Bill Gross On Minsky's Take Of The Liquidity Trap: From "Hedge" To "Securitised" To "Ponzi"

Tyler Durden's picture

Over the weekend, we commented on Dylan Grice's seminal analysis which excoriates the central planning "fools", who are perpetually caught in the "lost pilot" paradigm, whereby the world's central planners increasingly operate by the mantra of “I have no idea where we’re going, but we’re making good time!” and which confirms that in the absence of real resolutions to problems created by a century of flawed economic models, the only option is to continue doubling down until terminal failure. Basically, the take home message there is that once "economists" get lost in trying to correct the errata their own models output as a result of faulty assumptions (which they always are able to "explain away" as one time events), they drift ever further into unknown territory until finally we end up with such monetary aberrations as "liquidity traps", "zero bound yields" and, soon, NIRP (which comes after ZIRP), if indeed the Treasury proceeds with negative yields beginning in May under the tutelage of the Goldman-JPM chaired Treasury Borrowing Advisory Committee. Today, it is Bill Gross who takes the Grice perspective one step further, and looks at implications for liquidity, and the lack thereof, in a world where one of the three primary functions of modern financial intermediaries - maturity transformation (the other two being credit and liquidity transformation) is terminally broken. He then juxtaposes this in the context of Hyman Minsky's monetary theories, and concludes: "What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is two per cent of par and the downside substantially more?" In other words, Pimco is finally grasping just how ZIRP is punking it and its clients. It also means that very soon all the maturity, and soon, credit risk of the world will be on the shoulders of the Fed, which in turn labor under a false economic paradigm. And one wonders why nobody has any faith left in these here "capital markets"...

Some of Gross' thoughts in the FT:

Zero-based money is at risk of trapping the recovery


Isaac Newton may have conceptualised the effects of gravity when that mythical apple fell on his head, but could he have imagined Neil Armstrong’s hop-skip-and-jumping on the moon, or the trapping of light inside a black hole? Probably not. Likewise, the deceased economic maestro of the 21st century – Hyman Minsky – probably couldn’t have conceived how his monetary theories could be altered by zero-based money.


Minsky, originator of the commonsensical “stability leads to instability” thesis; the economist with naming rights for 2008’s “Minsky Moment”; the exposer of the financial fragility of modern capitalism; probably couldn’t imagine the liquidity trap qualities of zero-based money, because who could have conceived 30 or 40 years ago that interest rates could ever approach zero per cent for an extended period of time? Probably no one.


Nor, more importantly I suppose, can Ben Bernanke, Mario Draghi or Mervyn King. In their historical models, credit is as credit does, expanding perpetually after brief periods of recessionary contraction, showering economic activity with liquid fertiliser for productive investment and inevitable growth.


If they were to adopt Minsky’s framework, they would visualise a credit system expanding from “hedge” to “securitised” to “Ponzi” finance, pulling back after 2008 to the stability of the less levered “securitised” segment, but then expanding again as government credit substituted for private deleveraging, providing a foundation for future growth of the finance-based economy.


Well, maybe not. In modern central bank theory, liquidity traps are a function of fear and unwillingness to extend credit based upon the increasing probabilities of default. This world is the second half of Will Rogers’ famous maxim uttered in the Depression: “I’m not so much concerned about the return on my money, but the return of my money.”




The modern capitalistic model depends on risk-taking in several forms. Loss of principal – as in default – necessitates the cautious extension of credit to those that presumably can use it most efficiently. But our finance-based Minksy system is dependent as well on maturity extension. No home, commercial building or utility plant could be created if the credit liability matured or was callable overnight. Because this is so, lenders require and are incentivised by a yield premium for longer term loans, historically expressed as a positively sloping yield curve.




What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is two per cent of par and the downside substantially more?


Maturity extension for Treasuries, and then for corporate and private credit alike, becomes riskier. The Minsky assumption of rejuvenation once the public sector stabilises the credit system then becomes problematic. Instability may slouch back towards stability, but that stability may resemble more closely the zero-bound world of Japan over the past 10 years than the dynamic developed economy model of the past half century.


The global economy’s quest for a modern day Keynes or Minsky may be frustrated by zero-based money that rations credit just as fiercely as it does risk. Minsky’s economic theory is now at the zero-bound.

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GetZeeGold's picture



Pretend and extend....on steroids.




cossack55's picture

There's capital markets?  Iceland, maybe.

LawsofPhysics's picture

Interest rates should have been creeping up for quite some time now, many have pointed this out.  Fuckers like Gross and Grice were pre-positioned to benefit big time from prolonged ZIRP and the initial rush to treasuries, now they are whinning about it because they didn't think more than two moves ahead.  Fuck them, let this whole thing come down.

GeneMarchbanks's picture

But... but... he's "a little Ron Paulish"

Funny how once you're no longer in the inner circle you turn 'a little Ron Paulish'.

blindfaith's picture



OK OK OK I know I'll get junked by those who either don't know history, the bible, or work for the banks.  But goes, If you remember your bible, there was NO INTEREST charged on loans between Christians, and that went for the Moslems too.  Granted those were simpler times.  Have we come full circle??  Heavens I don't know but I sure do see and hear more and more vocalizations from both the Christians and the Moslems.

Any comments Ben?  Hello...ben...Ben...BEN  !!  You there?????

Janice's picture

Are you sure about that? Maybe no interest charged among Jews of the Old Testament. They also couldn't eat an unclean animal, but they were allowed to sell unclean road-kill to non-Jewish immigrants.

GeneMarchbanks's picture

Steve Keen has already covered most of this. 2008 was exactly the end of Minsky's 'Ponzi finance' phase which is the last layer before the unwind. Yet the only solution, according to Keen, is global debt jubilee which seems unworkable since the Yanks have never heard of such a concept and are all too prepared to blow things up instead. Debt destruction followed by actual destruction is the only model they understand.

tarsubil's picture

To create, you must destroy... everything.

prains's picture

just like i keep saying, backwards is the new forwards (less 1%)

blindfaith's picture



Diogenes was walking backwards across the Agora, affecting a studied indifference to all who laughed at him. Finally, when he had collected a large following he stopped and announced, "You are laughing at me walking just a little distance backwards while you all lead your entire lives arse-about."

"And what's more," he asked, "can you change your way of living as easily as this?" Whereupon, he turned on his heel and walked off in normal fashion.

dtwn's picture

+1 for Steve Keen.  In addition to his book 'Debunking Economics', he also runs a blog  Here he has posted his lectures for those willing to take the time to educate themselves, not the easiest to do as the material can be a bit dry and challenging to comprehend for non financial folks such as myself (developmental biologist).  Some of is ideas such as the debt jubilee tend to recieve strong negative reactions, however consider that he is going against the neo-classical economic status quo that Bernanke and the rest of the economic/political 'elite' are a product of.

kridkrid's picture

We've been conditioned over many lifetimes to be be against debt jubilee.  The finance oligarchs have done a masterful job.  We are thankful serfs.  Anyone who gives careful consideration over the meaning of money and debt would have no problem becoming open-minded regarding debt jubilee... there is a reason why we don't publiclty discuss the meaning and definition of these things, especially in our academic institutions.

tarsubil's picture

Do helicopter drops equal debt jubilee?

AnAnonymous's picture

Anyone who gives careful consideration over the meaning of money and debt would have no problem becoming open-minded regarding debt jubilee...


Really? Money is debt but debt is not forcefully money.

Debt can exist in a trade system without money.

So it is the reverse proposition here. People interested in Jubilee either do not know the basics of debt or want to ignore it.

If they are US citizens, the second option is the right one.

Everybodys All American's picture

The Federal Reserve is trapped along with anyone else who owns US Treasuries. Good luck figuring your way out of this one. Short end of the curve returns next to nothing and so there is little if any reason to buy there. The other end of the curve or the the long end has an extraordinary amount of interest rate risk. How long can the Federal Reserve be the sole buyer/owner of our debt before another downgrade? Even Gross knows how this ends. 

LawsofPhysics's picture

I would say that your logic extends to everyone holding fiat or any kind of paper.  All paper relies on faith and confidence.  The moral hazard has been unleashed, game over.  This is what the slow decline of an empire looks like.  As J.P. Morgan himself once said, "gold is money, everything else is credit."

The bottom line is that if you can't hold an "investment" in your hand or go check on it in person (especially true for revenue-bearing investments like rental properties), then you don't "own" it and chances are it has already been stolen.

blindfaith's picture



Asked about his worst nightmare, Diogenes said, "Waking to find myself living in a palace and everyone else in barrels.".


Mr Lennon Hendrix's picture

Bernanke is a genius....

He will own all of the worthless paper in the world!



resurger's picture


just mentioning his name gives me high blood pressure !!!

blindfaith's picture



GREEN-FUCKING-SPAN  that is the piece of worthless human flesh that should be held accountable.

resurger's picture


How many world wide banks got screwed on that policy Tyler, when in 2008 the short term interest rate was close to 5% then it suddenly dropped to 0% , the TBTF knew that this policy would be implemented, so they gave shit loads of loans fixed for worthless floating ... (Interest Swaps)

It only happens in America, when the world drops their worthless paper and they drop interest rates down with it! This is not according to supply and demand, when you dump treasuries, interest rates should go higher so that you attract more investors, but with the US paper it goes negative (Like when the S&P downgrade happened in August)

Bill gorss knows this, and he is pissed? The treasuries should be priced 30% or 50% no maybe 10000%

Yes expect NIRP, because US has passed recessoin, and everything is great!

LawsofPhysics's picture

Same thing for Germany,  winning!!

FoieGras's picture

Gross sounds like a whining little brat.

hedgeless_horseman's picture



On a long enough timeline

the return rate of Pimco

drops to zero.

resurger's picture

That's when you repent for dealing with suck crooks ...

Kevlar Akubra's picture

The good ship Greece is sinking

Poor China's gone to seed

Uncle Sam is dead

The UK stinks

Hare Krishna cult for me!

falak pema's picture

when in delhi Oberoi try the kebab from Kakori. If you eeeeeeeeeat meeeeeeeat, sorry if you be veggieee.

G-R-U-N-T's picture

A little off subject but would like to share a NYT article on the foreclosure frauds...Because the U.S. is about ready to forgive the massive frauds associated with the liars loans by a minor pay off considering that no one will do time.

What a mockery of justice.

"Now he splits his time between Orlando and Boca Raton, advising lawyers as an expert witness. “From my own personal experience and 20 years of research and investigation, nothing — and I mean nothing — that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true,” Mr. Lavalle said."

Here's the WSJ article on: We will let you rip off the American people give you a small fine no time and you can be on your way to continue a more creative form of theft.


Snidley Whipsnae's picture

"No home, commercial building or utility plant could be created if the credit liability matured or was callable overnight. Because this is so, lenders require and are incentivised by a yield premium for longer term loans, historically expressed as a positively sloping yield curve."


Eventually Ben will have to hit the bid on every T paper offered for sale by the US Treasury or by foreign holders selling into the market. The supply of paper US Ts is infinite but the morons that will buy it at negative real returns is limited.

How big will the Fed balance sheet get?

How small will the real US Economy become?

How many safe havens will protect you from the results of mad men, a top down controlled economy, and ZIRP?


ebworthen's picture

Jizz fest on CNBC about how great the bailouts were even though it abrogated rights of shareholders.

Cramer saying how stupid people who were against the bailouts are because "look at GM and Chrylser now".

Hey asshole, how about I rob you to pay my mortgage?  That will be o.k. right?  Because three years later I won't lose my house and will have a place to live?  Whadda ya' say Jimmy boy?  How about I rob your Dad too? 

After all, the ends justify the means, no?

Fucking tool!

Your IRA, Pension, and Retirement WILL be stolen for the sake of the Kleptoligarchy.

The ends justify the means, apparently.

Captain Kink's picture

Well said.  the auto bailouts were pure theater.  Airlines go bankrupt every other week and the employees remain employed.  it's not as though the Auto makers would have gone away under bankruptcy, just reorganized legally. 

falak pema's picture

...The ends justify the means...

Maria, Maria, I just met a girl named...Machiavellia!...The world will never be the same again! 

Dialogues in Hell...Machiavelli and Montesquieu...

We seem to like going there often; to visit, Maria, Maria Machiavellia!

Stuck on Zero's picture

I'm reminded of Nancy Pelosi's famous comment about the Obama medical plan when asked what effect it would have: “[W]e have to pass the bill so that you can find out what is in it.”

LongOfTooth's picture

Best candidate for a bimbo that I know of.


Snakeeyes's picture

Gross is correct. We are in a liquidity trap AND we are running out of room. But don't tell Bernanke that! Scenes from "An Officer and a Gentlemen."

Gross’ “Minsky Moment” – Liquidity Trap + Zero Bound On Interest Rates – “I Got No Where Else To Go!”

falak pema's picture

Oh my, that pyramid IS upside down...

But who would build such a contraption in the first place?

"Don't just look at me, we're all in it together. Remember way back then in 2008...we did it to serve our country...I mean our economy...I mean...well, you know what I mean." 

Dermasolarapaterraphatrima's picture

Just keep printing. We are in a Deflationary Death Spiral Downward.

rrrr's picture

Well written article. Unfortunately I was looking for information, not craft.

ebworthen's picture

Shortened version for you:

Future = Negative Interest Rate Policy or NIRP (versus ZIRP) indefinitely by FED operating under a false economic paradigm (Ponzi), or in other words, Japan.

michael_engineer's picture

The positive sloping yield curve may have been the result of the left side of the Hubbert curve.  If so, what can be expected from the right side of the Hubbert curve?

slewie the pi-rat's picture

as tyler sez, gross is starting to wake up;  this is bG's 2nd semi-cogent essay in a row!

oh, well, at least he's not responsible for how insane things have gotten now that minsky is safely outa the way.  and glassSteagall.   and the Consitution.   and much of his client's "money/wealth/assets/purchasingPower/taxShelter/retirementAnnuity" or whatever tf he is selling...

feel free to slouch back to your stacking, BiCheZ, or, like slewie, start looking for work or something...

if, by some lucky star, this shithead's problems are not ours...   that may not be good enuf luck to save us from having to deal with the net downside of his stupid game of whatever...

maybe bG's dealie has already been nationalized and he didn't get the memo... 


Gromit's picture

My reading of Minsky suggests he believed his fellow Keynesian high priests were just too wise to let things go too far......

LongOfTooth's picture

Did he account for the possibliity of corruption?  Obviously I haven't read Minsky.