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Gold Bug Bill Gross Will Gladly Pay You Tuesday For A Hamburger Today, Hoping "Tuesday Never Comes"

Tyler Durden's picture





 

We will forgive Bill Gross for taking the chart that Zero Hedge first presented (oddly enough correctly attributed by his arch rival Jeff Gundlach) as the centerpiece of his just released monthly musings, and wrongfully misattributing it, for the simple reason that everything else in his latest monthly letter "Tuesday Never Comes" is a carbon copy of the topics covered and discussed extensively on these pages both recently and over the past 3 years. However something tells us that the man who manages over $1 trillion in bonds in the form of the world's largest bond portfolio (second only to the Fed's of course, with its $2.5 billion DV01) will be slow in getting branded a gold bug by the idiot media even with such warnings as "real assets/commodities should occupy an increasing percentage of portfolios." Also won't help warnings that the tens of trillions in loose money added to the system will ultimately be inflationary: "inflation should creep higher. Do not be mellowed by the affirmation of a 2% target rate of inflation here in the U.S. or as targeted in six of the G-7 nations. Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that were initiated in late 2008 and which will likely continue for years to come." Finally, since Zero Hedge is the only venue that has been pounding the table on the whole "flow" vs "stock" debate which is at the heart of it all (see here), we were delighted to see this topic get a much needed mention by the world's now most influential gold bug: "The Fed appears to have a theory that is somewhat incomprehensible to me, stressing the “stock” of Treasuries as opposed to the “flow.” And there you have it. In summary: to anyone who has read Zero Hedge recently, don't expect much new ground covered. To anyone else, this is a must read.

From Bill Gross

Tuesday Never Comes
  • The current acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero bound interest rates will limit that growth and induce serious risks in future years. 
  • Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that will likely continue for years to come. 
  • Focus on securities with shorter durations – bonds with maturities in the five-year range and stocks paying dividends that offer 3%–4% yields.  In addition, real assets/commodities should occupy an increasing percentage of portfolios.

The global economy is floating on an ocean of credit, and a good thing too as our cartoon friend Wimpy reminds us. Without it, he would be a hungry puppy by next Tuesday and nearly seven billion world citizens would be worse off if barter, and not credit, was the oil that lubricated trade. Unlike Wimpy, early societies functioned without an exchange (money) or the promise to pay it back in the future (credit). Growth was limited, however, because savings or investment could not be incented properly. Those that wanted to save for a rainy day had no means to express that caution; better to consume a banana or a hamburger today than to watch it rot and become worthless on Tuesday. But money changed all of that and the ability to borrow and exchange it for repayment at some future date was the economic elixir of the ages. Shakespeare, with his admonition to “neither a borrower nor a lender be,” might have won a 17th century Pulitzer, but definitely not a Nobel Prize for economics.

 

Still, the use of credit never really kicked into high gear until the discovery of fractional reserve banking and the ultimate formation of central banks to facilitate and protect its disbursement. Picture a Wild, Wild West Bank in Yuma, Arizona back in 1901. It had a big safe where miners left their gold nuggets for safe keeping, but in order to become more than a depository, the bank needed to issue notes and letters of credit in an amount greater than the gold in its vault. Theoretically there was some of the owner’s gold dust in there too, but who was counting as long as gold came in and gold went out and Yuma’s citizens thought that the bank’s notes were backed by tangible evidence of wealth. Fractional reserve banking was aborning in the 20th century, sharpshooters and all.

Problem was that many of those local banks with their individual currencies and drafts went out of business, leading to panics and mild depressions throughout the growing states, and so in 1913 the dollar became our single currency, and the Federal Reserve our official central bank. The Fed, with a certain amount of gold certificates, would then extend credit to its member banks, which would then extend credit to businesses, which would magically promote savings, investment and economic growth. No leftover hamburgers on Tuesday for Wimpy – his tummy was grumbling and by god, or by Fed, he was gonna get it NOW.

This process of credit and its creation powered global economies for the next century. It benefited not only consumers who wanted their burgers now, but lenders and investors who were willing to go hungry on Friday for the benefit of getting their money back with interest on Tuesday. Both sides experienced a win/win exchange as the real economy charged ahead, creating jobs, technological advances and the eradication of disease. What was not to like about credit? Nothing really, except much as the absence of it hindered ancient societies, the excess of it now hobbles modern economies. Credit is the foundation of the wealth creation process, but it can also be the cause of financial instability and potential wealth destruction. Like nuclear energy, “atomic” credit or debt must be controlled if it is to benefit, as opposed to destroy.

And so the job of modern-day central bankers – Bernanke, King, Draghi and their global counterparts – is to decide how to control a beneficial chain reaction without it getting out of hand. In many ways they are like their Wild, Wild West counterparts, trying to convince skeptical depositors that the gold will always be there. Yet, since 1971, when Nixon cratered Bretton Woods, there has been no explicit or even implicit gold backing. The U.S. and therefore the world’s finance-based economies have been backed by an increasing amount of IOUs, which are simply paper promises to create more paper when there is an old-fashioned 20th century run on the banks, or incredibly enough – even when there is not. Lacking a disciplined parental example, the banks, investment banks, money managers and hedge funds piled paper on top of paper as well, creating derivatives and seemingly endless chains of repos and rehypothecation of repos to amass a total amount of credit that literally cannot be counted. Estimates suggest global credit in the financial sector exceeds $200 trillion, with developed economies’ central banks holding only $15 trillion in reserves or figurative “gold dust.” If so, then the global banking system is levered at least thirteen times. These numbers don’t even count the amount of side bets or credit default swaps, which can’t be used as burger payments, but which total $700–$800 trillion alone. Wimpy has financed so many Whoppers that Tuesday can never come. Judgment day must always be around the corner or after the next weekend. Wimpy cannot pay the tab, except with more and more credit creation, as Euroland countries are discovering first hand.

Yet how much credit is too much credit and how is a dedicated central banker to know? Part of the problem is in clearly defining what does or doesn’t fit the definition. There are the families of M’s – M1, M2 and the disbanded M3 in the U.S. – the former two of which the Fed now loosely uses to monitor a growth rate so as not to bring credit creation to a boil. 21st century privateers, however, proved there can be no accurate gauge of credit growth as long as banks and the shadow banks can create their own money at will. CDOs, CLOs and securitized lending that managed to skirt regulatory standards for bank loans by applying 1%, 2% and 5% “haircuts” to securitized assets made a mockery of sound banking and ultimately created great risk for central bankers and their ability to temper the excess of credit creation. In 2008, central bankers never really knew how much debt was out there, and to be honest, they don’t know now.

Austrian school economists might say “no matter, forget the counting – all a central banker has to do is observe the interest rate, the price of credit, to know whether things have gotten out of hand.” And they may have had a point – even after 1971 and up to the mid-1990s, but then economies and the credit that was driving them morphed into a universe that the conservative Austrians would not have recognized. With the dotcoms, the subprimes and now the reflexive delevering of our financial system, it is practically impossible to know what interest rate is applicable. With the QEs and LTROs reducing real yields far below absolute zero, a central banker must wander aimlessly in policy space, wondering how much credit to create, how many Treasuries to buy, and how firm a twist to give the yield curve in order to allow Wimpy the chance for another burger and a side order of fries.

What they should know – and what the following chart, provided by the always observant Jim Bianco, shows – is that when QEI and QEII lapsed in recent years, stock prices declined by 10%–15% until magically they came back to live another day. The same stunting effect can be observed in the bond market when measured by real as opposed to nominal interest rates. They go down with QEs and up in their absence.

Admittedly, Chart 1 shows only two real data points, which are difficult for a Fed Chairman or his staff to rely on, but common sense underlies the historical observation as well. With the Fed buying nearly 70% of all five- to 30-year Treasuries during Operation Twist, and similarly large percentage amounts of Treasury and Agency mortgage-backed issuance since the beginning of QEI in December 2008, who will buy them now, if the Fed doesn’t?

 
 
The Fed appears to have a theory that is somewhat incomprehensible to me, stressing the “stock” of Treasuries as opposed to the “flow.” Future flows and annual supplies of $1 trillion and more, the theory argues, will be gobbled up by the market even without the Fed’s help, at current artificially suppressed yields because the private market’s “stock” of Treasuries has been depleted. Much like a wine cellar, I suppose, that is now nearly empty because policymakers have been drinking the rare vintages, wine lovers will now be forced to restock their cellars to get a historically comfortable inventory. Hmmm, being a beer drinker myself, I might otherwise assume that appetites might switch due to higher prices (and lower yields). And if wine or bonds were mandated to fill the cellar, then why not a foreign wine or a foreign bond? And too, I’m sure the Chinese in addition to PIMCO clients would be willing at the margin to change their preferences to real as opposed to financial assets. More conservative investors might migrate to cash as the preferred alternative, because the price of bonds or burgers was too high. Wimpy, in other words, might just go vegan if burgers aren’t cooked to taste.

Because of QEs, the associated Twist, and similar check writing by the BOE, BOJ and ECB, several trillion dollars of what is academically referred to as “base money,” and what Main Street citizens would recognize as “gold dust,” has been added to global central bank vaults. Rather than dug out of the ground, this credit has been created at the stroke of a pen or a touch of the keyboard in today’s electronic monetary system. How that is done is a topic for another day, but since the early 1900s, and especially since 1971, it has been done so often that prices of goods and services are 400% of what they were when President Nixon decided to propel central banking to another orbit. “We are all Keynesians now,” he said back then, but he should have replaced Mr. Keynes with Mr. Burns, Miller, Volcker, Greenspan and Bernanke. We are all central bankers now, at least from the standpoint of endorsing stimulative policies that permit Wimpy and his seven billion counterparts to keep on eating burgers, and their lenders, by the way, to keep on coining profits.

Part productive, but increasingly destructive, the current acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero bound interest rates will limit that growth as argued in previous Outlooks, and induce serious risks in future years. In addition, inflation should creep higher. Do not be mellowed by the affirmation of a 2% target rate of inflation here in the U.S. or as targeted in six of the G-7 nations. Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that were initiated in late 2008 and which will likely continue for years to come. We are hooked on cheap credit just as Wimpy was hooked on Friday’s burgers. As I highlighted last month in “The Great Escape,” bond and equity investors should focus on securities with shorter durations – bonds with maturities in the five-year range and stocks paying dividends that offer 3%–4% yields. In addition, real assets/commodities should occupy an increasing percentage of portfolios. Wimpy would not be pleased by this change of diet nor by the cost and risk of burgers for delivery next Tuesday. But for him, and for central bankers, the hope is that Tuesday never comes.

 

William H. Gross

 


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Tue, 05/01/2012 - 07:40 | Link to Comment malikai
malikai's picture

I'm not sure what to think about Gross. Is he a crony, an idiot, or just too big to succeed? A dinosaur, maybe? White knight?

Tue, 05/01/2012 - 07:42 | Link to Comment BeetleBailey
BeetleBailey's picture

His name says it all malikai.....he's just gross

Tue, 05/01/2012 - 08:03 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Dude owes me money.

 

Tue, 05/01/2012 - 08:28 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Think of it as a small fee to keep Mr. Gross from ever bothering you again.  Well worth it.

Bill Gross was an insider who has been cast out.  Gold bug?  I think not, he is/was the king of paper.  Like a lot of folks in that posh town of Corona Del Mar (lived there for 2 years in 1998) he is bitter about a lot of things. 

Tue, 05/01/2012 - 08:34 | Link to Comment francis_sawyer
francis_sawyer's picture

We're all 'insiders' now... Every day I wake up I know one thing for sure... They'll print until the cows come home...

Tue, 05/01/2012 - 08:37 | Link to Comment TuesdayBen
TuesdayBen's picture

Gawd I love Tuesdays.

Tue, 05/01/2012 - 08:59 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

They'll print until the cows come home...

 

IT tip for Ben.

 

Use nail polish to repaint the CTRL+P keys on the keyboard. It holds up really well.

 

Tue, 05/01/2012 - 09:23 | Link to Comment HoofHearted
HoofHearted's picture

But at least one more paper bug is starting to get the picture. Dust off some Milton Friedman, "Inflation is always and everywhere a monetary phenomenon." Now your Keynesians will disagree, but then again your Keynesians assuredly hold nothing but fiat.

Tue, 05/01/2012 - 09:38 | Link to Comment Leopold B. Scotch
Leopold B. Scotch's picture

Notice how he still defends the underlying premise of fraud: Banksters accepting the demand deposit of one person who did some work for payment, and lending 95% of that deposit out to another, who in turn deposits a part of that, which is then loaned out... and around and around it goes.  Only the original depositor actually created something of value in exchange for money, the rest simply showed up and were bestowed magically with purchasing power -- dollar claims to others' hard work in exchange for their borrowed "nothing", so long as they pay interest to the bankster.

This is no different than if you or I crank up a printing press in our basement, and using a "startup" investment of $100,000 as our capital reserve, we crank up the presses and loan it on out.

The root of it is counterfeiting in both cases. Purchasing power is magically bestowed upon those on the inside, at the expense of sellers doign hard work on the outside. One legalized fraud, the other -- you and I go to jail for not being part of the cartel.

But I digress: the primary reason the economy is getting weaker is because of the unspoken cancer of inflationism.   Inflation is redistributionism.  It hoodwinks economic participants into thinking there's been a bountiful economic harvest, when all you've done is raided the seed corn of the best, most responsible farmers, and distributed outward. Some recipients plant it and use it responsibly to become self sustaining.  Most just eat it, plain and simple.  The rest, having not earned the seed corn by "getting it" or "doing it right", they create farms perpetually dependent on raiding more seed corn from the productive.

Where Gross is horribly wrong is by not discerning between backed and unbacked credit and allowing for the expansion of credit out of thin air (unbacked credit) to be "part productive" but "increasingly destructive".  The problem is unbacked credit is always destructive as it begets ever increasing dependence on more of the same.  At first it's not noticed in an economy when the seed corn stores are vast and deep. But from the word go, unbacked credit undermines the  harvest -- the real growth of the economy, and gradually replaces it with more and more "fake harvests" -- the seed corn distribution racket.  And the more you dig into the seed corn, the smaller the real harvest, and the more you need to dig into the seed corn. Harvests / GDP in the 1800s was 99% real harvest, real, backed genuine growth.  Today, GDP is a bullshit, useless number that treats dipshits blowing money on not ready for primetime solar power, or welfare recipients using their weflare cards,  as if they no different Andrew Carnegie building steel mills on the Monongehela.

Notice how Greenspan's seed corn raid worked for a while, but once it slowed it exposed the farmers who hadn't a clue about what they were doing? Thus requiring another raid of the seed corn in QE I?  And then QE II?  Then Operation Twist?  and the EC interventions?

This has been going on for decades, it's only now that the seed corn stores are so depleted that the real rot of unbacked credit expansion is finally there to see, plain as day, for all who bother to look.  But contrary to Bill Gross's underlying statments, unbacked credit (while it makes teh beneficiaries feel good for the time being) is always bad those who fund it through exchaning something for nothing, which is always bad for an economy over the long run.

Tue, 05/01/2012 - 09:42 | Link to Comment fockewulf190
fockewulf190's picture

....and the answer is....Phyzz...ding! ding! ding!

Tue, 05/01/2012 - 10:06 | Link to Comment Leopold B. Scotch
Leopold B. Scotch's picture

My last sentence in that diatribe above was slop.  Sorry.

Bottom line, Gross's thinking that there's a good amount of / responsible way to create unbacked credit vs. how we've been doing it is flatly WRONG.  Once you embark on a plan of unbacked credit, you start the cycle. It can take a while to be exposed, but the process of insidiously rotting the economy from within has begun.  What Gross is saying is the equivalent of suggesting there is a responsible amount of Meth for a user that is manageable.  In truth, there is an unnoticed amount on a user whose body is healthy enough to hide the source of unbounded energy.  But the end game is always the same: either you die or you bottom out and hit the rehab, stop whoring, recover, and go to the dentist.

I'll grant you, Gross may be right in pointing out that Bernanke, et al, are guilty of trying to gin up more good days for the addict by pumping more highly addictive drugs into the system (while the statisticians in the government rig CPI, GDP, employment, etc, to try to make everyone believe the addict's degrading behavior either does not exist, or is healthy) in order to avoid the politically painful reality of withdrawal.  Gross is essentially saying, once you are there, there are only two ways out: you go through withdrawal (painful when bottoming out), or death.

I would differ in pointing out that the addict is an addict in the first place because they get hooked on the little high on the front, and do what they must to avoid the little low on the back.  That's what central banks and politicians always do for an economy.  Eventually your best high is worse than your original pre-use baseline, and then worse than your initial lows.  Your lows get lower, and lower and lower, and things just get worse and worse as your bandwith of what constitutes a high and low slopes downward on a a increasingly terminal trajectory.  All the while you need more and more Meth / unbacked credit, as you try to pretend all is normal.

Bill Gross thinks with responsible management of Meth / unbacked credit, you can avoid it.  Good luck.

Tue, 05/01/2012 - 13:44 | Link to Comment financial apoca...
financial apocalyptic contagion's picture

you did rant for a good 20mins Leopold but I liked the bit abt the high's and low's of drugs/credit.
George Carlin would be so proud of you right now (I assume you knew this is his stuff on drugs)

Tue, 05/01/2012 - 09:59 | Link to Comment maximin thrax
maximin thrax's picture

This is no different than if you or I crank up a printing press in our basement, and using a "startup" investment of $100,000 as our capital reserve, we crank up the presses and loan it on out.

If our intent is to destroy the principal and only profit from the interest as the loans are repaid, where is the inflation? All we've done is increase the amount of money available to be borrowed, which, theoretically, should depress interest rates. The "counterfeited" money is removed in kind from circulation as the debt is repaid, and the currency circulating prior to our banking forray is reduced by the amount of interest payments to us - until spent or invested back into the economy.

When a bank lends this counterfeit money out, it has borrowed it from the central bank. It must pay that money back, with interest, to the central bank. The central bank tries to control the amount of currency through policies affecting the difference between money going out and money coming in. The real problem is their policy to create enough currency expansion that interest rates can be suppressed to the end that governments can afford to service debt, and that assets are inflated from all the money chasing them, which leads to massive and pernicious inflation.

Tue, 05/01/2012 - 10:28 | Link to Comment Leopold B. Scotch
Leopold B. Scotch's picture

If our intent is to destroy the principal and only profit from the interest as the loans are repaid, where is the inflation?

I don't think the intent is to destry the principal. The major Wall Street players in this busines self-deal and use that principal to further profit.

As well, inflation of the money supply "is the inflation."  In terms of prices, it is reflected in prices of assets, not just the (horribly understated) CPI figure.  Take the bond market, for example.  QEI has inflated the price of mortgage related securities, while QEII and Twist have inflated the price of Tresuries, which in turn sets the tone for inflated prices in the bond markets as everyone front runs the telegraphing with their freshly minted claims.

All we've done is increase the amount of money available to be borrowed, which, theoretically, should depress interest rates.

It decreases them outright, and it is specific interest rate targeting policy that drives inflation / available money.

The "counterfeited" money is removed in kind from circulation as the debt is repaid, and the currency circulating prior to our banking forray is reduced by the amount of interest payments to us - until spent or invested back into the economy.

This money is never removed from the system. Debt is always held constant or increasing.  The monetary base is never allowed to shrink.  This is what the market wanted to do to the credit markets, but the CBs have intervened to prevent it.

When a bank lends this counterfeit money out, it has borrowed it from the central bank. It must pay that money back, with interest, to the central bank. The central bank tries to control the amount of currency through policies affecting the difference between money going out and money coming in. The real problem is their policy to create enough currency expansion that interest rates can be suppressed to the end that governments can afford to service debt, and that assets are inflated from all the money chasing them, which leads to massive and pernicious inflation.

The "real problem" for whom?

Tue, 05/01/2012 - 08:14 | Link to Comment Element
Element's picture

Isn't this the chap who was rumoured in 2010 to be getting early-warning about FED moves, in advance of the 'markit' ... from the FED?

So he's like, legit, a man of the people now, right?

And any one notice Ben may have injured his hand? 

Extreme-wanking accident? ... or Carpal-Tunnel from hitting print too often ... too many mouse-clicks?

All of the above?

 

Tue, 05/01/2012 - 08:29 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Planned opposition, the only reason he gets the attention that he does.

Tue, 05/01/2012 - 09:12 | Link to Comment knukles
knukles's picture

Ah yes, an integral tool within the Hegelian Dialectic.
(Seriously)

Mayhaps sumptin' bein' ready to happen....
BillyBoy's gettin' on the band wagon for hard assets.
Omar El-Goattrain is on the telly all over talking about how shitty thing are (If you read between the lines... very politic in his comments)
OK, also pumping the Federalies to gear up ofr QEwhateverthefuck

And....

PaulCrumpMan is on Bloomberg, again, today.
After his Horsehit Ex Cathedra yesterday.

The Liberal MSM is starting to throw His Majesty, Secular Lord and Savior Extraordinaire Under da' Back of da' Bus...

Whazzzzhappn'in'?

Betcha betcha betcha the PTB behind the scenes (you know, the Fat Rich White Men in the Smoke Filled Rooms) have decided that they can't live with the Shill any longer, just far too negative horseshit, so he's gotta be replaced this time around.
And a tidge of clarity allowed into the system, the press, etc....

Too hard to paper over All of the Mistakes...
The Information Reformation has woken too may up to the Word of The Reality of the Moment.
Plus, the mood of Joe Normal is downright crappy.
Things not be good, at all.

Betcha betcha betcha

 

 

Tue, 05/01/2012 - 09:26 | Link to Comment Leopold B. Scotch
Leopold B. Scotch's picture

Krugman getting lots of airplay because of his new book promoting stupidity.

 

Tue, 05/01/2012 - 08:55 | Link to Comment Arnold Ziffel
Arnold Ziffel's picture

"...who will buy them now, if the Fed doesn’t?"

Eine gute Frage.

Tue, 05/01/2012 - 09:15 | Link to Comment eddiebe
eddiebe's picture

Arny, what's with the German?

Tue, 05/01/2012 - 09:32 | Link to Comment Ben Burnyankme
Ben Burnyankme's picture

Next he will provide a text book explanation of wonders of stealing and parting out late model european cars.

Tue, 05/01/2012 - 07:42 | Link to Comment francis_sawyer
francis_sawyer's picture

Tuesday came... It's today...

Tue, 05/01/2012 - 07:45 | Link to Comment disabledvet
disabledvet's picture

Perhaps if the thirty year dropped to 1 percent that would make him..."see the light"?

Tue, 05/01/2012 - 07:48 | Link to Comment I should be working
I should be working's picture

Ah Bill Gross, bashing the system that made him rich. Someone wants to have his cake and eat it too...

Tue, 05/01/2012 - 08:07 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

My mentor once told me the markets are a snakepit......been operating on that principle ever since.

 

I've never been surprised yet.....welcome to the jungle.

 

Tue, 05/01/2012 - 08:21 | Link to Comment disabledvet
disabledvet's picture

If you mean "by the snake pit nature of markets" okay. If you mean "I've never been surprised by the market" however...

Tue, 05/01/2012 - 08:33 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

I'm not surprised when I'm surprised.......how's that?

 

Tue, 05/01/2012 - 09:06 | Link to Comment DrewJackson
DrewJackson's picture

How common are snake pits in the jungle?

Tue, 05/01/2012 - 09:33 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

You can barely take a step without hitting one.....plan accordingly.

 

Tue, 05/01/2012 - 07:56 | Link to Comment JuicedGamma
JuicedGamma's picture

"The U.S. and therefore the world’s finance-based economies have been backed by an increasing amount of IOUs, which are simply paper promises to create more paper when there is an old-fashioned 20th century run on the banks, or incredibly enough – even when there is not. "

Gold bitchez.

Tue, 05/01/2012 - 08:00 | Link to Comment cat2
cat2's picture

1% has a double meanin there.  But at least there is a worker making min wage flipping that burger, as those are the only jobs that get created giving certain parties access to cheap money first.

Tue, 05/01/2012 - 08:05 | Link to Comment Sean7k
Sean7k's picture

"This process of credit and its creation powered global economies for the next century".

Can Bill Gross be so ignorant of economics to actually think this is true? How can people forget the role unresolved debt and malinvestment factors into the equation? 

Trillions in debt, a quadrillion in derivatives, trillions in malinvestmest that requires deflation are all unpaid liabilities against the wealth creation of the last century. 



Tue, 05/01/2012 - 09:02 | Link to Comment fredquimby
fredquimby's picture

Stop shouting Sean7k we can hear you even when you talk normally.

 

Tue, 05/01/2012 - 09:22 | Link to Comment WmMcK
WmMcK's picture

font-weight:normal ; not bold
At least he didn't capitalize, too.

Tue, 05/01/2012 - 08:05 | Link to Comment lizzy36
lizzy36's picture

Krugman wants inflation at 4%. And he is a Nobel prize winning Ph.D, which clearly trumps an MBA who runs $1T.

If 4% is good, is 6% better?

Inflation FTW!

Tue, 05/01/2012 - 08:22 | Link to Comment mess nonster
mess nonster's picture

Credit didn't bring us all the good things of life, energy did.

Having said that, what else is a shark supposed to do? It must swim or die. It must swim and eat, in order to keep swimming, or die.

That's flow, using the ZeroHedge analogy.

Everyone and every Entity, is in debt, and cannot repay. If interest rates go up even a smidgen, then the insolvency clampdown starts immediately, as we see with the (incredibly boring) EuroCrisis. (I mean, this is like watching a Daytona 500 where everyone's going 13 miles and hour. No dramatic collisions and fireballs are going to happen there!) But I digress. if interest rates go up, then the insolvency boogeyman begins to creep out from under the bed. Everyone;'s broke, no-one can pay. So ZIRP is extended to infinity. The deflationary nightmare must be held off by staying awake on meth for as long as possible. Freddy Krug(er)man must be held at bay.

Oh, but I'm getting sleepy, SOOO sleepy!

The minute interest rates rise to match reality, reality will slash our guts out with its deflationary (ie we're all broke and don't have any FUCKING MONEY, helloooooo?) nine-inch steel finger-talony things. Ouch. Will someone please pass the meth-pipe over here?

Tue, 05/01/2012 - 08:31 | Link to Comment Obadiah
Obadiah's picture

Wow nice diatribe.  Very sharp analysis.  The big question is simply "When?"  And if we dont know that date with certainty then I ( and other small businesses like me) must continue to believe that what we do DOES add value to others and maximize our influence and employment and profit till that date. 

It's a pretty easy sell to myself that the crash is closer tomorrow, but I think in reality that date is 20 years ahead.

Tue, 05/01/2012 - 08:35 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

And he is a Nobel prize winning Ph.D

 

Former Enron consultant to boot......impressed yet?

 

Tue, 05/01/2012 - 10:26 | Link to Comment Doubleguns
Doubleguns's picture

And when the going gets tough he gives up. Dont forget this jewel.

 

http://www.americanthinker.com/2010/08/paul_krugman_gives_up_1.html

Tue, 05/01/2012 - 08:47 | Link to Comment mess nonster
mess nonster's picture

Yeah, I think you're right. Actually, i don't think we will see a "collapse" as in some dystopian movie with zombies. My guess is that when the credit system fails, we lurch hard right into a centrally planned fascist/socialist economy. The debt will be written off, everyone will get an olive-drab jumpsuit, and the State will issue ration cards to all. The fact that you have a moninker on ZH will get you a "Tenner" in the gulag, making (...something, bricks, video monitors?) out of the ashes of your cremated fellow inmates, or something like that. Just another face of what deflation really looks like.

Tue, 05/01/2012 - 08:25 | Link to Comment disabledvet
disabledvet's picture

I would argue that "if I'm getting a 1 percent yield on my thirty year that 25% everyone else is paying is quite the spread indeed." still wanna talk smack to The Kroog-man knowing that?

Tue, 05/01/2012 - 08:11 | Link to Comment Obadiah
Obadiah's picture

Wow the evil is in high gear.  Who can you trust?  No one but GOD himself.  Learn from a great Korean War Vet as he reads the good book, line by line, verse by verse, chapter by chapter.

There is no other book for these times brothers.  None.
http://www.shepherdschapel.com/broadband.htm

Tue, 05/01/2012 - 08:36 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Wow the evil is in high gear. Who can you trust? No one but GOD himself.

 

By Jove....I think he's got it!

 

Tue, 05/01/2012 - 08:21 | Link to Comment sinner
sinner's picture

hmm...

 

;since Zero Hedge is the only venue that has been pounding the table on the whole "flow" vs "stock" debate which is at the heart of it all (see here), we were delighted to see this topic get a much needed mention by the world's now most influential gold bug

 

no offense to the Tylers but stock to flow was covered by the ANOTHER/FOA/FOFOAs (the worlds most influential gold bugs)...if you missed it you haven't been paying attention

http://fofoa.blogspot.com/2010/10/its-flow-stupid.html

Tue, 05/01/2012 - 08:53 | Link to Comment manhunter
manhunter's picture

Yes, and even Bill Gross is learning to walk in the footsteps of Giants. A/FOA spelled out this story 15 years ago. The call of the century; physical gold.

Tue, 05/01/2012 - 08:21 | Link to Comment El Viejo
El Viejo's picture

the “stock” of Treasuries as opposed to the “flow"

(Engineering 101)

Tue, 05/01/2012 - 08:23 | Link to Comment Mercury
Mercury's picture

Jurrien Timmer at Fidelity has been known to lift the odd ZH chart too.

ZH is just too sexy.

Tue, 05/01/2012 - 08:26 | Link to Comment Muppet Pimp
Muppet Pimp's picture

So can we get rid of taxes already? What is the point anymore?

Tue, 05/01/2012 - 08:53 | Link to Comment kraschenbern
kraschenbern's picture

Can't get rid of taxes!  The taxpayer (and progeny) is pretty much the only collateral left out there for future expansion of debt.

Tue, 05/01/2012 - 09:04 | Link to Comment Muppet Pimp
Muppet Pimp's picture

Is it not completely obvious that Obama's tax on the rich boils down to penance for success?

Tue, 05/01/2012 - 09:14 | Link to Comment SheepDog-One
SheepDog-One's picture

Obama's 'tax the 'rich' targets anyone with a bit of money, NOT the real rich, his friends in other words. Same old bait for the proles since the middle ages tell them youre gonna get those rich guys....anyone actually believe it?

Tue, 05/01/2012 - 09:25 | Link to Comment kraschenbern
kraschenbern's picture

Not completely obvious; although it could be an element in getting something like the "buffett rule" made law.  The real objective of the governing class has to be finding ways to sustain the system; and foreign sources of funding won't last forever (but use them as long as possible).  Once the "fat cats" are paying their "fair share", and the system is still running in the red, then the masses will accept higher taxes to keep the debt train rolling.

At the end of the day (closed system argument) it is not possible to consume more than the system has produced.  For now China seems to be filling the US production shortfall.  Point being:  nations that produce more than they consume are in the ascendancy; nations that consume more than they produce are in decline. 

Tue, 05/01/2012 - 11:05 | Link to Comment marathonman
marathonman's picture

The real targets are what is left of the middle class and the shlubs stupid enough to not be tied into a government redistribution program.  If you are rich by earning $200,000/yr, just wait a few years when the Bernank keeps the monetary jets on.  Eventuallly everyone will be "rich" and taxed at the max rate. 

The welfare state is the political stabilizer for the central banks redistribution of the middle class' wealth to the upper class via government transfer payments - i.e. income taxes.  There is no escape at this point, when over half the population is getting something from the government.  Liberty is toast.  The best we can hope for is that us milk cows don't become beef cows.

Tue, 05/01/2012 - 09:14 | Link to Comment Waffen
Waffen's picture

Well to keep up appearances ofcourse. In addition, how else can politicians curry favor from one group or another, if they are not using force to steal from them?

"vote for me and I will steal from you less"
" vote for me and I will steal from them more"

You don't expect politicians to give up their ball and let you go home with it so you?

Tue, 05/01/2012 - 08:29 | Link to Comment SheepDog-One
SheepDog-One's picture

Hey Bill I dont know how someone can be so confused and yet managed so much money, youre confused about the FED bond policy? Its called monetizing the debt, fuktard.

Tue, 05/01/2012 - 08:33 | Link to Comment eddiebe
eddiebe's picture

I'm glad to see one of the big guys sort of gets it and talks about it. The way I see it, the whole fractional reserve system with or without reserve is built on smoke and mirrors and is held together by the people that are doing the work today for a hamburger today and tomorrow. The problem is two fold simply put.

1, you can't eat a hamburger tomorrow if it is only smoke and

 2, people will ultimately find out about that fact.

Tue, 05/01/2012 - 08:33 | Link to Comment evolutionx
evolutionx's picture

Summer 2012: Iran war, crash in the markets and financial institutions

 

five devastating storms will mark the summer of 2012 and thus accelerate the process of world geopolitical swing:

    . US relapse into recession against the background of European stagnation and BRICS slowdown
    . dead end for the central banks and interest rate increases
    . storm on the foreign exchange and Western sovereign debt markets
    . Iran, the war ´ too far ª
    new crash in the markets and financial institutions.

 
Full Analysis:

http://www.webcompact.net/index.php/news/21800-summer-2012-iran-war-crash-in-the-markets-and-financial-institutions

Tue, 05/01/2012 - 08:35 | Link to Comment Dermasolarapate...
Dermasolarapaterraphatrima's picture
REPORT: Bank Of America Plans To Axe 2,000 Investment Bankers

 

http://www.businessinsider.com/report-bank-of-america-lay-off-2000-inves...

 

 

Tue, 05/01/2012 - 08:39 | Link to Comment mess nonster
mess nonster's picture

ZH is schizophrenic these days. On the one hand, it's all "ponzi ponzi ponzi" and on the other hand, it's "inflation inflation inflation".

Let's connect the dots folks. Ponzi schemes are essentially deflationary, in that they hurtle forward towards a definite event horizon. in other words, the ponzi can't go on forever. It faces a collapse under its own weight as it's growth chart approaches infinity. In other words, it goes up, up up and then explodes, and is gone.

if inflation is to have any validity at all, it is only when put into perspective as the upwards trajectory of the ponzi roman candle. Anyone who is looking at inflation isn't taking a very long-term view of the situation. Hyperinflation tomorrow means something worse next week. as in, what happens when Bruno comes looking for me on Tuesday to get repaid for the hamburger i ate last Friday?

When I turn out my pockets, Bruno is going to beat the ever-living fuck out of me and break my kneecaps. if inflation was the indigestion I got from eating all those free hamburgers (well, the ones i ate on credit) then the fishes I see wearing my new cement overshoes are the deflationary visions with which i will be regaled, come Tuesday.

Fiddling with the car stereo because there aren't any brakes is what complaining about inflation is like when the car is headed for Thelma and Louise terrain.

Tue, 05/01/2012 - 08:43 | Link to Comment SheepDog-One
SheepDog-One's picture

Yea I dont see big inflation coming, because who can pay for it? Everyones broke, except for the FED and really theyre broke too.

Its 'Whimpynomics'....everyone chowin down on free cheeseburgers today and they dont care when the bill comes theyll all bolt out the door.

Tue, 05/01/2012 - 09:33 | Link to Comment SamuelMaverick
SamuelMaverick's picture

In Rhode Island that is called the ' chew and screw '.

Tue, 05/01/2012 - 09:06 | Link to Comment Quinvarius
Quinvarius's picture

Money is created at the origination of the loan.  Nothing...NOTHING that involves debt based money is deflationary.  Not even when the debt is defaulted on.  Default is twice as inflationary as creating the money in the first place because now there is no demand on it to repay the debt.  Never confuse insolvency with deflation.  If you do that, you will never understand this market.  The money exists.  Someone else has it when the bankers lose it 

Tue, 05/01/2012 - 11:06 | Link to Comment css1971
css1971's picture

Default is twice as inflationary as creating the money in the first place because now there is no demand on it to repay the debt

Exactly, and that's why recessions are self limiting. The debt gets cancelled, the credit still circulates to pay other debts. It's only when you prevent bankruptcy and the repudiation of the debt that you get zombie economies.

Tue, 05/01/2012 - 09:51 | Link to Comment riphowardkatz
riphowardkatz's picture

You hang on tight to those dollars and just wait this thing out. once deflation hits you will be able to buy gold for $100 a house for $15,000 oil for $10 and food for a year costing around $500. A ne car will only be $1000 think of how awesome that will be. If you play it right you might even get to buy a 50% stake in Apple for a couple hundred thousand.  Then you can have the last laugh at all these cooks calling for inflation

 

Tue, 05/01/2012 - 12:46 | Link to Comment akak
akak's picture

The simple fact that financial and monetary history demonstrate not ONE single example of your purported fiat currency deflationary scenario in the face of exponentially-rising governmental debt --- but literally hundreds of examples of fiat currency inflations, hyperinflations and collapses instead --- should tell you just how unrealistic, and woefully ignorant and naive, is your dream of an appreciating fiat currency, must less during a period of ballooning governmental deficits.

Tue, 05/01/2012 - 08:39 | Link to Comment SheepDog-One
SheepDog-One's picture

Now that the FED has scammed up the markets back to pre-bubbletop implosion heights, whats next on the agenda? I dont think they know. 

I think their only goal was to get stocks back up, and their precious little 'assets', so what are they going to do now blow it up higher than the ridiculous R/E bubble? 

Nothing but total insanity from here on out, strap in tight or youll lose it.

Tue, 05/01/2012 - 08:44 | Link to Comment manhunter
manhunter's picture

Bill says credit creation benefited both consumers and investors. He sees these as 'both sides' but actually they are on the same side. The other side of consuming and investing is saving, and savers do not benfit from credit creation when they save in the currency. Their savings are diluted by credit creation, and they lose.

Solution: save outside the monetary system. Save in freely priced gold which floats against the currency. Let the borrowers have their easy money, while savers are not diluted. Credit creation will increase the value of savers 'savings. This is freegold. This is near.

 

Tue, 05/01/2012 - 08:49 | Link to Comment SheepDog-One
SheepDog-One's picture

Bill says 'investors have benefitted'....well no, not unless theyve already sold to someone else. Those holding equity funds and looking at the numbers and 'feeling good' can get it taken away any overnite. Its a huge lie to say because a stock went up, youre wealthier, because on the other side of this stock pump here is no buyers. Good luck with that Bill.

Tue, 05/01/2012 - 08:46 | Link to Comment monopoly
monopoly's picture

Lets not get into a debate about Gross and his wealth, his past and his current position. Lets concentrate on what he is espousing. He makes sense, and yes, we here at Zero Hedge understand most of his current letter. But even if one was part of the "establishment" and helped create this WX. pattern of Tsunami's that will ride over us all, he makes good points, many of which we support. 

I have a problem with high yield stocks, even good ones, since the yield will vanish as the Wx. gets worse. Short duration bonds may not be good enough when the head inmate loses control of interest rates. And mark my words. He will lose control. The idea of "conservative investors" moving to cash is sound. Even at -3%, with mild inflation, you lose purchasing power slower than what is coming in from the sea to engulf us. Remember, 10,000 baby boomers a day are now eligible for medicare. And we all now how well funded Medicare is.

I feel we all want this to end. We all want this absurd house of cards to collapse, the thieves and scum that brought us to this point incarcerated and their phony wealth taken from them, not for revenge, but to show the "cool brilliant ones" that trying this again will get them nothing. But that just will not happen. With a corrupt banking system and a political system that supports it so the "donations" will continue to flow, we here expect nothing. We know our children are screwed, their version of the American dream will be nothing like many of us have experienced. So what can we do, well, I think most of us know. Protect what we have, if able, continue to purchase physical and prepare for what we hope will never occur. Our nation that was once free moves closer and closer to a nation of absurd laws, big brother and ever increasing corruption. Until the millions "march on Washington for our Spring" nothing will change....But we here know what we have to do. If only there was another Thomas Jefferson out there. We still have hope.

Tue, 05/01/2012 - 08:53 | Link to Comment orangegeek
orangegeek's picture

A message to Gold Bug Bill:   elliott wave count still says bearish gold.

 

http://bullandbearmash.com/index/gold/daily/

 

You can get email notifications with updates about Gold:

 

http://bullandbearmash.com/members/signup/

Tue, 05/01/2012 - 09:11 | Link to Comment SheepDog-One
SheepDog-One's picture

'Elliot waving' gold, sheesh now thats fuktarded!

Tue, 05/01/2012 - 09:13 | Link to Comment eddiebe
eddiebe's picture

Unless the banksters are using elliot as a model, those predictions are worthless.

Tue, 05/01/2012 - 08:55 | Link to Comment mess nonster
mess nonster's picture

What? There is a house of cards underneath that tower of bulllshit? Well, now I see what's holding the whole thing up!

Tue, 05/01/2012 - 08:56 | Link to Comment zonetraders
zonetraders's picture

The gladiator and Falcon indicator indicating the upward pressure on EU to stay. 

It has been long since 1.3240

http://capital3x.com/think-tank/falconfx-eu-update/

 

Full analysis http://capital3x.com/think-tank/the-curious-case-of-intermarket-analysis...

Tue, 05/01/2012 - 09:00 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

"FREE BEER TOMORROW!"

 

the sign works everytime!

Tue, 05/01/2012 - 09:01 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Obama beer.....even better.

 

Tue, 05/01/2012 - 09:17 | Link to Comment riphowardkatz
riphowardkatz's picture

amazing that a guy this smart can be so wrong

 " Credit is the foundation of the wealth creation process, but it can also be the cause of financial instability and potential wealth destruction. "

Wrong. Savings, property rights and free trade are the foundation of the wealth creation process.

Austrian school economists might say “no matter, forget the counting – all a central banker has to do is observe the interest rate, the price of credit, to know whether things have gotten out of hand.” 

Wrong. Austrians know things have gotten out of hand when money artificially increases leading to a credit boom and eventual bust. I think he is confusing Austrians with Chicago school.

 

Tue, 05/01/2012 - 09:29 | Link to Comment razorthin
razorthin's picture

Growth and progress are limited by absence of fiat, my ass.  Neanderthals would have something to say about that as they watched Neolithic man sweep the world.  Just takes some well-placed bronze (or other dense metal) between the eyes.

Tue, 05/01/2012 - 09:59 | Link to Comment AGuy
AGuy's picture

" but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that were initiated in late 2008 and which will likely continue <strike>for years to come</strike> forever!"

Fix that for you Bill!

 

Really wish ZH supported the strikethrough html tag!

 

Tue, 05/01/2012 - 10:20 | Link to Comment proLiberty
proLiberty's picture

 

"And so the job of modern-day central bankers – Bernanke, King, Draghi and their global counterparts – is to decide how to control a beneficial chain reaction without it getting out of hand. "

The creation of fiat money and money substitutes from thin air may appear to be "beneficial" from the few consequences that can be seen, but when the unseen consequences are taken into effect, the totality of its moral corruption must be apparent.

This is because creation of money does not cause creation of economic assets.  It only gives the appearance of prosperity, at least for those who see the money being disbursed at the printing plant and being used to buy things and pay wages.  However, the wealth represented by each pallet of currency only comes by diluting the value of every other currency unit already in circulation.  It is embezzlement by dilution, just as when the bartender waters down the drinks.  

When done on a small scale relative to the amount of currency already in circulation, the crime is invisible simply because the dilutution is immeasurable.  But it is still embezzelment.  In private business, we wouldn't excuse the payables clerk who padded her own bank account because she only took $500 over two years from a company with $1 million in annual sales.  But the central banker's concern is embezzeling so much that the theft becomes tangible.  That is the "getting out of hand" they worry about.  But like the payables clerk who gets used to having a few extra dollars in her hands each week, the governments of these central bankers gets addicted to being able to spend 30 or 50 percent more dollars than they actually receive in tax revenues.  

The extra social spending becomes triggers the cancer of a growing dependency in the private sector. People arrange their lives around their "benefits", and soon lose the ability to earn an income by working.  They can only become desparate when it becomes clear that they have allowed themselves to be screwed.  They focus their energies on political means rather than economic means.  That is, they spend their time protesting and lobbying rather than learning new job skills or trying to find ways to earn a living.

So, while the central banker is trying to find new ways to "sterilize" money printing so he can create money without it "getting out of hand", he is destroying the very fabric of society's ability to create the wealth that is the very basis for the money he prints.  

The meta-Ponzi scheme is now past the point of self recovery.  This will not end well.

 

 

Tue, 05/01/2012 - 10:41 | Link to Comment BanjoDoug
BanjoDoug's picture

THIS ARTICLE SUCKS - It suggests the bankers and their fractional banking system as "benficial", which it is to the elite bankers, but not to the common American.....  and it makes light of pre fractional reserve banking as a backward wacko-ville wild west as in Yuma Arizona.....  & BTW, never do they clearly state that the central banksters are non gov't entities (FedRes, BOE, etc) who manipulate and abuse the entire financial landscape for their own selfish benefit. 

This entire article is TOTALLY IRRESPONSIBLE....  I may stop reading ZH if there is too much of this crap.....

Tue, 05/01/2012 - 11:22 | Link to Comment robertocarlos
robertocarlos's picture

I have to pay the bank 35 dollars a month for the next forever. I am a debt slave.

Tue, 05/01/2012 - 11:38 | Link to Comment grekko
grekko's picture

Bill Gross certainly has a way with words.  He should open up a non-fractional, gold reserve bank.  It might catch on and put the Fed out of business.  All he has to do is buy a few politicians and get the legal tender law repealed.

Tue, 05/01/2012 - 12:34 | Link to Comment Nukular Freedum
Nukular Freedum's picture

Ah, Tyler, welcome to my world. Welcome indeed.

pearlsforswine.wordpress.com

Tue, 05/01/2012 - 15:10 | Link to Comment malek
malek's picture

 It benefited not only consumers who wanted their burgers now, but lenders and investors who were willing to go hungry on Friday for the benefit of getting their money back with interest on Tuesday. Both sides experienced a win/win exchange as the real economy charged ahead, creating jobs, technological advances and the eradication of disease.

I must assume Bill Gross is on purpose sidestepping the very important question, if one might need to distinguish between credit used (aka going into debt) for consumption, or for investment.

That devalues his whole narrative.

Tue, 05/01/2012 - 17:35 | Link to Comment robertocarlos
robertocarlos's picture

If a person goes up to their eyeballs in debt is there a chance they will get away with it and get to keep the ill gotten gains?

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