Philip Pilkington: What Has Bill Gross Been Reading?

By Philip Pilkington, a writer and journalist based in Dublin, Ireland

Question: what on earth has Bill Gross been reading? Gross has long been an acolyte of Hyman Minsky, or so he says. But his recent piece in the Financial Times entitled ‘Zero-Based Money Risks Trapping Recovery’ has a lot of people scratching their noodles.

Look, Gross is trying tell the world that ZIRP policies might be stalling recovery and there is certainly a case to be made that the ZIRP policies are, at best, a two-edged sword – indeed, there’s the even more important case to be made that ZIRP policies may be leading inflation hedgers to pour into the commodities markets, causing both an unsustainable bubble and rising price inflation for households. So, you have to sympathise with Gross for swimming against the tide in this regard.

But really, what is all this strange talk about Minsky and Keynes he throws into his piece? Poor Hyman is mentioned nine times in Gross’ thirteen paragraph article and yet, to say that Minsky has been misrepresented would be an enormous understatement.

As he kicks off his argument Gross writes:

Likewise, the deceased economic maestro of the 21st century – Hyman Minsky – probably couldn’t have conceived how his monetary theories could be altered by zero-based money. Minsky… probably couldn’t imagine the liquidity trap qualities of zero-based money.

Say what? Did Bill Gross just claim that Minsky could never have imagined a so-called liquidity trap environment in which interest rates were running as low as possible and the economy continued to stagnate? Has Bill Gross actually read Minsky?

In fact Minsky discusses the liquidity trap at multiple points in his work. Here is a brief passage from his analysis of the ISLM framework in his 1975 book John Maynard Keynes (p.36):

The view that the liquidity-preference function is a demand-for-money relation permits the introduction of the idea that in appropriate circumstances the demand for money may be infinitely elastic with respect to variations in the interest rate… The liquidity trap presumably dominates in the immediate aftermath of a great depression or financial crisis.

Yeah… sounds like Minsky was pretty well aware of the potential for a so-called liquidity trap. (Whether such a concept really had much to say about his more mature analysis, which included an endogenous approach to money and credit creation, will be left up in the air for now). But then Gross’ article gets even weirder.

Who could have conceived 30 or 40 years ago that interest rates could ever approach zero for an extended period of time? Probably no one.

Hang on a minute… what? Did Gross even Google the term ‘liquidity trap’? While the term seems to have originated with Hicks, the concept was introduced by Keynes in his famous book The General Theory of Employment, Money and Interest – written in 1936. From the chapter entitled ‘The Psychological and Business Incentives to Liquidity’ (hmm… precisely the topic Gross discusses in his article…):

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.

Keynes admits that he has never come upon such a phenomenon. But it is clear that he certainly ‘conceived’ of it. Indeed, in the same paragraph he even alluded to what might be done under such circumstances:

If such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.

In other words, the government could spend its way out of the depression. But then wasn’t that the point of the whole book?

While it’s nice to have someone of Gross’ stature and talent boosting the theories of Keynes and Minsky, I think we’d all appreciate it if he did a little reading to ensure… that he is actually boosting the theories of Keynes and Minsky.

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  1. John Regan

    I don’t know if they thought of this one, though: you might actually spur some borrowing by beginning to gently raise rates. If people think money is getting more expensive they’ll borrow now rather than later, just as there is a tendency to pull back on borrowing money when it’s getting cheaper because you think you might be able to get it cheaper later on.

    Do Keynes or Minsky get into that?

    But honestly, I don’t think raising rates would work either, at the point. The problem is debt saturation, and the only solution is debt cancellation. A reset. A jubilee.

    1. Because

      Raising rates in a liquidity trap gives you 1931. You want to break the trap, increase government purchases. That will end the zerobound. The whole point of the Minsky/Keynes doctrine. Heck, even the little ARRA was beginning to weaken the trap in the spring of 2010 as rates rose. But we didn’t continue on.

      Right now, we are muddling waiting for the banks return to solvency to have a massive write down of debt breaking the trap. That is the Washington Consensus model.

      1. Attitude_Check

        If no-one wants debt, but prefer cash, then how is the government going to deficit spend if it borrows (from whom?). The requirement is naked printing to finance the spending which will significantly devalue the $. It could be argued that is what is needed to enable the US to re-establish balanced trade, but the potential of hyper-inflation switching on all of a sudden if foreign $ holders decide to buy anything they can while the $ has value could suddenly increase $ velocity all at once — hence inflation to hyper inflation.

        Steve Keen has a better (but not painless idea). Have the government give everyone some freshly “printed” money with the stipulation that debt must be paid first, and any remaining after paying debt can then be used for purchases. Effectively government printing goes straight to deleveraging, and not to consumption. This improves the balance sheet while minimizing the possibility of a rapid increase in monetary velocity and very destructive high/hyper inflation.

        1. skippy

          How do you insure compliance.

          How do you rectify any fraudulently issued debt.

          How do you change peoples perspectives of their not so distant losses (investments) in 08 and on going. Twas an illusion anyway.

          Skippy…. What will the sovereign neighbors say?

        2. j.grmwd

          The vast majority of foreign-held $US are in the hands of foreign central banks. Unless you expect the Bank of China to start handing out millions of $US dollars to random peasants, I don’t see a credible transmission mechanism for foreign dollars to avalanche back into the domestic economy.
          Steve Keene’s ideas are great but they’re just deficit spending by a different name and an unusual mechanism.

        3. enouf

          Perhaps some very silly and naive questions but;

          a) Why does everyone presume borrowed money requires that Interest (of any form) be tied to it? What’s wrong with borrowing and paying back exactly the same amount?

          b) Why do Sovereigns even need to borrow at all? (and please don’t give me the “we need to fund wars” bullshit).

          and if you can answer those in a rational manner, please follow up with;

          c) What’s wrong with total liquidity only? (if everyone has it) Which really loops back to answering question (a) above.



          1. enouf

            hrm ..well seems nobody wants to answer/reply to my questions– maybe they’re harder to answer than i presumed.

            This one should be dead easy though;

            a) Why does 1 USD today purchase roughly 20x less today than it did in 1913?


    2. David B. Schuster

      Raising the interest rate would have the same effect as a debt jubilee, resulting in widespread defaults. Already insolvent banks and consumers would be devastated. I often wonder who Bernanke is protecting.

      1. KnotRP

        >> If such a situation were to arise, it would mean that the >> public authority itself could borrow through the banking >> system on an unlimited scale at a nominal rate of interest.
        > In other words, the government could spend its way out
        > of the depression. But then wasn’t that the point of
        > the whole book?

        That’s a big leap in logic:

        1. Keynes says public borrowing would be unlimited.
        2. ?
        3. You say the government could spend its way out of a depression.

        Its not that simple.
        For one, people anticipate and react to debt-financed (as opposed to revenue growth financed) government spending in ways that are apparently outside the reach of people who don’t study such systems. And that’s without even talking about *what* the spending accomplishes (investment for the future, or malinvested to line someones pocket?)

        But sure, central economic planning will work any day now….it just hasn’t been tried. Or tried hard enough.
        Or something.

        1. j.grmwd

          Actually in the real world they don’t. There is zero empirical support for the theory that people react differently to debt-financed spending as opposed to any other kind of spending.

          1. Philip Pilkington

            P.S. Is there any such thing as ‘non-debt financed’ spending? All money is someone’s debt when you trace it back. It just depends on whether its a private individual’s or a governments.

          2. j.grmwd

            Obviously, there are individuals who react to government spending as you say, perhaps by hoarding gold. That’s a zero-sum game that some will win and some will lose.
            However at the macroeconomic economic level that I’m trying to address there just isn’t any positive correlation between personal saving rates and government deficits as would surely have to be the case if the kind of Ricardian effects suggested by the original commenter were significant.

        2. Philip Pilkington

          “But sure, central economic planning will work any day now….it just hasn’t been tried.”


          1. Fiver

            That’s right. We must recreate the conditions of Total War. Those were the glory days – the greatest waste of resources and human spirit the world had ever seen – until the ’80’s and every decade after.

  2. craazyman

    “liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest.”

    How can a debt yield so low a rate of interest if nobody wants to hold it? The reason the rate is so low is because so many people are willing to hold it, even at such a low yield? If they weren’t willing to hold it, the yield would not be low.

    If Keynes were here, I’m sure he’d have an answer that would probably seem like it made sense. However, it may be that the monetary authority never really did have effective control over the rate of interest, although it appeared that it did.

    Just like it appears that you have control over your own pysche, but if you confront a unique enough set of circumstances, you’ll realize you are in fact not really the one running the show. And by the fallacy of composition, you realize that nothing is really in control except strange things that have no names.

    There must be a dead economist somewhere who has theory for this. Or I must be missing something.

    And Minsky. Good grief! What is “The view that the liquidity-preference function is a demand-for-money relation permits the introduction of the idea that in appropriate circumstances the demand for money may be infinitely elastic with respect to variations in the interest rate” supposed to mean? Infinitely elastic demand for money would imply an equally infinite supply of money. I think, anyway. You would not be able to observe the phenomenon, except through its manifestation. So how would you know?

    Glad the sunshot from last week is over. It really wiped me out. I don’t think Mr. Taibbi has been the same since. But he’ll recover.

    1. j.grmwd

      Well, in graphical terms, infinitely elastic demand is just a horizontal demand curve. It implies nothing about the nature of the supply curve. No actual infinities required and perfectly observable in the real world. The horizontal demand curve is after all the whole basis of the theory of perfect competition.

    2. PianoRacer

      It’s like they’re all playing the same video game, like a financial MMORPG. They have zealously documented the rules, mapped out all of the play areas, and concocted the optimal strategies to succeed against the various enemies. They can even predict each other’s behavior because they’re all playing by the same rules with the same goal (profit). It never even occurs to them that the servers could be shut down and hauled away, never to return.

    3. Philip Pilkington

      “How can a debt yield so low a rate of interest if nobody wants to hold it? The reason the rate is so low is because so many people are willing to hold it, even at such a low yield?”

      You’ve got to look at the effect the central bank’s rate of interest has on yields. It tends to drive them. And when it drives them low and there’s no ‘real’ places to invest and you’re reluctant to spend, you may prefer to hold money.

      But you’re right to call Keynes on this one. I think his discussions of ‘interest rates’ in the abstract is often a bit confused/confusing.

      P.S. Regarding the infinite demand-for-money argument. You have to take it in context of the ISLM model (I know, wonk alert). What Minsky means is that at a given rate of interest (presumably low, probably zeroish) people will choose to hold money rather than spend and invest.

      In the ISLM model if the interest rates are lowered it is assumed that the supply of money (the LM curve) is then increased and that this will have corresponding effects on savings and investment (IS curve). But in a liquidity trap people just grab the hold the money. That’s why Minsky says its infinitely elastic — he means its infinitely elastic in relation to the usual (presumed) relation between money supply (LM) and investment and saving (IS).

      P.P.S. I think the ISLM model is nonsense. And I think the liquidity preference theory should be thrown out. I think Minsky would have broadly agreed, especially in his later work. I’ve almost finished a rather long piece on this. Hopefully goes up next week?

      1. Philip Pilkington

        “In the ISLM model if the interest rates are lowered it is assumed that the supply of money (the LM curve) is then increased and that this will have corresponding effects on savings and investment (IS curve).”

        That’s actually a bit backwards. It should read something more like: if money is extended interest rates stay flat because (a) they’ve hit the floor or (b)they have no effect on savings and investment because people just hoard the extended money.

        God, I hate the ISLM model. It takes effort to think in this silly way when you recognise how badly this represents the credit creation system…

  3. ambrit

    I had an all thought out bit of snark ready to put up regarding the dreaded liquidity trap when it hit me; who the H— do I think I am to opine about a technical subject even the ‘experts’ disagree on.
    As far as economics, indeed anything else societal is concerned, let’s look at the historical record and learn from the mistakes of those who went before us. Apply the Scientific Method to the subject.
    I know it has become somewhat a struggle between competing sects, but there was a Great Depression, and Keynes did formulate a system that brought us up out of it. (For those of you who say it was WW11 that did the trick, consider; WW11 was won by a society that had been kept together and not allowed to dissolve by the methods advocated by Keynes and the other New Dealers.)
    Be pragmatic a moment and you discover that appeals to chimerae like ‘rugged individualism,’ ‘compassionate conservatism,’ and ‘ubermenschen’ fail every time.
    Trickle down economics has failed for those who matter, the people. Time to throw it on the rubbish heap of history, where it belongs.

  4. Hugh

    Isn’t Gross just talking his book and grousing about the effects of ZIRP on bonds and bond yields?

    1. skippy


      Skippy… Bill only thinks, of Bill.

      PS. Philip if your confused to his logic, I can dispel it, he wrote it at the bar and after a few drinks.

  5. Max424

    “In other words, the government could spend its way out of the depression. But then wasn’t that the point of the whole book?”

    Yeah it was. Unfortunately, the US government has decided not to borrow its own free money. It’s too damn dangerous. We might have to pay it back to um, to…um…to ourselves?

    Other people are borrowing that free money*, though. They’re not scared.

    The Dow is sitting at a robust 12,878! Only 12 hundred or so points to go, and we bust through the all-time high (14,093)!

    And we’re gonna do it. Congratulations Ben, the Bernanke put is greater than the Greenspan put (which was a pretty great put indeed).

    *In fact, in many cases, they’re getting paid to borrow that free money. Why the US government doesn’t do the same thing is beyond me. It’s almost like the US government no longer works for the US, but for someone else entirely.

  6. brian

    zero interest rates
    thanks to zimbabwe ben and his sidekick timmy working so have to look after the interests of their bankster friends

    one mans story
    they have cost me over the last 4 years or so an average of $6000 dollars a year in interest income
    i would have spent almost every dollar of it in my local town on various goods and services
    my own mini stimulus
    i suspect i’m not alone

    and don’t tell me to seek a higher return in the ponzi game/casino/criminal enterprise known as wall street

    1. ambrit

      Dear Brian;
      It’s about time to introduce those long haired quackademics to Dr. Guillotines one size fits all tonsorial palace. Talk about a close shave! Haircut anyone?

  7. Pwelder

    The money quote in the piece by Bill Gross is down at the end:

    “What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is 2 per cent of par and the downside substantially more?

    Maturity extension for Treasuries, and then for corporate and private credit alike, becomes riskier. The Minsky assumption of rejuvenation once the public sector stabilises the credit system then becomes problematic. Instability may slouch back towards stability, but that stability may resemble more closely the zero-bound world of Japan over the past 10 years than the dynamic developed economy model of the past half century.

    The global economy’s quest for a modern-day Keynes or Minsky may be frustrated by zero-based money that rations credit just as fiercely as it does risk. Minsky’s economic theory is now at the zero-bound.”

    Phil P. and Krugman (in his NYT blog this AM) – both usually a worthwhile read – dumped all over the Gross column. IMO both of them whiffed badly on this one.

    Krugman whipped out an Econ 101 model as if that were all it took to settle the matter. To my mind it was not a very interesting or helpful response to the Gross argument, which starts from the premise that these models don’t capture important aspects of present-day financial reality. Pilkington says he remembers his Minsky more clearly than Gross does. That’s probably true, but so what?

    Gross is a bond trader, and a year ago he happened to be mistaken about the near-term outlook for Treasuries. So let’s stipulate that everybody here is not only smarter than Gross, but a better all-around human being. With that off the table, let’s consider: Is there any chance Gross is on to something important that Pilkington, Krugman – and Bernanke – have not yet taken on board?

    I’d vote the affirmative. Daily experience and a wealth of anecdote strongly suggest that ZIRP isn’t working. In FDR’s day they would by now be trying something else.

    1. j.grmwd

      Pilkington, Krugman (to some extent), Koo, Post-Keynesians, MMTers etc. have been saying for longer than anyone, years even, that monetary policy is no solution. Why should Gross get the credit for being “onto” anything ?

      1. Philip Pilkington

        The Krugster still thinks negative real interest rates would have an effect. I think Gross is ahead of him in this regard…

    2. Pwelder

      “… ZIRP isn’t working.”

      I know I know, it’s working fine if all you care about is a stealth recapitalization of the banks.

    3. ambrit

      Dear Pwelder;
      “In FDRs day..” Indeed, such would be the case today too if the ‘experts’ surrounding both flavours of politico had a clear understanding of macro socio-economics. That can be persuasively argued as being the proper preserve of politics. However, the two realms function like one of those Venn Diagrams we all encountered in grade school. The two circles overlap and commingle. The proper function of advisors is to educate the patron so he or she will make the best choice, not make it for them. Complicated as the job assuredly is, the POTUS has no excuse blindly taking the advisors recommendation on faith. The advisor might just belong to a different faith than that of the POTUS!
      Look at the backgrounds of the FDR ‘Brains Trust’ versus that of the BushObama ‘Wrecking Crew.’ The whole sad story is there; just ask the Chileans.

      1. skippy

        “In FDRs day..” … ambrit.

        Nay it is not.

        Skippy… one big game of chicken, played out with electrons.

        1. ambrit

          Dear Skippy;
          It feels to me like a game of kick about in the middle of the highway. Funny how we groundlings never get to spend any time in the corporate sky box.

    4. Philip Pilkington

      I have opined regularly on the dangers of ZIRP and I clearly say in the piece that I’m sympathetic to Gross in this regard.

      But to my mind he’s trying to claim that two of the 20th century’s most important economists didn’t think through a certain situation — while one of them clearly did (Minsky — and in a more profound way than Gross) while the other invented the bloody concept!

      He has to be called on that…

      1. Thisson

        I actually think you’ve misread Gross’s column by taking Gross literally. I don’t think he’s arguing that Minsky couldn’t *conceive* of this situation conceptually – I think he’s saying Minsky would be shocked that it’s actually occurred and is here now.

        Nevertheless, I think Keynes is wrong that the government can spend unlimited amounts to get us out of a depression. If the government attempts to do so, there will be a bond strike, interest rates will spike, and there will be defaults.

        One way or another, there will be defaults before any real recovery can begin.

  8. Ziggy

    Gross wrote a similar FT column about a month ago. Both were adaptations of his monthly investment outlook. His point is that ZIRP is, perversely, not reflationary but deflationary because a flat yield curve at the zero bound induces delveraging, thereby causing credit contraction instead of credit creation. Personally I think his analysis is spot on and brilliant.

    1. skippy

      Query to Ziggy…

      Whom will issue the credit, securitize it, buy it and insure it?

      Skippy… who do you reinvigorate fraud?

    2. j.grmwd

      If you’re quoting him correctly, that’s a truly bizarre causal analysis. Low interest rates “causing” net deleveraging and credit contraction. Correlated with, yes. Causing, no.

      1. Ziggy

        Here are a few excerpts from Gross’s Dec. 20, 1011, FT column. Hopefully they will give you a better idea of the causality.

        “Zero-bound money–credit quality aside–creates no incentive to expand it.”

        “A good example would be the reversal of the money market fund business model where operating expenses make it perpetually unprofitable at current yields. As money market assets then decline system-wide leverage is reduced even if clients transfer holdings to banks, which themselves reinvest proceeds in Fed reserves as opposed to private market commercial paper. Additionally, at the zero bound, banks no longer aggressively pursue deposits because of the difficulty in profiting from their deployment.”

        “It is not only the excessive debt levels, insolvency and liquidity trap considerations that delever both financial and real economic growth; it is the zero-bound nominal yield, the assumption that it will stay there for an ‘extended period of time,’ and the resultant flatness of the yield curve which are the culprits.”

        “When the financial system can no longer find outlets for the credit it creates, then it delevers.”

        1. j.grmwd

          Still a mystery to me what he’s going on about. Obviously, a financial system that can’t find an outlet for its credit delevers. The fact that the money market fund business model fails under these conditions seems neither here nor there. The banking system as a whole never needs to “aggressively chase deposits”. A loan creates a new deposit which ends up back in the system somewhere. True, under normal conditions, the cost of attracting a new customer might be less than taking a loan from the Feds, but the system-wide need for reserves is always accomodated. The elephant in the room in all this, the thing that Bill Gross seems determined to ignore, is the flipside of the coin -the borrower. Why doesn’t cheap money just fly out the banks doors ? Because the borrower sees no realistic chance of generating a positive cash flow with it. Hidden beneath all the layers of financial intermediation, that’s what it comes down to in the end. Ultimately, I think that Bill Gross is trying to create his own self-serving bizarro universe economic narrative where raising interest rates in the face of 8-9 % unemployment is actually the right thing to do.

          1. Thisson

            You’re onto something here. And the *reason* the borrower cannot deploy those funds to earn a positive return is…. *costs* in the system are too high. Taxes, rents, regulatory costs, insurance, etc. are too high. The solution is that these costs have to come down. Instead of propping up housing and increasing taxes, the Government needs to get out of the way and allow costs to decrease in order to induce growth in the real economy.

          2. j.grmwd

            Well the tax take as a percentage of GDP in the US is already the lowest in the developed world (with the exception of South Korea). And has only varied within a couple of percentage points for decades. Only two costs skyrocketed leading up to the crisis. Private debt service. And linked to that, the cost of criminal fraud within the financial industry.

        2. Philip Pilkington

          Bill’s language is hopelessly confused (trend here?). But I think what he’s saying — in the most roundabout way possible — is that ZIRP lowers profitability and profit incentives for banks and other creditors.

          Warren Mosler has made this point for years and I did an article recently here:

          Our focus was on interest income.

          I’m not so sure what Bill is focused on. Maybe the incentive to invest? If he is he should probably step outside the financial sector for a moment and look at what’s REALLY killing the incentive to invest: lack of demand. (Which is why Mosler and I focus on that).

          1. j.grmwd

            Well if he’s simply making the observation that it’s a bad time to be a financial middleman then he’s undoubtedly correct. The question is, why should anyone who isn’t a financial middleman give a damn ? He’ll get his livelihood trading bonds back when the rest of us get a fully functioning economy back.

          2. Philip Pilkington

            I’d tend to agree. But there is a case to be made (in the link above) that lowering middlemen’s profitability might suck demand out of the economy. There’s also a case to be made that this can hurt pension funds and insurance companies and the like.

            All of this affects demand, which is the underlying problem. I doubt Gross sees this though. In fact, I doubt Gross sees anything beyond his own portfolio…

          3. j.grmwd

            Yes, one has to suspect that this is all pretty self-serving when his warnings about the distortionary impacts of ZIRP aren’t combined with a ringing endorsement of new fiscal policy, industrial policy, labor policy. Something constructive.

  9. Maximilien

    “‘If such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.’

    In other words, the government could spend its way out of the depression.”

    I read somewhere that Keynes never envisioned a (Western) government to which no one would lend. He presumed that it could ALWAYS borrow.
    Yet the very thing he never thought about is happening today.

    As US government borrowing has increased, willing lenders have grown scarcer–and more wary. More and more, the Fed (and its hidden balance sheet) has been forced to intervene and buy up debt. (Did Keynes ever foresee such massive CB intervention? I doubt it.)

    But the dollar is still the world’s reserve currency, and Bernanke is standing at the ready with his finger on the “PRINT” key. The US will
    never default on its debt, so some investors are still willing to play with fire, hoping they can be the first to jump clear when the heat rises.

    ZIRP, TWIST, PRINT. It’s Bernanke’s game now. Keynes is sitting on the bench.

    1. j.grmwd

      Willing lenders have grown scarcer ? Real yields on U.S. government debt have turned negative. How much more willing could they be to hand their money to Uncle Sam ? Voluntary cash gifts to the IRS, maybe.

      1. Maximilien

        How many lenders to the government would there be if the Fed hadn’t taken on or quaranteed all the banks’ bad debts? If the Fed hadn’t manipulated short and long rates down to protect the value of their debt holdings? Most agree that the banks would be insolvent/bankrupt otherwise.

      2. j.grmwd

        Are you arguing that insolvent banks (essentially all of them) should have been nationalized, their deposits guaranteed, their balance sheets pruned and then sold off at a nice profit for the government. If so, then yes there would be absolutely no takers for government debt at today’s interest rates. The economy would be back to normal and a real investment could be expected to earn a real return.

  10. gs_runsthiscountry

    “What has Bill Gross been reading?”

    Probably one too many memos from Michael Diekmann, Paul Achleitner and Henning Schulte-Noelle.

  11. Conscience of a Conservative

    Bill Gross has a point. And he’s not alone.. Thomas Hoenig has also spoke up. When rates approach zero, there’s just no reason to take duration risk as a saver, and you can’t just spend all your acorns in case the winter comes. It’s also true that interest rates serve a very important purpose in CAPM theory, and at zero rates, there’s no discount rate and capital has the highest probability of being misallocated.

    Ben Bernanke recently spoke up about this, arguing that the borrowers benefit, but this is not necessarily true, as the banks seem to be sitting in between capturing the lion share of the lower rates. So what we see with ZIPR, are the pockets of savers(including public and private pension funds) getting picked or forced to take on imprudent risk.

    1. j.grmwd

      And there’s the rub, why are there are only two classes of investment in the present environment 1) government bonds that cost you money to hold and 2) imprudent risks ? Two words – aggregate demand.

      1. Thisson

        The reason is there is too much capital seeking deployment. Once losses are recognized, there will be less capital available to be deployed, and interest rates will rise accordingly. The problem is that zombie banks are being permitted to delay recognition of these losses.

      2. j.grmwd

        Money isn’t capital though the two are systematically conflated in economic discourse. There is of course a lot of money sitting the game out, waiting to be deployed. But agreed, letting the banks fail and writing down private debt would be the quickest way to make it profitable to turn money into capital again.

  12. rjs

    bill gross just talkin his book like he always does…you cant read him as anything but a bond fund manager without getting a headache…

  13. ryanmburke19

    I think that Gross’ main gripe is not with low interest rates per se, but zero interest rates and a flat yield curve concurrently. I believe that Gross thinks that Bernanke’s Operation Twist is the bridge too far. By essentially guaranteeing rates will be low for several more years, the entire front end of the curve has flattened with potentially confounding effects.

    A flat yield curve at the zero bound can cause de-leveraging because it is no longer as financially enticing to accept risk when there is not additional yield to be attained. Money markets are extremely relevant, because they provide crucial short-term lending to corporations and financial institutions through the Commercial Paper market.

    Just look at what has happened in Europe since the money market funds have ceased funding. Banks are now way more reliant upon secured lending via repo versus unsecured lending via CP. With a dearth of pledgable assets, these banks are dependent upon LTRO to survive. They are all de-leveraging.

    The point is that when there is no yield pickup to reward an investor for taking risk, said investor tends to move to the safest of safe assets. Why accept risk without return? Thus, assets move from money markets and margin accounts to Treasury-only funds. This removes funding corporations and banks via Commercial Paper, and the funds are instead parked in Treasuries or at the Fed. This necessitates dependence on secured funding, but increased reliance upon secured funding often requires de-leveraging given the current state of bank balance sheets.

    Moreover, you also have companies that have historically provided unsecured funding on the front end no longer allowing their assets to be re-hypothecated. This is further diminishing the pool of pledgable assets and forcing additional de-leveraging.

    While its fine to critique Gross’ reading of Minsky or Keynes, it many ways doing so is a waste of time. His point that ZIRP + flat front end of yield curve forcing de-leveraging is brilliant in my opinion. In fact, it is at the relevant to the unfolding European debacle and was a major part of MF Global as well. While his motives might not be pristine (i.e., he is probably upset that there is no longer the possibility of strong returns for PIMCO by investing in the front end), the implications of what he is talking about are nonetheless profound.

    1. Philip Pilkington

      “While its fine to critique Gross’ reading of Minsky or Keynes, it many ways doing so is a waste of time.”

      Minsky and Keynes had a lot more to say about low interest rates than Bill Gross ever will. And Gross tries to make the two of them stand on HIS shoulders.

      Trust me, there’s more profundity in a page of Minsky and Keynes than in Gross’ entire oeuvre.

    2. j.grmwd

      These are all good points in regards to how ZIRP affects the normal workings of the financial market. What I take exception to is the implicit assumption that the financial sector is the engine of the economy.
      Japan is of course the test case. Despite 20 years of extremely low interest rates they’ve remained at the top of the value-adding chain in every industry that matters. They haven’t done that without a lot of productive investment. In that light warnings about the dangers of “malinvestment” and “lack of incentive to invest” if ZIRP continues look incredibly overstated.

        1. j.grmwd

          Rates go up when the Japanese Central Bank say they go up and not before. That’s what being sovereign in your own currency does for you. At any rate, I was referring to the possible microeconomic effects – i.e. lack of incentive to invest. Well, the Japanese yield curve has been flat for a long, long time and I see no evidence that it has caused a lack of productive investment.

  14. Dal

    to say ZIRP isnt working is all well and good but of course we will never truly know because the counter experiment has never been run in parrallel.All of the comments here are interesting but to my mind over complicate the true intentions of ZIRP.
    1.Banks need more capital.Period.Thay also need to run down crappy books of assets. Both require long periods of low rates.
    2.Us gov needs to raise unprecedented amounts of money. Nuff said.
    3.Us/global economies need more demand.That doesnt happen by raising rates.Period.
    4.There is no inflation. Please dont waste my/yopur time citing commodities….labor costs are flat. Nuff said again.
    5.Europe is effed. Middle East is a powder keg.China(and by extension Asia) is wobbling. Why on earth would you throw any more fuel on a global fire in the making??
    6.Assuming most of 5 turns out ok….(yeah right)…things are slowly but surely getting better…….why rush??
    None of this is rocket science so please stop pretending it is….the end users of money dont give a shit about Minsky , Smith , Keynes etc etc they see a historically low interest rate and will , as confidence sloooowwllly returns, borrow.always has been that way….always will be.
    Oh and as for Bill Gross… bloke but lets face it PIMCO has lived through the longest bond rally in history and its only now that yields have stagnated at the lower bounds.Make what you will of that comment .

    1. ryanmburke19


      (1) The best way to earn your way out from under bad assets is a steep curve. The Fed is trying to flatten the curve. My concern is not with the banks, so my issues with ZIRP are decidedly not the banks’ ability to earn free arb profits off the backs of subsidized lending from savers/depositors. But, in my opinion, any asset that cannot perform with Fed funds at 1.5% 4 years after subprime should be written down. Emergency rates made sense to me during the acute crisis. But now we are an a chronic crisis. Bad assets are bad assets. Short rates need not go back to 5%, but 0% causes issues.

      (2) I agree that the government needs tons of money and will for a while yet. But if this is the concern, then how come treasury is not terming out the debt into the long end of the curve? 10-yr rates are at historic lows. If the Treasury keeps funding at the short end, then they will not be able to raise rates when they actually need to. Thus we would be stuck with ZIRP indefinitely, as raising rates would lead interest expense to overwhelm tax revenue. If the Fed/Treasury are worried about cost effectively funding the debt, then they need to stop being short sighted and term out the debt so that we have flexibility to raise rates when necessary.

      (3) I understand the argument that the world needs more demand. But is it not just as possible that the bubble years (US real estate bubble + commodity boom + China bubble) previously created demand that was above its “natural” levels? Much of the demand was also driven by a generational debt bubble. If one believes this to be so, then is it really rational or productive to try to recreate said demand? What are the odds that this could work?

      (4) I agree there is no inflation as measured by core PCE. But wasn’t the housing bubble inflation? Wasn’t the commodities boom inflation? I find the argument that we do not have to worry about inflation because it does not flow through to wages to be callous and quite frankly disingenuous by many of its practitioners. I agree that there is no wage inflation, so we do not need to worry about runaway inflation any time soon. But the biggest proponents of this argument also tend to be those who complain about income inequality. I agree that income inequality is a major issue. But if you believe this like I do, then how do you get behind the idea that the inflation created by ZIRP and QE doesn’t matter because wages are stagnant? Food & energy inflation + flat wages = decline in real wages for average American. Meanwhile the stated purpose of the Fed is to raise asset prices and create a wealth effect that will hopefully trickle down to the little guy. This is essentially the same supply side thinking that is (rightly) criticized in other venues by the same people who are cheering on the Fed, ZIRP and QE. The net effect is flat/declining real wages for the avg American and rising wealth from asset price inflation for the wealthy. People are for this why exactly?

      I don’t really see how ZIRP is helping to solve any of the problems plaguing the overindebted US. All it is doing is shifting the losses around.

      1. Philip Pilkington

        Sorry, an otherwise intelligent comment, but I’ve come across this before and its such nonsense:

        “I understand the argument that the world needs more demand. But is it not just as possible that the bubble years (US real estate bubble + commodity boom + China bubble) previously created demand that was above its “natural” levels?”

        Natural in line with what? Growth wasn’t THAT great during the Clinton-Bush years. And it required the level of demand that the bubbles inflated.

        Unless you mean that wage stagnation is ‘unnatural’. Then you might have a point.

        But the demand was only facilitating the growth over the Clinton-Bush years. To say that it was ‘unnatural’ is to say that a good deal of the growth was ‘unnatural’ and that the ‘natural’ state of the economy in these years was stagnation.

        1. ryanmburke19

          In the US, housing was being invested in inefficiently and US consumers were extracting “wealth” from housing through HELOCs and spending it. In other words, the actual rate of consumer demand exceeded income due to debt and the ability to pay back such debt has come into question. So I do not think that trying to get consumers to re-lever makes much sense at all. Private sector demand during the Bush years and to lesser extent Clinton years was aberrantly high due to careless borrowing. This was in part a reaction to stagnant wages by ordinary Americans. They became dependent upon wealth extraction from gains in asset prices that are not likely to recur any time soon. So yes, I do think this demand was unnatural and largely unrepeatable until balance sheets are healed.

          In China, 65% of their GDP is fixed asset investment. They long since passed the point at which they were earning even a modicum of return on most of those investments. They have “decoupled” only insofar as they continue to create fake GDP. When you grow at 10% and then have delinquincy rates near 50% on stimulus loans, you did not really grow at all. Its like a bank booking the gains from a loan up front with no reserve. There are no writedowns to GDP, but this doesn’t change the fact that China’s growth is not sustainable or real (at least since 2008). And the halo effect from Chinese growth in terms of materials and equipment has echoed through emerging markets, creating other booms.

          Then you had the bubble in Dubai, where 1/3 of the cranes in the world were located in 2005 as they were building beaches with air-conditioned sand and indoor ski mountains. And the real estate bubbles in Ireland and Spain. That construction was wasteful and temporary and funded by lots of debt. It led to a temporary boom that created short term positive effects but ultimately did not create enough wealth to service the debt.

          In other words, the world was in a debt-fueled boom for many years and it created a positive feedback loop. Much of the debt-fueled investment and demand was not economic and private balance sheets no longer lend themselves to a resumption of such behavior.

          Do you believe that this demand was “natural”, especially since so much of it was so based upon debt? Debt levels are much higher than they previous were and it will take a while to have the capacity to create such dynamics any time soon. I very much enjoyed your post, so I would be very interested to know where you disagree with me on this.

          I have no issue with government funded infrastructure spending as a way to buy time during as private spending returns to its more normal levels. My only demand is that that spending creates and economic return such that it is self-funding, even if it adds to short-term deficits. But I have trouble seeing how demand in the latter stages of the previous boom cannot be considered aberrant.

        2. ryanmburke19


          Simplistically, I do think that the natural state of demand in the US during Bush and to a lesser extent Clinton was “stagnant”. The tech boom papered over lesser issues in the late 1990s and the real estate boom papered over serious issues during the Bush years. The Bush Administration in my opinion pulled from the future in almost every conceivable way to keep the economy going. Remember, there were not only tax cuts, but big deficits and two wars. And obviously you had Greenspan and Bernanke pushing monetary policy to its limits as well.

          1. Philip Pilkington

            Economies all ‘pull from the future’ in order to grow because all growth is based on debt. It has to be. In order for new money to enter the economy some entity has to go into debt (yes, even in the case of a trade surplus, a foreign state/private entity must go into debt). That’s what Keynes meant by “in the long run we’re all dead”.

            It’s shocking that people don’t understand this.

            What happened in the US is that the government (in the Clinton years) refused to go into debt and extracted money from the economy in a deranged attempt to run a surplus. On top of this, private companies raised profits and compensation to the top executives. So, who had to go into debt? Well we know the answer to that…

            As for inefficiency. There is not period in economic history when growth has generated quote-unquote inefficiencies. Capitalism is built on inefficiencies. On bubbles, railroads to nowhere, housing manias. Whatever. All we can do is try to channel and stymie them.

            That the housing and stock bubbles were so big was a symptom and not a cause. A symptom of bad government policy and vicious cuts to the income of working people.

            Any opinion to the contrary must concede that the natural state of modern capitalism is stagnation. And if you can live with that… well… what can I say, comrade? You might as well whip out the red flag and rally the people now because that means that capitalism has been an unworkable system for at least the last 20 years.

        3. different clue

          Question for Mr. Pilkington:

          When you say “economic growth” do you mean “growth of money”? Or do you mean bio-physical world growth of more people turning more energy into waste heat in order to turn more matter into waste crap? If the second choice is what you mean, how do you get more people turning more energy into waste heat in order to turn more matter into waste crap
          when non-renewable stocks of matter and energy are visibly depleting and the world’s ability to tolerate rising pollution levels is also visibly depleting?

          If we “warm the global” enough to melt down all the Arctic Permafrost and belch all the shallow-inshore-Arctic Ocean methane hydrate clathrates into the atmosphere, how will Ireland make out during the heatup to follow? And if Ireland becomes a tropical paradise, how many refugees is Ireland prepared to accept from the Venusian HellDesert Continents of the Global Burning Future? Because isn’t that
          where enough economic growth takes you?

          1. ryanmburke19

            Debt is wasteful when it grows faster than the economic output generated from said debt. While growth is often based upon debt, it is not a pre-requisite. It is possible to create economic value and productivity gains without the use of debt. To use your pedantic phrase, its shocking that some people do not understand this.

  15. martin

    Faramirr – McCulley was the quintessential Minskyite – I believe he studied under the man. I suspect that Gross relied on McCulley for his macro-economic foundational bearings. El Erian is a different beast and it will be interesting to see if BG can regain his sure footing while working with MeE.

  16. Susan the other

    I don’t think the House understands who does what. Ryan was trying to approach this whole debacle-economy diplomatically when he contrived a question to Bernanke which was really a statement, something like: So (Chm B.), is it true that the Fed is responsible for monetary matters and interest rates and inflation prevention and we, the House of Representatives and Congress, are responsible for all fiscal matters? And Bernanke duly affirmed. It’s like we have some 700 government representatives who don’t quite know what they are supposed to be doing. It’s terrifying really. Because they are supposed to ensure employment in various ways, stimulate the economy, for example: pass trade laws that are not treasonous; pass budgets that are sane, honest and accountable, etc. Right.

    For 30 years the government kept the lid on inflation by keeping unemployment at 6% (or so we were told); PIMCO flourished. Now the real unemployment rate is over 20% – as bad as it was in the great depression – and there seem to be no methods to bring it down, and PIMCO isn’t doin so good. Gosh, is there a connection?

    Bernanke (at the hearing) then had to clarify himself about Congress’s fiscal responsibilities. He told them in no uncertain terms not to raise taxes. He said it would prevent the recovery. True enough, but he actually had to say it. So why doesn’t he just come out and tell the dolts that they need to create jobs and do a little more deficit spending? Bernanke, of all people, should not indulge those twits.

  17. Thisson

    “…all growth is based on debt.” – This is false. Organic growth is possible by deploying surplus. It’s only when you abstract this process into a monetary system where debt is borrowed into existence through a central bank that you create a system where debt expansion is a requirement of systemic stability.

    As for capitalism? We haven’t had it. What we have now isn’t capitalism.

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