Bill Gross Says Yellen "Worships False Idols" So "Worry About The Return Of Your Money, Not On It"

Tyler Durden's picture

In his latest just released monthly letter, Bill Gross does not break any new ground, but merely once again reiterates that in a world without any new exogenous money creation (the endogenous money created by central bankers has been stuck in liquidity traps like capital markets) and thus without any pick up in the velocity of money - a key component of GDP - economic growth is limited at best, and stagnant or negative in practice.  As he puts it, "with yields at near zero and negative on $10 trillion of global government credit, the contribution of velocity to GDP growth is coming to an end and may even be creating negative growth as I've argued for the last several years. Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played."

He lays out the global economy as an analogy to Monopoly where the narrative only works if everyone gets $200 in cash on every rotation around the board:

it’s the $200 of cash (which in the economic scheme of things represents new “credit”) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player “bankruptcies” become more probable.

And without banks creating new loans and injecting money into the broader economy, economic activity grinds to a halt.

In Monopoly, the $200 of credit creation never changes. It’s always $200. If the rules or the system allowed for an increase to $400 or say $1,000, then players could keep on building and the economy keep growing without the possibility of a cash or credit squeeze. But it doesn’t. The rules which fix the passing “Go” amount at $200 ensure at some point the breakdown of a player who hasn’t purchased “well” or reserved enough cash. Bankruptcies begin. The Monopoly game, which at the start was so exciting as $1,500 and $200 a pass made for asset accumulation and economic growth, now turns sullen and competitive: Dog eat dog with the survival of many of the players on the board at risk.

What happens when the $200 in "new money" stops? "Ask Janet Yellen for instance what affects the velocity of credit or even how much credit there is in the system and her hesitant answer may not satisfy you. They don't believe in Monopoly as the functional model for the modern day financial system. They believe in Taylor and Phillips and warn of future inflation as we approach "full employment". They worship false idols."

Which brings us to a familiar conclusion:

investors should not hope unrealistically for deficit spending any time soon. To me, that means at best, a ceiling on risk asset prices (stocks, high yield bonds, private equity, real estate) and at worst, minus signs at year's end that force investors to abandon hope for future returns compared to historic examples. Worry for now about the return "of" your money, not the return "on" it.

All that may change if and when the Fed decides to inflate the S&P some more, an S&P which has gone nowhere since the end of QE3, and launch another QE program. Until then, however, make sure to have the "stay out of margin call jail" card handy...

* * *

Just A Game

Bill Gross July 2016 - Just a Game If only Fed Governors and Presidents understood a little bit more about Monopoly, and a tad less about outdated historical models such as the Taylor Rule and the Phillips Curve, then our economy and its future prospects might be a little better off. That is not to say that Monopoly can illuminate all of the problems of our current economic stagnation. Brexit and a growing Populist movement clearly point out that the possibility of de-globalization (less trade, immigration and economic growth) is playing a part. And too, structural elements long ago advanced in my New Normal thesis in 2009 have a significant role as well: aging demographics, too much debt, and technological advances including job-threatening robotization are significantly responsible for 2% peak U.S. real GDP as opposed to 4-5% only a decade ago. But all of these elements are but properties on a larger economic landscape best typified by a Monopoly board. In that game, capitalists travel around the board, buying up properties, paying rent, and importantly passing “Go” and collecting $200 each and every time. And it’s the $200 of cash (which in the economic scheme of things represents new “credit”) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player “bankruptcies” become more probable.

But let’s start back at the beginning when the bank hands out cash, and each player begins to roll the dice. The bank – which critically is not the central bank but the private banking system– hands out $1,500 to each player. The object is to buy good real estate at a cheap price and to develop properties with houses and hotels. But the player must have a cash reserve in case she lands on other properties and pays rent. So at some point, the process of economic development represented by the building of houses and hotels slows down. You can’t just keep buying houses if you expect to pay other players rent. You’ll need cash or “credit”, and you’ve spent much of your $1,500 buying properties.

To some extent, growth for all the players in general can continue but at a slower pace – the economy slows down due to a more levered position for each player but still grows because of the $200 that each receives as he passes Go. But here’s the rub. In Monopoly, the $200 of credit creation never changes. It’s always $200. If the rules or the system allowed for an increase to $400 or say $1,000, then players could keep on building and the economy keep growing without the possibility of a cash or credit squeeze. But it doesn’t. The rules which fix the passing “Go” amount at $200 ensure at some point the breakdown of a player who hasn’t purchased “well” or reserved enough cash. Bankruptcies begin. The Monopoly game, which at the start was so exciting as $1,500 and $200 a pass made for asset accumulation and economic growth, now turns sullen and competitive: Dog eat dog with the survival of many of the players on the board at risk.

All right. So how is this relevant to today’s finance-based economy? Hasn’t the Fed printed $4 trillion of new money and the same with the BOJ and ECB? Haven’t they effectively increased the $200 “pass go” amount by more than enough to keep the game going? Not really. Because in today’s modern day economy, central banks are really the “community chest”, not the banker. They have lots and lots of money available but only if the private system – the economy’s real bankers – decide to use it and expand “credit”. If banks don’t lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn’t increase. The system still generates $200 per player per round trip roll of the dice, but it’s not enough to keep real GDP at the same pace and to prevent some companies/households from going bankrupt.

Chart I: Annualized U.S. Credit Growth

Now many readers may be familiar with the axiomatic formula of ("M V = PT"), which in plain English means money supply X the velocity of money = PT or Gross Domestic Product (permit me the simplicity for sake of brevity). In other words, money supply or "credit" growth is not the only determinant of GDP but the velocity of that money or credit is important too. It's like the grocery store business. Turnover of inventory is critical to profits and in this case, turnover of credit is critical to GDP and GDP growth. Without elaboration, because this may be getting a little drawn out, velocity of credit is enhanced by lower and lower interest rates. Thus, over the past 5-6 years post-Lehman, as the private system has created insufficient credit growth, the lower and lower interest rates have increased velocity and therefore increased GDP, although weakly. Now, however with yields at near zero and negative on $10 trillion of global government credit, the contribution of velocity to GDP growth is coming to an end and may even be creating negative growth as I've argued for the last several years. Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played. Ask Janet Yellen for instance what affects the velocity of credit or even how much credit there is in the system and her hesitant answer may not satisfy you. They don't believe in Monopoly as the functional model for the modern day financial system. They believe in Taylor and Phillips and warn of future inflation as we approach "full employment". They worship false idols.

To be fair, the fiscal side of our current system has been nonexistent. We're not all dead, but Keynes certainly is. Until governments can spend money and replace the animal spirits lacking in the private sector, then the Monopoly board and meager credit growth shrinks as a future deflationary weapon. But investors should not hope unrealistically for deficit spending any time soon. To me, that means at best, a ceiling on risk asset prices (stocks, high yield bonds, private equity, real estate) and at worst, minus signs at year's end that force investors to abandon hope for future returns compared to historic examples. Worry for now about the return "of" your money, not the return "on" it. Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.

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Haus-Targaryen's picture

Stack'in & cash boys and girls.  Anything digital will likely be stolen. 

Looney's picture

 

The only way to avoid “Worrying about the return "of" your money” is not to participate in the “investing scam” AT ALL!!!

Just like with elections, where NOT VOTING is a valid choice, not being invested into any paper asset, long or short, is a valid choice as well. I think?   ;-)

Looney

Bokkenrijder's picture

"Falls" idols, or "false" idols?

Perhaps edit the tittle?

Stuck on Zero's picture

Am I the only who couldn't find any content in this piece?

bob_stl's picture

I don't see much either. First, it sounds like it's an argument for QE at some regular given interval. Second, in Monopoly, there isn't any taking of raw materials, expending work into it and producing something of more value. It's just Realestate and basically how the cards are stacked that allows you to buy Boardwalk and take everyone elses money. The argument for regular QE is an argument for stacking the card deck.

Kissy Ass's picture

I'll give you some content:

Bill says "Fuck the FED and all it's jew confetti"!

RaceToTheBottom's picture

Perhaps his drug use has gone beyond moderation?

Croesus's picture

The sooner people realize its all a scam, the better off they'll be. 

robertsgt40's picture

What happens when the $200 in "new money" stops?--- What happens when the $200 won't buy a loaf of bread?

jakesdad's picture

anything digital has already been stolen - it just hasn't been recognized/accepted yet...

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) MATA HAIRY Jul 6, 2016 8:37 AM

I was thinking damn did Bill Gross have a stroke or something "Falls idols"?  Welcome to Typo City

Librarian's picture

A good proof reader is worth their weight in whatever precious metal you choose.

One could say that eventually "worship falls idols" meaning that the act of blind reverence eventually will lead to discrediting the idol.

But no.  It's just a neon green hairy typo.

Kissy Ass's picture

Does all that is retained anally eventually explode out? Curious Kissy.

Jayda1850's picture

The $200 in monopoly is even more like credit now since the newest version doesn't even use cash.

http://www.hasbro.com/en-us/product/monopoly-electronic-banking-game:EB2...

new game's picture

to put in perspective, 200 is the interest on the past debt. this fucker is in troubled water, as in iceberg of growth, but full speed ahead and the band plays on....

china first, then japan, then euro scam then the dolla dies...

Jendrzejczyk's picture

"Falls Idols"? You need that drunken heroin addict intern back.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jendrzejczyk Jul 6, 2016 8:38 AM

Yellen really loves Kelly Clarkson from American Idol and wonders why she's not a bigger star...

SheepDog-One's picture

False not falls, just a glitch in Bills spell checker I guess.

J J Pettigrew's picture

FORCED ULTRA LOW INTEREST RATES DO NOT HAVE THE ADVERTISED EFFECT.

LOW RATES CAN INITIALLY STIMULATE, BUT TOO LONG WILL BE DETRIMENTAL AND AN IMPEDIMENT TO ECONOMIC

ACTIVITY.

DEBT CREATION IS ENCOURAGED, WHICH IS MERELY FUTURE CONSUMPTION DENIED.

THE ECONOMISTS WILL WRITE THE BOOKS THAT WILL REVEAL THE ABSURDITY AND RECKLESSNESS OF CENTRAL BANKING.

THE CENTRAL BANKERS DONT NOTICE THEIR THEORIES NO LONGER ARE VALID, IF INDEED THEY EVER WERE.

illuminatus's picture

Oh my god, you mean to tell me that credit isn't real money ???

Paul John Smith's picture

Errata: "False Idols" not "Falls Idols" ...

(unless that's a new show from M. Knight ...)

SWCroaker's picture

Somebody fix the typo in the article title: FALSE idols, not FALLS idols.    Spell check is only sometimes your friend.

brada1013567's picture

Isn't this guy dead yet?

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jul 6, 2016 8:49 AM

So the cure we need is for the government to waste, I mean spend, more money? Really?  How much money does the government take in in taxes a year and how much does it spend?  Are we supposed to pretend that the US government is sitting on a mountain of savings that they refuse to spend?  They spend every dollar and then some that comes through and its all spent on bullshit.  Yes we need more of that to spur the economy, take a look at all the potholes in the street of your local neighborhood and wonder whose pocket your taxes went into.

RaceToTheBottom's picture

"warn of future inflation as we approach "full employment""

 

They pretend to worry about inflation but inflation is thier goal.  They worry about deflation, the banksters only fear.

 

CNONC's picture

If governments would only spend more, we would all be saved!  Where does .gov get the money to spend?  Oh yeah, freshly imagined into existence by the CB's. 

Iconoclast421's picture

We are living a game of Monopoly where the Fed has stacked the entire Chance and Community Chest card decks with "Advance to Boardwalk". So now everyone gets to advance to boardwalk, which happens to be owned by the same player that owns the Fed. But hey, you're only one square away from collecting your $200, so you will be happy!

Jacksons Ghost's picture

Jews worshipping False Idols?  Say it isn't so.  What is the Jewish religions stance on usury for Gentiles?

trueFacts's picture

the article reminds me of a favorite saying of my 12 grade math teacher, "zero is a very tricky number"

... i now think he was more right than he ever imagined, and ZIRP is the proof.  (NIRP is included here, since you need to cross the rubicon of ZIRP to enter the land of NIRP)  zero is easy to add, but a bear to divide by.  too bad bankers and legislators dont know that zero is a very tricky number.  

moonmac's picture

Buying 99 cent shovels at Goodwill is part of my investment strategy. I'll supply their army of ditch diggers if the Fed's money printing scheme fails. 

Aubiekong's picture

Stupid Zero head the economy is any number we want it to be....

conraddobler's picture

Bill Gross worships false Idols in my opinion.

You know why Bill?

Cause I believe you know full well that debt based monetary systems are ponzi schemes at heart and that the entirety of borrowing and lending of which you have built an entire career is based on mathematical fraud.

So who are you to speak to anyone about false idols?

Money itself and our credit system are a false idol and have been in plain sight for anyone who knows better.

Until this is addressed correctly not a God damn thing will ever change.

We were not created to accumulate debt and borrow money so a global economic system can grease the palms of the well connected.

We were not created to kick up to the top but that is in fact how the entire system is constructed and more than that it is constructed to control all aspects of the lives of all of us unwashed masses.

It is OBVIOUS what it is and has been forever.

It is an ancient system of control and of fuedalism that keeps people on a plantation system where it gives an illusion of freedom but it is FALSE.

You are not free, we are not free, we are all trapped inside a system that is controled by a very few peoople and we are manipulated at will and whim in such a system from birth to death.

Sure you can win the game but someone has to lose for you to win it's not now nor has it ever been any kind of win win.