Bill Gross on Quantitative Easing, Economic Stimulus and Recovery

| About: iShares 7-10 (IEF)

Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., recently wrote that he now takes a less optimistic view of what he dubs "Keynesian consumption remedies." As a result, he talks to Bloomberg about the possible need for more, non-fiscal, economic stimulus in the wake of James Bullard’s call for more quantitative easing.

Two things:

  1. QE is just a shuffling of new net financial assets. It’s basically an asset swap since T-bills yield next to nothing. Get ready for another pile up of excess reserves.
  2. QE could work well in inflating asset prices more than consumer prices – but that could serve the Fed’s purpose too.

I have always viewed QE with scepticism. It wasn’t effective the first go round except in regards to asset prices. And I don’t see QE preventing a slowdown in growth in the US this time either. That means yields will remain low. Gross’s Total Return fund has been doing quite well as yields have come down. See Bloomberg’s post "Pimco’s Bill Gross Rolls Down Treasury Yield Curve for Non-Normal Returns."

Gross also has some interesting comments about the asset-based economic model and whether the US can get out of debt with more debt late in the video. This is a theme he took up in his monthly commentary earlier in the year. See my posts "Can you get out of a debt crisis by piling on another layer of debt?" and "Gross: Is it possible to get out of a debt crisis by increasing debt?" for more on this.