Wednesday, June 1, 2011

Who is the frog in the kettle? Bond investors or Bill Gross?

Bill Gross is out with his latest misinformed commentary on the Pimco website.

Using his usual technique of (bad) sortytelling, Gross invokes the "boiling frog" parable and equates bond investors to the frog in the pot of water that is slowly brought to a boil. The frog doesn't feel the incremental temperature increase and is eventually cooked. That's what he says will happen to investors because inflation will eat away at these paltry yields. He says this even as he admits that "total returns for almost all bond categories, when you factor in positive performance and coupon income, has beat inflation any way you measure it."

Remember, Gross has been short Treasuries since April. It's something he's recently tried to back away from in comments he has made.

Then he goes on to make this amazing statement:

"Because the QEs cover an extraordinary period of monetary policy with a limited time frame, there is not enough data to indicate whether the end of QEII will lead to higher or even lower rates, although higher is our strong preference. “Who will buy them?” remains a critical question to be answered."

Gross doesn't see that government spending creates the funds that are used to buy Treasuries. This is why there has NEVER been a lack of buyers, ever. It is impossible under the current reality where the government pays by simply crediting bank accounts. And inestors will always buy a risk free asset that pays more than zero. If he's worried about inflation, then he is making the same mistake as everyone else. He equates QE with "printing money," even though it's not and even though it strips a hefty amount of interest income from the private sector. (This latter point he should know, but he doesn't.) Gross is a great marketer, and I guess he's a decent trader, but he may soon lose that last distinction if he remains a slave to his own dogma.


googleheim said...


I have to commend your work in this blog again.

Most of the homework was done 3 years ago ahead of the curve of others, and now it's simply a matter of listening to the austrians,libertarians, and republicans .. even clueless democrats and then picking them off like flies on yesterday's pizza boxes.

Even Phil Grande at Phil's gang, though he gets the charity thing right, is constantly saying we have to borrow from China.

However, he does not mention Nixon's and Bush's China which was the act of opening relations with them to allow them to buy our treasuries in the first place.

THEN says that "we are borrowing from china" ... "we have to borrow from china" ... "we have to stop borrowing from china"

when in fact we know that we are not borrowing from their currency since the accounts are strictly USD, and when in fact we know that China's libertarian tax free zones have stolen our manfacturing bases, and when in fact we know that China is simply giving back the money we paid for their products which were sold and bought in USD.

We are NOT borrowing from China, we are funding their investment in USD Treasuries by buying their crap.

Therefore, are we better to say that we need to BOYCOTT LIBERTARIAN'S AND REPUBLICAN'S CHINESE PRODUCTS ??

mike norman said...

Thanks, Goog!

googleheim said...

thank you again.

a cross-platform, for everyone version :

"if we don't buy chinese, we cannot borrow from china nor can they purchase our US treasuries"

"every dollar of chinese bought debt, represents one dollar of purchasing their exports"

china us treasuries : $1 trillion
british : $1 trillion
japanese : $1 trillion

other european US treasuries: $1 trillion

opec savings in USD : $1 trillion

money stuck in the zombie banks : $1 trillion plus

subtotal $6 trillion

looks like a savings glut and nobody want to buy anything American USD USA

God bless America.

Anonymous said...

Hi Mike,

I think Mr. Gross is very likely to be feeling the heat right now...

apj said...

TC, I like your clunkers analogy a lot. Very apt. Dealers have been complaining about shortages for ages. Funny that. Who will buy them indeed. The data run now is nearing the performance (in terms of consensus expectations) during the GFC. The drop off is just astounding, and while we see the muppets in Congress continue to dither and squeeze past the elephant in the room, why on earth would Tsy yields rise? It doesn't make sense, and Gross is outright wrong.

Notice the talk of QE3 is beginning to make its way onto the airwaves?

Ralph Musgrave said...

The U.S. does borrow from China - (I always enjoy entering a lion’s den!). China sends more stuff to the U.S. than the U.S. sends in return. China does not ask for immediate payment. That constitutes a loan.

Whether China buys Treasuries, plonks the money in bank accounts or ships containers full of $100 dollar bills back to China is immaterial.

If anyone disagrees with the above, please send me a new car and PC. On receipt of same, I’ll refuse to acknowledge that I owe anything to anyone.

Anti said...


I think your blog's improved a great deal with the addition of your new authors and I continue to appreciate much of your commentary, but I think you're way off base on the effects of QE.

You've acknowledged in previous comments that the markets and economy seemed to respond well to news of QE2 last year and we had what seemed to me to be a very strong response to that rather weak $600 billion program. All indications to me are that the only mistake was not targeting the forecast, failing to make the program large/permanent enough to get NGDP back to pre-crisis trajectory.

Do you think it's possible that you're taking MMT too literally and that we should trust the reactions of the economy? Maybe the MMT perspective offers some benefit, but perhaps it shouldn't be taken in an absolute sense.

Chewitup said...

I seem to recall the comments being the positive market response was to the perception of what QE2 was, not what QE actually was.

On the Bill Gross frog story, I remember Pimco profiting greatly from "betting" the Fed would throw some ice into the Fannie/Freddie cauldron.

mike norman said...



mike norman said...


Love your "Wall of Shame."

mike norman said...


China gets paid when they sell of the "stuff." (Your bank account gets debited, their bank account gets credited.)

It's called a "Balance" of Trade because it balances. China sends us merchandise and we "send" them financial assets. They two sides balance. It's also a voluntary deal.

I'll send you a car when I have a very strong desire to "net save" in your tokens or when your tokens are necessary for the purchase of oil or other important commodities that I must have.

It's also nonsensical to talk about China or any other country lending us our own money. Think about it.

Calgacus said...

Quite right, Ralph. Money is debt. Since they have a lot of US money, the US does owe China a large debt, and whether it is held in treasuries, accounts or dollar bills is immaterial.

Of course it is nonsensical to talk about China or any other country lending us our own money. Our money is a token of our debt to them, which they cannot unilaterally create.

Once thinking this way, Lerner's beautifully lucid treatment of international trade in his Economics of Employment (& his earlier Economics of Control) can't be praised enough. I particularly like his observation that currency exchange rates are private matters between the two countries involved. On the other hand, the domestic value of the currency, that it not inflate, is a public matter, an international responsibility, as is each nation's responsibility to use functional finance, because depressions are contagious. (See E of E, pp. 364-367) As usual, the usual way of thinking and speaking gets things backwards.