Wednesday, October 27, 2010

Ponzi Schemes and Liquidity Traps

Bill Gross of PIMCO is out with his November newsletter.

Here are some key statements:
  • We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal?
  • We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole.
  • Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.
  • Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.
  • Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further.... The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.


Now Let's Play Punish the Saver

More from Gross's Newsletter:
Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates.

Here is PIMCO's next (stated) investment strategy, in the last section of his newsletter, since bonds are dead-in-the-water for the foreseeable future:
Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.”

Is it any wonder that everyone thinks the answer is to own farmland?

What a sad state of affairs our country is now in when faced with elections in which no citizen in their right mind wants to vote for any of the candidates, realizing that the system itself is badly broken, redistricting, our two-party system, and corporate power, to name a few of the biggies. Gross's letter's theme is such.

On a personal note, I rarely turn on the TV, but I had a rude awakening about a week ago when I decided to watch the national evening news while cooking dinner. Hence, the insane political ads that I was deluged with came as a shock to me and reinforced why I don't watch MSM evening news in the first place. As Gross said in this newsletter, the things they are stating in their assassination-attack-ads are not the things that we care about, want to hear about, or that really matter to this country.

Let me add that the fact that they think we are that stupid infuriates us, or, in many cases condemns us to apathy.


  1. Kalpa,

    I am very confident that the following is true.

    The men and women behind the curtain who pull the strings, don't care whether we are that stupid or not. They just want us to hate all politicians, which will make them much easier to intimidate with threats of a well-funded opponent in the next race. It really matters very little who wins a seat as they are automatically captive to the string pullers.

    The class war ended in decisive victory for the plutocrats and some of their auxiliaries in the oligarchy. It wasn't a close contest for at least half a century.

  2. It really matters very little who wins a seat as they are automatically captive to the string pullers.


    Some, I hate to break it to ya, have egos the size of Manhattan convincing them that they are the best thing that can happen to this country.

    What sane person would want the job?