Bill Gross Says Nothing is Going Up, So Treasury Must Intervene

Bill Gross of Pimco’s monthly newsletter, “There’s a Bull Market Somewhere?” is out and making the rounds. The title refers to a Jim Cramer dictum. The bond chief uses it to argue that asset prices are declining on all fronts, which he then contends that the US government must reverse (boldface his):

because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand….

What Happens During Delevering

1. Risk spreads, liquidity spreads, volatility, term premiums – they all go up.

2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.

3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down….

This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.

Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.

Despite Gross’ lament (his firm is a big holder of Fannie and Freddie paper, so the pain must be acute), this isn’t factually correct. As readers have pointed out repeatedly, Treasuries are in what one might contend is a massive bull market, with the ten year bond trading under 4% (it was 3.74% a couple of days ago). The dollar has rallied and Gross is overselling his case on commodites. Yes, they are down markedly since July, but over the last 12 months, they are still up nicely. 30% plus gains in a year (and some indexes are up nearly 45%) is nothing to sniff at.

The next bit is a doozy:

to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required…..we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

First, the Fed has already made heroic, unprecedented interventions to shore up banks and agency paper. The Federal Home Loan Banks have also been a less visible vehicle for propping up mortgage paper. As Paul Krugman pointed out:

And the usual problem with such intervention applies: the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.

And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality.

What Gross ignores is that we have already gotten what Brad Setser called a quiet bailout from our friendly foreign funding sources:

The roughly $30 billion sovereign wealth funds provided to troubled US financial institutions (Citi, Merrill, Morgan Stanley) attracted a lot of attention.

The (almost) $30 billion of Bear Stearns’ assets that the Fed took onto its balance sheet (as explained here) to facilitate JP Morgan’s takeover also has attracted a great deal of attention…

The $283.5 billion increase in central banks’ holdings of Treasuries and Agencies in the custodial accounts of the New York Fed during the first half of 2008 hasn’t attracted nearly as much attention….

Not all central banks make use of the New York Fed, though someone big clearly is. The growth in the the Fed’s custodial holdings consequently is a minimum, not a maximum…..Central bank reserve growth has been very strong, most because a couple of big countries are adding to their reserves at an incredible rate. The New York Fed data tells us that a lot of that growth has been channeled into safe US assets.

Tim Duy, writing at Economist’s View, put these number in context:

In the first half of this, global central banks accumulated $283.5 billion of Treasuries and Agencies, something around $1,000 per capita…. Foreign CBs are happily financing the first US stimulus package; will they be happy to finance a second? Do they have a choice? …Do not underestimate the impact of these foreign capital inflows. If the rest of the world treated the US like we treated emerging Asia in 1997-1998, the US economy would experience a slowdown commensurate with the magnitude of the financial market crisis. The accumulation of US assets is also forcing an expansion of foreign CB’s balance sheets, creating global monetary stimulus that allows the rest of the world to decouple from the US economy, supporting continued US export growth (see point 2 above).

The US simply does not have the resources to perform a rescue operation on the scale Gross envisions. If we were to attempt it, the amount of borrowing required would push Treasury yields up, undermining (more likely, more than completely reversing) whatever benefit there was from spread reduction. We’ve already seen a some interventions not producing some of the expected benefits. The Fed had clearly hoped that its pushing down of the short end of the yield curve would provide some relief to fixed mortgage rates. Instead, they’ve gone up.

Since the US’s firepower is limited, it should be directing it to the highest-potential uses. The most successful example of a modern advanced economy pulling itself out of a major financial crisis (one big enough to be included in Kenneth Rogoff’s and Carmen Reinhart’s “big five” designation) is Sweden, which wiped out the private shareholders in failed banks and recapitalized them and had its own version of a Resolution Trust Corporation to liquidate bad assets.

Nevertheless, a research paper at the Cleveland Fed on the Swedish experience noted:

In the end, the resolution occurred much more quickly than initially anticipated, thanks to the rapid growth of the Swedish economy, which paralleled the global economic boom of the 1990s. Liquidations were completed by 1997 at a smaller cost to the taxpayers than was anticipated… That being said, the cost of the crisis to Sweden was not limited to the capital spent by the AMCs [the bad bank vehicles]. There have been significant income and output losses associated with the crisis. In the early 1970s, Sweden had one of the highest income levels in Europe; today, its lead has all but disappeared. Cerra and Saxena (2005) found that the crisis caused a permanent decline in output that can explain the entire fall in Sweden’s relative income. So, even well-managed fi nancial crises don’t really have happy endings.

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  1. S

    gross is talking his book. he was on TV just threatening Paulson that he will not be the buyer of last resort. This guy is invcredible. Don’t Sh$t where you eat gets it about right. gross is s shill. He appoints Cramer a guru. End of reading. Cramer is a worse shill. He wraps himself in populism and parrots what GS and the IB execs tell him (in confidence wink wink). The two of them should be put to pasture for good.

  2. Anonymous

    I once had a margin of respect for Bill Gross. By raising Cramer to the level of sooth-sayer I feel he has lost all credibility.

  3. tk

    Gross must be pretty desperate to refer to Cramer as an example of courage and wisdom. Cramer is a parrot working for GoldmanSachs. Gross had no problem seeing the US economy imploding in 2007 when his investment strategy benefitted very handsomely. He is bellyaching now because his new strategy has backfired on him. It’s pathetic to see a professional crying for Uncle Sam to save his hide.

  4. bg

    Gross is a fine prognosticator, and a fine investor. His politics are off center, and he is talking his book. But that does not mean that we should not take his observations to heart.

  5. Matt Dubuque

    Gross citing Cramer is indeed pretty bad.

    On the other hand, it looks like Gross in on board now….which is a hopeful sign.

    Gross is clearly doing MORE than just talking his book.

    I have been publicly asserting for months now that we are facing a rapidly growing tail risk of HYPERDEFLATION, a term I apparently coined in the Financial Times a while back. That tail risk will dramatically surge no later than February of next year and needs to be competently addressed immediately. The ECB and the Bank of England need to be brought to heel. They are fighting the last war.

    HyperDEFLATION requires different policies than the hyperinflation Weimar episode of November 1923. But tell that to Trichet and his stooges at the ECB.

    As Henry Kaufman (the original Dr. Doom) has pointed out, in the event of the absolute liquidation of the world’s financial system (which I contend is occurring), the SMART money heads into the safest bonds available.

    The roaring bull market in Treasuries is entirely consistent with Gross’s scenario of a global collapse. As previously stated, the next decisive move by the Fed will be to REDUCE interest rates. Unfortunately the Fed Funds futures are, as usual, too stupid to understand this.

    As for Gross’s policy prescriptions, that’s a different matter entirely. But clearly in a crisis of this magnitude, leadership has to agree on the problem to be solved.

    I know of no single person better than Paul Volcker to smash some monetarist skulls to wake people up to what is coming down and what needs to be done.

    Recall that it was Volcker at the urging of Vice Chairman Wayne Angell, who was leading the ascendant Kansas City school at the FOMC, who persuaded Volcker to DRAMATICALLY lower interest rates in the summer of 1982 in the face of SURGING monetary aggregate growth.

    Friedman, as you should recall, was apoplectic, publicly shouting that an inflationary burst was imminent.

    It’s been 26 years. That promised inflation never happened.

    Monetarists need to study that episode before they destroy us all with their folly.

    We are talking MILLIONS of excess deaths worldwide that can be caused by stupid decisions in the next six months.

    See the Bank of Japan papers on suicide rates during their mild brush with deflation.

    And of course public health will be the FIRST item to be cut back….

    Matt Dubuque

  6. doc holiday

    Gross and Pimco need to be investigated, and this Lady Macbeth posturing is borderline criminal, with false and misleading information, i.e, I’d like to understand why the overvaluation of bond prices is not related to 50 year lows in yields; is that really a problem for Pimco to sell into this panic, which thre profit from? WE have people complaining about oil being gouged, by oh my God, poor Pimco, they have to sell securities at the top of this bubble! Out damn spots, out!

    Nonetheless, Pimco obviously wants bailed out by Treasury and taxpayers and then no doubt, Treasury will buy Fannie mortgages and stuff them into Maiden Lane-like trust accounts where exchanges will help gross and friends reap the bounty!

    Re: A newly created firm named Maiden Lane LLC was designated to hold the assets and finance a loan (Maiden Lane is a street near the New York Federal Reserve Bank headquarters in Manhattan). JPMorgan supplied $1.15 billion, which would cover the first losses from any decline in the assets’ value.

    The Fed and BlackRock are valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an orderly market …

    Total bullshit!

  7. Anonymous

    Relative terms like hyperdeflation cannot be used without bias. Economic corrections require some hardship. Seems the economic establishment’s overwhelming goal is to avoid all pain. You cannot cure a patient with some pain. These geniuses have not grasped that basic fact.

    It could be argued the entire cause of the current crisis is an irrational desire to avoid all economic pain, which naturally leads to moral hazard. Politically motivated, short-term thinking tends to do that.

  8. Lord Huggington

    Wow… a bond guy worried he’s going to get a painful haircut begging for a bailout?

    Color me shocked.

    I guess Gross is the “Fool me twice, or even 3,4, or 5 times” type of guy. Just now he’s coming to his senses? Give me a break.

    Getting a put from the Federal government isn’t an investing strategy. It’s either a suicide pact or communism – take your pick.

    This is just getting embarrassing.

  9. Matt Dubuque

    One positive note is that at least Gross recognizes that preventable foreclosures are THE accelerant on the fire.

    In terms of avoiding “pain” it is obvious adjustments, and profound ones, are necessary.

    That does NOT mean however that mindless application of shock therapy, complete with unwarranted monetarism and massive cutbacks in public health and education should be employed.

    That has produced a litany of failures around the world.

    Matt Dubuque

  10. Steve

    In April, Gross said: “I think Treasuries are the most overvalued asset in the world, bar none.”

    Maybe Bill Gross and Bill Miller share more than a first name.

  11. doc holiday

    So what is it gonna be, Treasury buys toxic mortgage pools from Fannie and Gross then collects more income at taxpayer expense? Why not just socialize Fannie/Freddie and let Gross go tits up — while, we the people “save” America? Why let some third-party fraudster con artist corporation steal directly from The Treasury and climb in bed with Paulson? In addition, since The Treasury/Fed Bed is getting so complicated and too small for just a simple ménage-à-trois, why don’t we just turn this chaos into a full blown fraud-filled orgy and set the stage lights for an erotic scene straight from Caligula?

    Is that acidic?

  12. Yves Smith


    However, the preventable foreclosures is not being addressed. The meme keeps coming up, that servicers aren’t making enough mods, and it gets dropped. And when we say “mods” we mean principal writedowns. Some of the so-called mods are catch-up-on-interest-arrearage plans, and from what I hear from mortgage counsellors, even the bona fide principal writedowns are shallow. Any rational calculus from the investors’ perspective would say deeper writedowns are a win-win, but the servicers aren’t making them. Why?

    1. Lack experience, staffing, and data to make good determination (although they can rent that from mortgage counsellors). Their loan files are often useless, and since they typically do not have a good relationship with the borrower, they can’t readily call them up to chat about their income

    2. Lack of incentive. There is clear compensation for foreclosure. My understanding is they don’t get paid for the work of doing a mod.

    3. Implications for parent loan book. If the servicing arm of Wells starts to do mods that take, say, 25% off the mortgage balance of certain types of loans, that may necessitate writedowns on loans Wells is holding on its books.

    The neatest solution for this mess was to let bankruptcy judges do mods. My understanding was that this would address the servicer economics problem (as in costs incurred via court order are reimbursable). I am also told that most bankruptcy judges come out of the creditor side, and so are reasonably savvy about debtors.

    People in mortgage counseling land were surprised that the industry opposed this idea, and they concluded it must be due to item 3.

    I am not certain if this is fully accurate, but the point is that given very large loss severities on foreclosure, there are more mods that would make sense than are being made, yet thinking about how to cut this Gordian knot has been dropped.

  13. bg


    regarding loan mods.

    I thought there was consensus that securitized loans diluted and shifted the incentive. Its like a landlord problem, except that the land is owned by a hundred shareholders, and the rental agent has no skin in the game.

    I also wonder if there is an oligopoly effect… the big players have a lot to lose, and in oligopolies the first mover loses the most.

  14. Russ

    re: load mods

    bg makes good points, although if the cramdown is based on seeing the fraud of the original appraisals the investors won’t have a leg to stand on.

    On the other hand, when we say “investors” we’re mostly talking pension funds (including lotsa government funds) and foreign government entities. A judicial cramdown may be looked at as a backdoor way of repudiating foreign debt, and impartiality may be lost when a judge’s pension fund is (or isn’t) on the line. Another question is how much bankruptcy case volume the judicial system can handle at a time.

    We haven’t even hit the OptionARM problem loans yet, so maybe the bankruptcy cramdown is inevitable once we hit critical mass.

  15. Anonymous


    Mods for someone who has already taken significant equity out of the house via the ATM window? How do you Mod a loan that started out for say 250K now up to 550K via serial refi, which is very common here in Calif.
    Most of these folks either have no skin in the game or have sold the house via equity withdrawl.
    Now toss in the fact that the house is only worth 300K today and the problem becomes of MODS become a little more clear!

  16. Mark

    Meanwhile, back on the ranch, the big three automakers want $50 billion in bailouts…

    I guess Gross wants to get in line before all the handouts run out.

  17. esb

    At least Gross is now seen clearly for what he is, a trader who wants to buy in the open market and sell to the Treasury (at a higher price).

    Never, never never take your analysis from someone with a mountain of paper for sale, and a performance review approaching.

  18. Dean

    BTW do not confuse Gross’ comments as an affirmation on Cramer. Gross has a very unique style of humor and a masked but penetrating sarcasm; he is obviously joking as he poses to be a Cramer admirer. Quite the opposite.

  19. Matt Dubuque


    As recently as a week ago, Obama stated he would support giving BK judges the power to adjust mortgage terms in bankruptcy. No matter who wins the Presidency, the Democrats, many of whom favor this approach, will increase their majority in Congress and seem likely to put precisely this bill to whomever is elected President.

    If current macro trends continue and accelerate, that would be a tough one to veto.

    But of course more damage would have been done to the economy and families if we wait till January.

    I wish I had more solutions. I think this is an excellent start. I sincerely hope the next President would bring Volcker in as a top policy maker so the Fed would have a competent counterpart at Treasury.

    Volcker has the credibility from all the parties that really count and he is more than just an academic, which you seem to hint (correctly, in my view) is Bernanke’s biggest failing.


    Soros’ plan at first looks appealing, but I have deep reservations about establishing a precise amount (such as 25%) for modifications for a variety of reasons, including broad variability in the housing market from Boston to San Joaquin County in California.

    Perhaps more importantly Dean, I fear that IF Soros’ plan did not work AND housing prices continued to plunge at a dramatic rate even 9 months AFTER its implementation, the psychological impact and despair could be devastating.

    I obviously don’t have all the answers here, but I do have deep reservations about overshooting any “target” (such as 25%) that would be legislated.

    Feldstein seems to expressed similar reservations last week. I’m no huge fan of his, but in the last month or so, he seems to be in rare form. I hope it continues.

    Matt Dubuque

  20. S


    Seriously been reading here on this blog for a while and you are obviously a political plant. That is ol. But in the meantime please at least disclose to us all that you work for Obama or the Fed.

    As for yur “ideas” or Obamas ideas, agree on fed cutting rates, with the likley outcome wider credit spreads and still flattish NIMs. Did you miss the WF 9.75% paper?

    Invoking suicide rates is like invoking the two chaps who jumped out the window in the great depression. It is pure hyperbole.

    You are overly concerned with hyperdeflation but where were you when the sanity police where screaming hyper-inflation during the housing boom and HELOC ATM raid. Absent. So now we are suppose to feel sorry for PIMCO (private capital mind you) and overleveraged homeowners with neary any equity ever in the game to begin with.

    Deflation rewards savers and we have none. Inflation rewards leverage and you want more. Not going to happen. printing and lower rates are ouncorrelated with velocity. It is not a tad ironic that we have heard for the past few years about the health of corporate balance sheets. Well good, because the debt service cushion will be needed with the declining top lines and margin compression settle in. I mean employees have been seeing wage compression for a decade plus. But that deflation is the good kind I suppose.

    The logic of your rhetoric is gravely flawed. Can I ask you with all the certitude if you are long the short end for the ride down? Or playing the funds contract?

    Also illuminate us as to what exactly cutting rates other than putting us ahead of the curve whatever that means has done thus far other than blow out spreads? cutting rates is obiosuly not the anwser hence the alphabet soup of programs. writing down mortgages is unamerican and an uneconomic decision for 95% of those at risk. As for banks, ring fence deposits and send the rest down the river. Even that, where is the $4 trillion plus going to come from after netting the assets? Don;t know what tat net liability is but shouldnt we save our firepower for this noble task as opposed to bailing out the pompous shill Gross.

  21. Anonymous

    Some guy with the initials JS has been saying for quite sometime that there is no practical solution to over the counter derivatives (unregulated) bust. Markets just now figuring this out? Hell no, it continues with narrow visions of public bailouts.

    If your lucky housing will bottom in 2010. Every REO sale just ruins the neighborhood values, taxpayers will backstop GSEs but receive nothing in return, having to endure the debt for generations.

  22. Anonymous

    The concept of “hyperdeflation” is utter and total nonsense. Even if one assumes that some assets have liabilities which could theoretically bring about a resultant negative value, there is nothing “hyper” about it. In fact, as bargain hunters inevitably step up to the plate, “hyperdeflation” is ridiculous if for no other reason than the rate of decline is inhibited by said process.

    We’ve all heard the story about the student ordering coffee in Wiemar Germany…and finding that the second cup cost more than the first. Do you really envision such a coffee shop handing money back to the student and saying, “Here you go son, the price of coffee is declining so rapidly that your second cup is cheaper.”

    Self-aggrandizing bullshit artists take note: spare us the idiocy.

  23. Yves Smith

    Anon of 11:53 PM,

    Please refrain from personal attacks. The ad hominem comment at the end wasn’t necessary to make your point.

  24. Anonymous

    Take what Gross says with a grain of salt. I once did an internship at a very famous investment firm run by a venerable old investor as well known as Bill Gross and equally adept in his frequent market commentaries. Those commentaries are not some profound insight into the markets (that is the way they are packaged though). Instead, in my one extended interaction with him, this old guy made it pretty clear that a) he was fully aware of his role as a market mover and b) the commentaries are pure marketing for the firm and for himself….and time after time, they work.

    Regardless, in the long run, we (the little guys of the world, not the Bill Gross’s) will benefit from a hard landing. Government intervention in this case will just force another asset bubble to pop up elsewhere. If the government ever starts buying assets on the scale that Gross wants, we will have entered a full blown socialist state.

  25. Francois

    Well Bill, if nothing is going up, just short the whole darn thing and STFU!

    What wrong with this guy? Never heard of a put option?


  26. Francois

    “The concept of “hyperdeflation” is utter and total nonsense.”

    Once you remove the prefix “hyper” (after all how much deflation is hyper, super or, excessive or…you get the idea) is it really such a stretch to figure out that deflation is what is coming right now?

    of course, not everyone agrees with Shedlock about that, but he present a rather compelling case that I would hesitate to summarily dismiss.

  27. Richard Kline

    As you know, Yves, I am much for giving judges a blanket option to do mortgage mods, preferably a process defined by statute, and ideally scaled toward ‘pre-packaged’ agreements between the mortgage parties. We won’t get anything like this until after the election, really until a year from now at the earliest, though.

    But I am wholly unsurprised by the slow pace of existing mods. There are two broad issues there, to me. First, the face value of _virtually all mortgages issued or refied in the last fifteen years_ is bogus, numbers tied to bubble marks, and thus all but assured to decline. That doesn’t mean that all borrowers will be able to bet a ‘do-over’ write down—but we can bet that nearly everyone who sees a decline will try at some point to negotiate down. And that’s quite aside from the evident fact that a fat share of present mortgage holders simply cannot afford the payment they have or will acquire in the next three-four years. So servicers, and behind them the holders of these mostly securitized mortgages have to be worried about legions of ‘the declared poor’ descending upon them screaming for a break if said servicers announce loudly that they are open to workouts.

    The strategy in Capitalville is never give the debtor a hand but make them come to you hat in hand, and give up as little as possible. Servicers are doing the Silent Number to intimidate debtors into agreeing to minimal cramdowns, i.e. maximum payments. As things are now, every debtor going for a mod is an isolated individual and a ‘failure,’ having to argue with Big Money alone and afraid, which is just what Big Money wants so as to ‘give back’ as little as possible. If debtors go on strike, or descend on a servicer in numbers, or even word gets out that “You can get 25% off with X Group,” their leverage is gone. In stead, the note holders Just Say “Owe,” and hold out for 2.5% off of face. This is greed, to boil it down to the flint nodule in its heart.

    Second, as we’ve all been round in the Spring on NC here with you, is the shear complexity of the terms. Less than level buyer declarations on things like primary residency; skewed appraisals; equity extractions; holders of seconds who won’t give up and walk away yet barring BK which hasn’t been declared; suspect up-selling of mortgages; ambiguous holding of title in securitization contract entities. Etc., etc. It will REALLLLLYY BE THE CASE in my view tha some many of these situations are simply unresolvable outside of summary judgments in court; that is, that claims, counter-claims, and simple car-accident paperwork guarantee the failure of any normal negotiation process. Which said process given point one here is _not sought_ by the note holder. Oh, servicers and noteholders would love to avoid the costs of foreclosure—by browbeating the home buyer into paying far more of the existing face than they can even if that’s a pittance less than the face they presently owe.

    In one sentence, writedowns mean that those with claims admit that they’ve lost money, and they can’t and won’t admit this of their own accord, especially when they still believe that they hold all the cards against individual debtors.

  28. Dean


    What you are describing stems from a traditional (old school) lender notion that borrower has some skin in the game (for LTV<80% that is/was true). However, we have a new loan breed today closer to 100% financing and in some cases 110%. Under such scenario all risk regarding the loan is held by the lender not the borrower. The negotiating leverage you speak of boils down to a realization that as a lender you either work with your borrower (adjust to his/her serviceable limits) or you own the keys.

  29. Anonymous

    “The US simply does not have the resources to perform a rescue operation on the scale Gross envisions.”

    If one were attempting to tie the hands of the next administration, this would be just the kind of event that might work. It would limit discretionary spending within bounds placed by the current administration.

  30. Jim Pivonka

    Perhaps (heh!) my background and location distort my perception – but it appears to me from attending land sales in Kansas and reading about land in places like the Czech Republic and Russia that the asset which is still experiencing a bull market is land.

    Except in Russia, and perhaps Canada, the supply of land available for agricultural use is pretty well fixed – barring continuation and acceleration of disastrous deforestation in the tropics. And increasing dought will offset any supply increase from that source.Russian agricultural policy is currently focused on increasing the capital intensity of its corporcollective farms, rather than on revitalizing its rural communities and increasing land under cultivation by freeholders.

    Land is also a preferred value sink for the burying of “amenity capital”. By which I mean the conversion of financial capital from productive assets to non-productive amenities when it is held by people so rich that they are more interested in the posession of amenities, like land in Montana and Paraquay (and in speculating in water rights, as Bush in Paraguay and others in the Caprock/Oglallah area in the Great Plains).

    Without the training to do serious analysis I am left with the following intuitive conclusion: We are moving into an era in which (as demand is suppressed by relative decreases in income of the less advantaged and the capital accumulations of the wealthiest incease) capital will flow out of investments in industrial production (as it has already from public infrastucture) into land and land based natural resources. This shift will be motivated by low returns on production investments due to suppressed consumption, the amenity preferences of the very wealthy, and speculation in resources – including agricultural and raw material production.

    This amounts to a permanent depression in the economy that has characterized the post Industrial Revolution economy and a return to that familiar to the physiocrats – and their feudal predecessors. All driven by growing inequalities of wealth and income.

    Land values will increase – and freeholders will be placed under great pressure to sell to the accumulators by whipsawing in the cost/revenue cycle of normal agriculture.

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