparisons to Japan over the past decade.

‘At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis,’ wrote Gross.

‘When all yields approach the zero-bound, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change.’

He added that the duration risk and flatness at the zero-bound can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit. 

‘Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration.’

‘Recent central bank behavior, including that of the US Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit.'