Bill Gross: U.S. Has Made a "Devil's Bargain"

February 2nd, 2011
in econ_news

haircut Econintersect:  Bill Gross, a founding partner of bond investing giant PIMCO, asks a question:  "Are record corporate profits a fair price for America's soul?"  Gross says that money has become the economic and political wedge for profound changes in American society.  He recommends thatinvestors should replace sovereign bonds with artificially low interest rates in countries such as the U.S. and UK with better risk/reward alternatives.  Gross advises moving investments from weakening currencies with negative real interest rates to those with stronger emerging markets or currencies with positive and high real interest rates.

Follow up:

Note:  The full article has been posted as a guest authored Op Ed at GEI Opinion with Bill Gross' permission.

Gross points out that historically the real 5-year Treasury yield has had a real interest rate around 1.5%, but today the real yield is negative (inflation greater than coupon).  He calls this "the devil's haircut."  The investor is getting scalped.

Gross writes:

Money would also become the economic and political wedge for profound changes in American society. Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

Gross argues that complete restructuing of  compensation and motivation through regulation and/or application of free market common sense.  Paraphrasing Paul Volcker, Gross says the only thing of value to come out of the banking industry over the past 30 years was the ATM. 

Editor's comment:  So much for the vaunted profession of financial engineering.

The Gross commentary is related to other recent discussions at GEI Opinion.  Michael Pettis, a professor at Peking University's Guanghua School of Management, has written that ultimately non-performing debt is written off, either directly or indirectly, by  transferring wealth from the citizenry to the defaulting institutions.

Another commentary by Derryl Hermanutz has discussed the fundamental conflicts between the two functions of money:  a medium of exchange and a store of value.  Gross infers this conflict in the following excerpt:

Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly.

Gross says, "the U.S. desperately needs a rebalancing of priorities, a new economic Keynes, a chastenened Congress and a president who does more than propose "Win the Future" at an Annual State of the Union address without policy follow-up.

Sources:  GEI Opinion (links in article) and Bill Gross February Investment Outlook

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