Bill Gross: Fed Policy Is A 'Brazen' 'Ponzi Scheme'

The Fed should stop meddling with the economy now, before it does more damage, say two top asset managers.

The Fed Reserve Bank's quantitative easing program, expected to begin next week, in which the central bank will go on a spending spree to inject more money into the economy, will deal untold damage to the system it attempts to support, say Pimco managing director Bill Gross and GMO chief investment strategist Jeremy Grantham. These purchasing strategies, in which the Fed will likely buy government bonds, intending to lower interest rates and stimulate demand, don't work, Gross and Grantham say in letters to investors: They actually make things worse.

"I ask you: Has there ever been a Ponzi scheme so brazen?" Gross says. "There has not."

Gross says that government debt has always operated in a Ponzi-like manner. The U.S., he says, can rely on future investments to pay for its current expenditures, in a theoretically unending chain. But in this case, Gross says, the government will be its own investor, feeding its own Ponzi machine.

"Instead of simply paying for maturing debt with receipts from financial sector creditors ... the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers," Gross writes. "There is no need -- as with Charles Ponzi -- to find an increasing amount of future gullibles, they will just write the check themselves."

Gross, it should be noted, has a huge personal stake in the matter. His company, Pimco, invests in bonds -- as Reuters notes, Pimco's bond-focused Total Return Fund, which Gross runs, has about $252 billion in assets, making it the world's largest bond fund. When Gross criticizes the Fed's anticipated quantitative easing, he complains that it will likely boost inflation, which would deal a severe blow to bonds, ultimately reducing their value (and his fortune). "Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants," he writes.

Grantham, whose firm manages more than $94 billion in assets, also had some choice words for the Fed. The title of his report, "Night of the Living Fed," not only conveys the danger he anticipates from quantitative easing (it's "a play on the traditional scary Halloween season," Reuters explains) but also suggests that the Fed's program will artificially -- and harmfully -- jolt the tepid economy.

"If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation," he writes. "I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times. ... It would be a better, simpler, and less dangerous world."

The Fed's powers are limited to adjusting the currency -- setting interest rates and determining how much money is in circulation. By taking that limited power to its furthest possible extreme, Gross and Grantham say, Fed chairman Ben Bernanke is making matters worse. Real stimulation, Grantham writes, will come from elsewhere.

"If you really want to worry about growth, you should be concerned about sliding education standards and an aging population," Grantham says in his letter.

Gross, in his letter, makes an argument similar to Grantham's, with a similar metaphor. He suggests that the economy might be stronger in the long run if the Fed were to allow it to grow naturally, "from admittedly lower levels."

"The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form," Gross writes.

So outraged is Gross by the Fed's anticipated policy that he gives it a nickname.

"I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time," Gross says. "It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme -- you and I, and the politicians that we elect every two years -- deserve all the blame.

Comments

[AZreb]

10:02 PM on 10/30/2010

Ponzi scheme? I am beginning to think that our whole economy is built on sand or is a house of cards. "Budget" is a dirty 6-letter word - and even when we see a proposed budget there are major expenses left out deliberately. Projections - sometimes known as wishful thinking.

[ltague]

12:37 PM on 10/30/2010

Yeah, like we're going to believe these 2 self-serving bums.

[truthisneeded]

03:41 PM on 10/29/2010

Moderators I hope that you are not censoring my post about the Fed's history. Because one just disappeared.

[truthisneeded]

02:25 PM on 10/29/2010

Even though the members of the Fed Board of Governors, including its chairman and vice-chairman, are chosen by the President of the United States; the ultimate responsibility for the actions of the Fed fall on our representatives in Congress. Everything decision pertaining to the Fed is subject to congressional oversight. The President has no authority on what the Fed does as the Fed does not report to the President. Just remember that about 100% of the US Senate today is made of rich people.

A central bank came to life in the US because of the need for a common currency. The first US attempt at a national currency was during the Revolutionary war. In 1775 the Continental Congress issued paper currency. But the money was not backed by gold or silver and its value depreciated quickly.

US Constitution. Article One. Section 8 states that the Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.

In 1791, which was after the U.S. Constitution was ratified, the government granted the First Bank of the United States a charter to operate as the U.S.'s central bank until 1811. Unlike the prior attempt at a centralized currency, the increase in the federal government's power—granted to it by the constitution—allowed national central banks to possess a monopoly on the minting of U.S currency.

[truthisneeded]

02:31 PM on 10/29/2010

Correction:

Even though the members of the Fed Board of Governors, including its chairman and vice-chairman, are chosen by the President of the United States; the ultimate responsibility for the actions of the Fed fall on our representatives in Congress. Every US decision regarding the Fed is subject to congressional oversight. The President has no authority on what the Fed does as the Fed does not report to the President. Just remember that about 100% of the US Senate today is made of rich people.

A central bank came to life in the US because of the need for a common currency. The first US attempt at a national currency was during the Revolutionary war. In 1775 the Continental Congress issued paper currency. But the money was not backed by gold or silver and its value depreciated quickly.

US Constitution. Article One. Section 8 states that the Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.

In 1791, which was after the U.S. Constitution was ratified, the government granted the First Bank of the United States a charter to operate as the U.S.'s central bank until 1811. Unlike the prior attempt at a centralized currency, the increase in the federal government's power—granted to it by the constituti­­on- allowed national central banks to possess a monopoly on the minting of U.S currency.

[truthisneeded]

02:59 PM on 10/29/2010

The creation of the First Bank of the United States was officially proposed by Alexander Hamilton, Secretary of the Treasury, to the first session of the First Congress in 1790. This came with a lot of controversy.

Like most Southern members of Congress, both in the Senate and in the House neither Secretary of State Thomas Jefferson nor Representative James Madison liked two of Hamilton's tripartite recommendations: the establishing of an official government Mint, and the chartering of the Bank of the United States.

They believed the South would not benefit from either a central mint or bank, as these were mostly to the benefit of business interests in the commercial north, not southern agricultural interests.

Many Americans were concerned that a national bank would result in a "money-monopoly" increasing interest rates and harming the very business interests it was supposed to protect.

The bank creation also raised early questions of constitutionality... Hamilton, then Secretary of the Treasury, (Treasury Fed connection that we still have today), argued that the Bank was an effective means to utilize the authorized powers of the government implied under the law of the Constitution.

Secretary of State Thomas Jefferson argued that the Bank violated traditional property laws and that its relevance to constitutionally authorized powers was weak.

[truthisneeded]

02:08 PM on 10/29/2010

Do people ever stop and wonder why Ronald Reagan nominated Greenspan as Fed chairman, a post he's held through the administrations of George H.W. Bush, Bill Clinton, and George W. Bush? Everyone now says that Greenspan was a pretty bad influence on the US economy and his policies helped create the current US economic disarray.

So how could four presidents of Reagan, Bush Sr, Clinton and Bush Jr. all say that Greenspan was great?

The Fed today and at least since Greenspan, has really nothing to do with US Democrats or US Republicans.

The Fed will adapt its message based on the current political climate and current political administration but the Fed goal is not to serve the American public. The goal of the Fed is to serve the some rich people, some American and some not. Money knows no borders.

The interests of the American people may be way down the list of the Fed priorities and goals.

[truthisneeded]

05:03 PM on 10/29/2010

I am studying the history of the Fed so I will learn more about the Fed and am sharing above in the history of the Fed. However, in theory, the Fed's goal and legal mandate is to serve the interests of its private shareholders; i.e. shareholders of shareholder banks; not the interests of the American people.

The Fed is a company owned by private shareholders. If Fed management (Fed Chairman and Board of Governors) decided to run the Fed based on the interests of the American people, then Fed management would be violating their fiduciary duties towards the Fed shareholders; as in any other corporation.

The legal structure of the Federal Reserve makes it unlikely that the Fed will serve the interests of the American people.

However in practice this may be different and I will update in my history of the Fed above that I posted at 2:25 PM today on this thread.

[truthisneeded]

01:49 PM on 10/29/2010

I said that I agree with Bill Gross on this one but that is not an endorsement of Bill Gross as a whole.

In this one instance we agree; but I dont believe that Bill Gross interests always match what is best for democracy in the United States

[JoeLeland]

01:32 PM on 10/29/2010

THE FEDERAL RESERVE BANK IS A PRIVATE COMPANY.
Article 1, Section 8 of the Constitution states that Congress shall have the power to coin (create) money and regulate the value thereof. Today however, the FED, which is a privately owned company, controls and profits by printing money through the Treasury, and regulating its value.
The FED began with approximately 300 people or banks that became owners (stockholders purchasing stock at $100 per share - the stock is not publicly traded) in the Federal Reserve Banking System. They make up an international banking cartel of wealth beyond comparison (Reference 1, 14). The FED banking system collects billions of dollars (Reference 8, 17) in interest annually and distributes the profits to its shareholders. The Congress illegally gave the FED the right to print money (through the Treasury) at no interest to the FED. The FED creates money from nothing, and loans it back to us through banks, and charges interest on our currency. The FED also buys Government debt with money printed on a printing press and charges U.S. taxpayers interest. Many Congressmen and Presidents say this is fraud (Reference 1,2,3,5,17).
Who actually owns the Federal Reserve Central Banks? The ownership of the 12 Central banks, a very well kept secret, has been revealed:
Rothschild Bank of London Warburg Bank of Hamburg Rothschild Bank of Berlin Lehman Brothers of New York Lazard Brothers of Paris Kuhn Loeb Bank of New York Israel Moses Seif Banks of Italy Goldman Sachs.

[truthisneeded]

10:37 AM on 10/29/2010

i agree with Bill Gross on this one; the Fed is showing an agenda and its not the agenda that benefits US democracy and most Americans

[themodernleader]

12:03 AM on 10/29/2010

The degrading of currency and the destruction of savings and the fortunes made by speculators come together. Responsible citizens are to be punished by destroying their savings; dangerous, harmful citizens win through easy money applied to finishing buying and dismantling our last manufacturing, pruchasing remaining assets---mines, oil and coal deposits, uranium, copper, bauxite, farm and ranch land and so on.
In less than 40 years we will be a nation of wanderers, servants and beggars looking into gated communities and airports watching our foreign masters fly in. luxuriate and count their money of their investments. Knowledge will be strictly censored: The military will prohibit travel without a card. The television will praise the progress of the new 5 year plan of peace and prosperty and will persistently warnthe people of subversives. Periodicaly, it will be announcedthe capture and hanging of terrorists atempt to destroy the Cathedral of Justice. Computers and cell phones are outlawed as subversive. The people are required to march in uniform every month as the Supreme Leaders praise heroic episodes in the Great Revolution of Reconcilation. All information and knowledge of the American Republic has been collected and destroyed Any private or public mention of it is an act of treason. Citizen spys are everywhere observing and listening to one another.

[asdusty]

02:18 AM on 10/29/2010

So whens the movie coming out?

[themodernleader]

06:43 AM on 10/29/2010

If I were to write such a screen play, I would go to jail for stealing ideas from George Orwell and others or go broke defending myself.. A few banking CEOs steal hundreds of billions and are rewarded. Predictably, such an egregiously evil organization has no honorable finish. My predictions may come true unless Americans again permit ordinary, uncorruptible, prudent, patriotic leaders capable of learning to play on the stage.

[terris]

11:47 PM on 10/28/2010

It takes a ponzi scheme lord to know one

[LibertyRoy]

11:32 AM on 10/29/2010

Bill Gross is one of the most respected managers on planet Earth. He manages the largest bond fund in the world, not some debt-infused hedge fund. Maybe you should stop parading ignorance as intelligence.

[Seamus45]

01:29 PM on 10/28/2010

If you can't cry, you might as well laugh.

http://forums.wallstreetexaminer.com/blog/5/entry-247-qe-2-believe-it-or-not-and-the-heat-map/

[Lorianne]

12:31 PM on 10/28/2010

The Biggest Bank Robbery In History? More Quantitative Easing = Backdoor Bailouts For The Big Banks Without Having To Go Through Congress
http://theeconomiccollapseblog.com/archives/the-biggest-bank-robbery-in-history-more-quantitative-easing-backdoor-bailouts-for-the-big-banks-without-having-to-go-through-congress

[joe kim]

10:35 AM on 10/29/2010

Thanks for the link Lorianne

[thestargazer]

11:35 AM on 10/28/2010

Next Up: The Barter System!

[Swiftlearner]

11:05 AM on 10/28/2010

American people loves Ponzi Scheme , the next generation is always the gullible. The Obama is just doing what the people wants, otherwise they will not be reelected. This is why Obama punted on the question on foreclosure. How can he be reelected if he acts contrary to the WILL of the people and yet he understand that the economy will get worst if the foreclosure process is stopped.

[lightningbolt]

11:01 AM on 10/28/2010

I see from many of the comments here that lots of people don't know what a ponzi scheme is. Read this and learn:

http://en.wikipedia.org/wiki/Ponzi_scheme