The Bond King, Bill Gross Weighs in Against Monetary Easing

Bill Gross Against QE

For the past few days the chorus has been getting louder: Monetary easing does not work and creates structural imbalances in the economy leading to systemic risks and asset bubbles.

Today Bill Gross weighed in with this “Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution.”

Bill Gross runs the largest bond fund, Pimco Total Return so he knows a few things about fixed income securities like US Treasuries and Mortgage Backed Securities -the ones that the Fed is buying to the tune of $85 billion a month in a bid to boost the economy and the financial system.

The Fed is the primary buyer of these securities. If the Fed were to taper their purchases or stop buying them altogether who would buy them? Other buyers surely would want a higher return which would cause interest rates to rise.

You can figure out what happens then.

The nasty scenarios you might envision are why the Fed is in a no win situation. It can taper and risk imploding the “recovery”, the stock and real estate markets or it can keep up the purchases risking a larger crash later. My guess is they continue to talk tapering while continuing to print money to buy US Treasuries and MBS’s.

Whatever choice the Fed picks will require a lot of luck to stave off a crisis.

I hope the Fed feels lucky.

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