Bill Gross On Bernanke's Latest Helicopter Flyover, "Money For Nothing, Debt For Free" And The End Of Ponzi Schemes
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Back in April 2012, in "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" we first explained how despite its best intentions (to boost the Russell 2000 to new all time highs, a goal it achieved), the Fed's now constant intervention in capital markets has achieved one thing when it comes to the real economy: an unprecedented capital mismanagemenet, where as a result of ZIRP, corporate executives will always opt for short-term, low IRR, myopic cash allocation decisions such as dividend, buyback and, sometimes, M&A, seeking to satisfy shareholders and ignoring real long-term growth opportunities such as R&D spending, efficiency improvements, capital reinvestment, retention and hiring of employees, and generally all those things that determine success for anyone whose investment horizon is longer than the nearest lockup gate. Today, one calendar year later, none other than Bill Gross, in his first investment letter of 2013, admits we were correct: "Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice."
It is this that should be the focus of economists, and not what the level of the S&P is, as it is no longer indicative of any underlying market fundamentals, but merely how large, in nominal terms, the global balance sheet is. And as long as the impact of peak central-planning on "business models" is ignored, there can be no hope of economic stabilization, let alone improvement. All this and much more, especially his admissions that yes, it is flow, and not stock, that dominates the Fed market impact (think great white shark - must always be moving), if not calculus, in Bill Gross' latest letter.
From PIMCO:
Money for Nothin’ Writing Checks for Free
It was Milton Friedman, not Ben Bernanke, who first made reference to dropping money from helicopters in order to prevent deflation. Bernanke’s now famous “helicopter speech” in 2002, however, was no less enthusiastically supportive of the concept. In it, he boldly previewed the almost unimaginable policy solutions that would follow the black swan financial meltdown in 2008: policy rates at zero for an extended period of time; expanding the menu of assets that the Fed buys beyond Treasuries; and of course quantitative easing purchases of an almost unlimited amount should they be needed. These weren’t Bernanke innovations – nor was the term QE. Many of them had been applied by policy authorities in the late 1930s and ‘40s as well as Japan in recent years. Yet the then Fed Governor’s rather blatant support of monetary policy to come should have been a signal to investors that he would be willing to pilot a helicopter should the takeoff be necessary. “Like gold,” he said, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Mr. Bernanke never provided additional clarity as to what he meant by “no cost.” Perhaps he was referring to zero-bound interest rates, although at the time in 2002, 10-year Treasuries were at 4%. Or perhaps he knew something that American citizens, their political representatives, and almost all investors still don’t know: that quantitative easing – the purchase of Treasury and Agency mortgage obligations from the private sector – IS essentially costless in a number of ways. That might strike almost all of us as rather incredible – writing checks for free – but that in effect is what a central bank does. Yet if ordinary citizens and corporations can’t overdraft their accounts without criminal liability, how can the Fed or the European Central Bank or any central bank get away with printing “electronic money” and distributing it via helicopter flyovers in the trillions and trillions of dollars?
Well, the answer is sort of complicated but then it’s sort of simple: They just make it up. When the Fed now writes $85 billion of checks to buy Treasuries and mortgages every month, they really have nothing in the “bank” to back them. Supposedly they own a few billion dollars of “gold certificates” that represent a fairy-tale claim on Ft. Knox’s secret stash, but there’s essentially nothing there but trust. When a primary dealer such as J.P. Morgan or Bank of America sells its Treasuries to the Fed, it gets a “credit” in its account with the Fed, known as “reserves.” It can spend those reserves for something else, but then another bank gets a credit for its reserves and so on and so on. The Fed has told its member banks “Trust me, we will always honor your reserves,” and so the banks do, and corporations and ordinary citizens trust the banks, and “the beat goes on,” as Sonny and Cher sang. $54 trillion of credit in the U.S. financial system based upon trusting a central bank with nothing in the vault to back it up. Amazing!
But the story doesn’t end here. What I have just described is a rather routine textbook explanation of how central and fractional reserve banking works its productive yet potentially destructive magic. What Governor Bernanke may have been referring to with his “essentially free” comment was the fact that the Fed and other central banks such as the Bank of England (BOE) actually rebate the interest they earn on the Treasuries and Gilts that they buy. They give the interest back to the government, and in so doing, the Treasury issues debt for free. Theoretically it’s the profits of the Fed that are returned to the Treasury, but the profits are the interest on the $2.5 trillion worth of Treasuries and mortgages that they have purchased from the market. The current annual remit amounts to nearly $100 billion, an amount that permits the Treasury to reduce its deficit by a like amount. When the Fed buys $1 trillion worth of Treasuries and mortgages annually, as it is now doing, it effectively is financing 80% of the deficit for free.
The BOE and other central banks work in a similar fashion. British Chancellor of the Exchequer (equivalent to our Treasury Secretary) George Osborne wrote a letter to Mervyn King, Governor of the BOE (equivalent to our Fed Chairman) in November. “Transferring the net income from the APF [Asset Purchase Facility – Britain’s QE] will allow the Government to manage its cash more efficiently, and should lead to debt interest savings to central government in the short-term.” Savings indeed! The Exchequer issues gilts, the BOE’s QE program buys them and then remits the interest back to the Exchequer. As shown in Chart 1, the world’s six largest central banks have collectively issued six trillion dollars’ worth of checks since the beginning of 2009 in order to stem private sector delevering. Treasury credit is being backed with central bank credit with the interest then remitted to its issuer. Should interest rates rise and losses accrue to the Fed’s portfolio, they record it as an accounting liability owed to the Treasury, which need never be paid back. This is about as good as it can get folks. Money for nothing. Debt for free.
Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by U.S. Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).
Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly. At the time Sir Isaac Newton was asked about the apparent success of the government’s plan and he responded by saying that “I can calculate the movement of the stars but not the madness of men.” The madness he referred to was the rather blatant acceptance by government and its citizen investors, that they had discovered the key to perpetual prosperity: “essentially costless” debt financing. The plan’s originator, Scotsman John Law, could not have conceived of helicopters like Ben Bernanke did 300 years later, but the concept was the same: writing checks for free.
Yet the common sense of John Law – and likewise that of Ben Bernanke – must have known that only air comes for free and is “essentially costless.” The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold. To date, central banks have been willing to accept that cost – nay – have even encouraged it. The Fed is now comfortable with 2.5% inflation for at least 1–2 years and the Bank of Japan seems willing to up their targeted objective to something above as opposed to below ground zero. But in the process, zero-bound yields and their QE check writing may have distorted market prices, and in the process the flow as well as the existing stock of credit. Capital vs. labor; bonds/stocks vs. cash; lenders vs. borrowers; surplus vs. deficit nations; rich vs. the poor: these are the secular anomalies and mismatches perpetuated by unlimited check writing that now threaten future stability.
Ben Bernanke has publically acknowledged these growing disparities. “We are quite aware,” he said in November 2011, “that very low interest rates, particularly for a protracted period, do have costs for a lot of people… I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy... I mean, ultimately, if you want to earn money on your investments, you have to invest in an economy which is growing.”
That growth now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5%. We at PIMCO would not argue with that objective. Yet we would caution, as Bernanke himself has cautioned, that there are negative consequences and that when central banks enter the cave of quantitative easing and “essentially costless” electronic printing of money, there may be dragons.
Investment conclusions
Investors should be alert to the longterm inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies. In addition, be aware of PIMCO’s continued concerns about the increasing ineffectiveness of quantitative easing with regards to the real economy. Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice. Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth. At some future point, risk assets – stocks, corporate and high yield bonds – must recognize the difference. Bernanke’s dreams of economic revival, which would then lead to the day that investors can earn higher returns, may be an unattainable theoretical hope, in contrast to a future reality. Japan we are not, nor is Euroland or the U.K. – just yet. But “costless” check writing does indeed have a cost and checks cannot perpetually be written for free.
William H. Gross
Managing Director
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Peter Schiff: Congress Sells America Down the River to Avoid the Fiscal Cliff
http://investmentwatchblog.com/peter-schiff-congress-sells-america-down-the-river-to-avoid-the-fiscal-cliff/
Peter Schiff ain't afraid of no NDAA.
There's a special FEMA camp just for Peter..."re-education of people to the economic values of the American System" and all that jazz.
"If we suspend taxation, borrow to fund the government and then keep rolling in the interest payments into the debt, our total obligation as a fraction of the economy will keep falling every year over the 30 year horizon."
You heard it here first.
They're transfering real estate ownership from the citizens to the Bankers. You have the right to remain silent and pay rent.
Slave Bitchez
Capitalism is the biggest wealth transfer scheme ever invented.
"[The Native Americans] didn't have any rights to the land ... Any white person who brought the element of civilization had the right to take over this continent."
~Ayn Rand, US Military Academy at West Point, March 6, 1974
Capitalism has left the US for a long time. We have crony capitalism in the form of Oligarchy troll.
Billy is just a big hypocrite. He has sucked from the ponzi scheme millions of times what he has actually produced in his life, then as the end result of using of the equation becomes into focuse he blames the very thing that gave him what he has. Billy should STFU.
Short 30Y Treasuries STRIPs BITCHEZ!
"If we suspend taxation, borrow to fund the government and then keep rolling in the interest payments into the debt, our total obligation as a fraction of the economy will keep falling every year over the 30 year horizon."
Mathematically correct. If you borrow at 0% when growth (or inflation) is running at 3% the real cost of money is less than nothing. You can pay back what you borrowed in 30 years, 100 cents on the dollar, for about half.
It's magic!
The only flaw in the plan is who is going to lend you the money knowing they are going to make a guaranteed loss?
They have already taken care of that. Now that there are no more lenders willing to buy US government bonds they just print them up, send them over to the Fed, and the Fed exchanges them for dollars!
Problem solved!
I like monetary policy articles like this. People need more understanding of how monetary policy is being used to kep financial markets flying high when the real economy is shrinking.
It is this that should be the focus of economists, and not what the level of the S&P is, as it is no longer indicative of any underlying market fundamentals, but merely how large, in nominal terms, the global balance sheet is.
PhD economists climbing on the the Wall Street bandwagon is more proof how academics have no principles, selling out to whomever writes the biggest check, prostituing their degree to the best pimp, Wall Street bankers in this case.
College doesn't teach principles anymore. People come out of college with degrees and no principles, no morals, prostituting their degree to whomever writes the biggest check.
Bernanke is doing it. Prostituting his PhD to Wall Street. Krugman is doing it. Prostituing his PhD to Wall Street. Other PhD economists are doing it. Prostituing their PhD to Wall Street.
That's the first thing you have to understand befoe we discuss policies they support. You have to understand (a) they have no principles, and (b) they sold out to somebody, and (c) it's Wall Street in this case.
How do we know they sold out? Simple. Policies they support now are completely contrary to what they learned in college.
College economics teaches monetary restraint. Maintaining the value of the currency by restraining printing.
Bernanke knows this. He said it publicly in 2002. It's quoted in this article:
“U.S. dollars have value only to the extent that they are strictly limited in supply..."
Yes, that's what Bernanke said in 2002. He said printing must be restrained to maintain the value of the currency, exactly what he learned in college economics.
Krugman learned the exact same thing. Printing has to be restrained to maintain the value of the currency.
Volker, Greenspan, and every other Fed chairman learned the exact same thing in college economics.
Now they all support open-ended printing. Why? What changed their thinking?
Wall Street changed their thinking. Bankers changed their thinking. Bankers who write big checks to buy off PhD economists ...just like they write big checks to buy off congressmen and anyone else they wana buy off.
They know PhD economists have no principles, no morals. They'll gladly sell their PhD to the highest bidder. So they write the biggest check. Very simple.
Bernanke, Krugman, all those PhD economists know printing debases the currency, stealing wealth from everybody using that currency. They learned it in college economics. They know it.
But they never talk about it. Bernanke doesn't talk about it. He avoids it like the plague. Krugman doesn't talk about it. He avoids it like the plague. None of those other PhD economists talk about it. They avoid it like the plague.
Bernanke is debasing the currency, stealing wealth from everybody using FRNs. He knows it. But he doesn't care apparently. Krugman doesn't care apparently. None of the others care apparently. Obama knows it too, but he doesn't care apparently. Everybody in congress knows it, but they don't care apparently.
Nobody in a position of power seems to care, and they never talk about it.
But it's THE thing that will destory America's power sooner or later. Inflation, then hyperinflation, then loss of reserve currency status, then currency collapse. When it happens, America's power is destroyed, no longer a superpower.
They all know it. Bernanke knows it. Krugman knows it. All those other PhD economists know it. Obama knows it. Everybody in congress knows it.
The Manufacturing Workforce - Debt Growth Correlation http://chartistfriendfrompittsburgh.blogspot.com/2013/01/the-manufacturi...
I think the article is excellent and its observations, and ZH's earlier in time similar claims, are true, good and wise.
However, the timing of the posting of the article here at ZH carries a perception risk. We look a bit like a finder of "sour grapes" and/or sore losers here. After all, the russell2k is at an all time high and Obama delivered us from evil, could we but admit it.
Sometimes, it is appropriate to give credit where credit is due.
One of those times is right after a previously warned of disaster has been averted.
So Obammy done saved ye? Stock markets up, and that's all that matters even if we're all destroyed as long as the media headline says you've been rescued? Meh...I'm not thinking the same way myself.
The Venezuelan stock 'market' rose 300% in 2012. Or check out this 2006 article about the Zimbabwean stock 'market':
http://www.guardian.co.uk/business/2006/apr/25/Zimbabwenews.internationa...
"It's quite embarrassing because the exchange is supposed to mirror the reality of the economy," said Emmanuel Munyukwi, the institution's chief executive. "We have benefited from the distortion of the market."
The world has become the plaything of Chavezes and Mugabes. Disgraceful.
Yeah....but remember.....we're America.
I didn't junk you, but whoever did must have been jealous of your avatar (refined gold bricks, nice).
The US stock market is a form of fixed asset that people purchase as a hedge against dollar devaluation and is allowed to go up. Just think where the price of gold would be if it were allowed to move in a free market scenario
Suppy or lack of supply will at some point drive the price of pm's upward and no paper manipulation will prevent it
Anyone prosecuted for banking crimes under Obuttfucks DOJ? Nope.
Retirees and savers crucified with ZIRP? Yep.
Inflation on everything you buy from homes to food to energy to education? Yep!
Artificially reduced purchasing power of every dollar you have earned and every dollar you will ever earn? YEP!
Cost free your ass. Justice abortions, theft from the prudent/fiscally responsible, and totally broken markets (no true price discovery) are few examples of the REAL cost of fraud Inc, dumbass. Perhaps you should ask the right questions instead of ignoring the obvious all around.
END THE FED-- CUSTODIAN, CHAMPION AND HOST OF USA FASCISM!
Eric Holder 's last name is a good indication. Another useless cabinet place holder.
"Obama delivered us from evil, could we but admit it."
Yes, Obama delivered us from evil...to dark evil. There I admitted it.
Disaster has been averted? No, we just got another drug fix.
Thanks to the FED and banksters irrational fear of deflation. We now have a zombie financial system and zombie economy. They people in charge are afraid to let things die off. Death is a natural part of life, denying it is evil. The FED with its moral hazard, therefore is evil.
Just delayed.
Wow- with enough dupes like you, Barry and crew can pull off their cu....
The Russell 2000? THAT is your measure of success? Wow.....
Good luck with that teacher's pension you're in- pay no attention to the fact that most of it has "disappeared", it's a GO, yeah sure......
my pension? it is adjusted for inflation and after 44 in nyc my teacher's retiremnent account is s e v e n figures and earns 7%-forever. if it ends in 5-10 years, well i'll likely be dead-but it won't
Your fuckin pension earns nowhere near 7%. My taxes pay your pension. Amazing you teach people and yet still can't understand 1st grade math. But guess what. I am probably moving soon. Along with anyone else with half a brain. Good luck.
I wish my taxes paid into ZH's pension because I learned more here in 2 years than all my years shooting spitballs.
"it is adjusted for inflation and after 44 in nyc my teacher's retiremnent account..."
No wonder why the US Public Education system sucks! With teachers like you, students are guarenteed to fail! I leave with a quote that is most approprate for you!
"It is difficult to get a man to understand something , when his salary depends upon his not understanding it!" -Upton Sinclair
Uh no, nothing was diverted only postponed. The doctor wanted to amputate the little toe, but now it will be necessary to remove the entire leg...
Could have saved him with a Breathalyzer. Dammit Jim....I'm a Congressman....not a doctor.
So basically you can't have your heroin and shoot it too? Anyway, looks like the latest mainline of full-retard dosage is wearing off already.
"So Obammy done saved ye? Stock markets up, and that's all that matters even if we're all destroyed as long as the media headline says you've been rescued? Meh...I'm not thinking the same way myself."
The point revolves around consistency in expression. Please keep in mind the tone and tenor of ZH commentary on the fiscal cliff in the weeks, days and hours prior to its resolution. A fair summary of that commentary was that disaster was assured and the sky could not be maintained in its place, no way no how. And, it was all Obama's fault, with a little blame left over for the congress and the political faction that one favored least.
Now, the same vitriol has moved on to another iteration of the same issue.
That is not progress. That is merely an example of one being stuck in one's own agenda, whatever it may be.
The level of discussion of matters of public finance depend on putting them in a proper perspective. Sometimes it is necessary to give credit where it is due in order to have some semblance of balance rather than imbalance.
Earth to ZH:
The fiscal cliff was averted.
Deal with it.
I'm sorry youre so fuckin stupid its not my problem Neandersheeple.
"Neandersheeple" -- I love that. I will definitely use that.
Not averted. Just postponned. 60 day extension. lol.
Each iteration of the "fiscal cliff" gets uglier and uglier. Heck, it was never called a "cliff" until recently... ever wonder why? Unless you are a supreme dumbass, you are missing the point. This is the process of the politicians being turned into scapegoats for the inevitable. It's all part of the script. Is about the lack of ability on behalf of government to correct a situation that cannot be corrected without profound pain.
The Fed's asset kiting scheme is nothing more than an effort to make bad money good while shielding criminality and maintaining the status quo for the power elite.
Fuck You Milton Friedman and disciples.
Damn right. Where are the Linda Greene's?
@ Benjamin Glutton,
These people are Criminals and treasonist. They're protecting a global criminal economic bankster enterprise system that controls the world's Governments and politcians. It's a criminal cabal based on shadow CIA/Mossad/MI6 etc.. intelligence, murder, espionage, blackmail, rackertering, bribery, threats, drug trade, human trafficing. It's a Global Criminal Cabal based on Evil Lucerferian belief system.
The rest is just political therater for consumption by the masses.
When the Fed buys $1 trillion worth of Treasuries and mortgages annually, as it is now doing, it effectively is financing 80% of the deficit for free.
There is no other choice. The debt is too large to be serviced at normal interest rates. So it must be artificially managed. Yet, US debt is rising at $1.5 trillion a year. And unfunded liabilities are rising at $6.8 trillion a year. It is the end game of a fiat currency - desperate measures are needed to manage the situation.
Perception is reality now. Bernanke is desperately trying to manage perceptions by boosting stocks and bonds and managing gold and silver. It is a matter of time before this collapses.
"There is no other choice."
Default and reset with new people in charge.
I'm thinking it might go: Painc, Controls, Bailouts, Chaos, Starvation, Default, Dictatorship. Gonna need to wait and see.
Largely agree with what you are saying, but getting tired of pronouncements of an "end game" that are way too frequent here. "End game" is more popular on ZH then "green shoots" used to be on CrapNBC
Problem with "End game" is that it can last 6 months or can last 10 years. Noone seems to be able to provide any sensible commentary on what is the gonna be the straw that breaks the camel's back (and why will the policy makers fail to kick the can down the road at that point yet again)
Make no mistake this is the "end game". The Fedgov and congress knows it, thus the need to pass NDAA, it will be needed when it all comes crashing down. I believe they are simply waiting for an event to blame the collapse upon; Europe implosion, Japanese collapse, Mideast war, could be anything, they're working on it.
You want an exact date for the crash? Most people on ZH don't subscribe to economic models that claim perfect predictive power for such things, unlike the banksters who with infinite arrogance think they know it all, despite abundant evidence to the contrary.
- Ookspay & Dr
Yes - this all makes sense and i wholeheartedly agree. I think Japan is indeed a perfect example - the flow has in fact turned. i believe its well over a year that the savings institutions have become debt sellers. The debt levels are unsustainable. The demographics are dire - i love the Kyle Bass anecdote about sales of adult diapers exceeding baby diapers (mind you all 3 are worse then in EU or US at the moment at least). Yet its been "afloat" and no reset has occured (yet).
I think we are all in agreement that the situation is unsustainable. However do not underestimate the Ponzi masters' ability and wiligness to keep it going. Also the "flows" argument is interesting in itself as now what we have is debt monetization to infinity. So what flows are we talking about?
Economic models are bollox. But economic decisions of a rational individual (which most here on ZH aspire to be and not to be influenced by media propaganda) will be very different depending of you "event horizon" view - if its 2 yr for Japan 5 years for US - or 5 times that.
"So what flows are we talking about?"
Flows to spend, i.e on real stuff like adult diapers.
Generally I agree with you though, the crash could take decades or more, with the unfortunate sideeffect that the longer it takes the worse it will be. I read another commenter here, can't remember who, making the point that when you awake and realize the unsustainability of the ponzi, it's easy to think it must fall soon.
To be clear i do like your comments - and no i am not looking for a date of the crash - although if you do find out - pls let me know.
The way it seems to be playing out at the moment is quite interesting - very Japan like in fact - is what we are seeing is a creeping stagflation - where the ~flation part does not indicate some government statistic but the loss of purchasing power in the west. This can take years and slow deterioration of the economic situation (as we have seen in last few years contrary to what MSM will tell ya) all the while stock market can be doing swimmingly well in nominal terms - as you have pointed out above on Zimbabwe and Vene. And sharp deterioration is a very different occurence then the current grind.
I have heard Soros (and i do loath the man) say a clever thing once - if you see a bubble (ponzi) dont go against it but go with it as it may last well longer. Sadly we are all living this scenario.
Nevermind all that folks....looks like we've now come full circle back to 'Greece needs a new bailout'! One emergency cycle to the next.
Now according to the finance pages "the rally has stalled" LMAO. As if the fucking tards are expecting a string of +300 moves for days,weeks and months on end.
This market is fucked and I guarantee there's a big monkeyfuck going on behind closed doors and it all coorelates with gun control, etc.
Interesting read: The Value of Silver
On Money supply, GDP, salaries etc. VS silver. It got me convinced to buy a few extra Silver Eagles!