Negative Interest Rates Eroding The Foundation Of Capitalism: Bill Gross

Pimco Bill Gross Janus CapitalBill Gross at the Morningstar conference in Chicago - June 19th 2014 photo by ValueWalk

Bill Gross offers a dire outlook if negative interest rates become the norm

Janus’s Monthly Investment Outlook from Bill Gross for January was published on Thursday. Gross uses the board game Monopoly as an analogy for the global economy, and points out that near zero or negative interest rates violate a fundamental rule of capitalism. He even goes so far as to suggest that if this deflationary condition persists too long, it could lead to investors losing the hope of making money, and thus refusing to invest, and the eventual collapse capitalist economic system.

The danger of negative interest rates

Gross highlights that negative or even zero percent interest rates cannot become “a permanent rule on Monopoly’s new board.” He points out that rational investors do not give money away; it makes more sense to just hold on to the money and do nothing. Gross extends his argument to say near-zero interest rates lead to low to no economic growth because “the markets and the financial sector are ultimately the servants of the real economy.”

He notes: “In a new world, returns on real investment – ROI’s and ROE’s – become so low that the risk of a new project or the purchase of green hotels offer too little return for too much risk.” Instead, cash accumulates in corporate coffers or is used to repurchase stock in the financial economy. Important investments in plants, equipment and infrastructure is put off. Structural headwinds such as aging demographics and high debt to GDP ratios just make the problem worse, and ultimately “hope is challenged.”

The Bond King closes his argument by saying there is no better system than capitalism, but that “policymakers to promote a future condition which offers hope as opposed to despair.”  He emphasizes that capitalism depends on hope, the reasonable expectation that an investor gets his money back with a decent return kind of hope. Without this kind of hope, capitalism ultimately breaks down.

Warning from Bill Gross

Gross ends his monthly missive with an apocalyptic warning: “In the final analysis, an investor – a player – must be cognizant of future low and in some cases negative total returns in 2015 and beyond. Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to what my mother warned was the final destination for all games – entertainment or real. “In the end,” she said, “all of the tokens, all of the hotels, all of the properties – they all go back in the box.” The strong odds are that 2015’s distorted capitalism continues with anemic growth, but the box rests on the family room coffee table, waiting, waiting, for its turn.”

See the full letter from Bill Gross here.


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11 Comments on "Negative Interest Rates Eroding The Foundation Of Capitalism: Bill Gross"

  1. ‘the poor’ aren’t buying trucks. The poor don’t have savings and can’t get loans and don’t have disposable income. Negative interest rates hit the middle class. As for investors making money.. the prime purpose of money is exchange of goods and services: if investment is a method of getting every richer, the system has to stop at some point because the money is sucked out the system and people buy gold or save. There needs to be higher inheritance tax and a much better method of readdressing wealth division so that the economy doesn’t freeze.

  2. Yeh exactly.. the point is that capitalism has a problem. Funny that it can only be seen from the side of the investor (no reason to invest if no returns) rather than the worker (no reason to work if can’t survive on wages). Investors that get increasing profit will eventually stall the economy, when money is no longer being used as a medium to exchange goods and services (which is the fundamental role more important than investment). How can investors expect to get a return when no one can even afford to buy the goods. We need to find away to reduce assets and savings, so the money stays in the loop.

  3. QE is just a last gasp hail-mary for Globalism and Reaganomics that had a good run but is unsustainable. Going back to the basics of Capitalism will not save it from the eventual New Deal like policies that favor the Middle class over the upper class like it is now.

  4. This is one wacko Monopoly game – The players bail out the bank,the bank gets to print more and more money to put everyone further in debt, players are going bankrupt but still get to play, and NOBODY ever goes to jail!

  5. We’ve been eroding the foundations of capitalism for the last 30 years. Granted, recent events are washing it away at a faster rate but the cracks have been forming for a long time.

  6. Explain this negative interest rate being a tax on the poor? lol. You do know they are all buying trucks at 2%
    I can understand investors being P.O’d, the yields on bonds suck.

  7. If someone could just take the Fed out of the equation and let the market determine interest rates and the stock market find it’s own value, there may be some short term pain but we would be better off in the long run.

  8. You are obviously a bottom, in more ways than this.

  9. Didn’t used to be that “Investment” meant “What can I Get-Away-With”….From TOP to bottom of our “New Culture”..

  10. Finally, a voice of reason! It is the zero interest rate money policy that is destroying the middle class, while enriching C-Level Executives and Wall St. Middle Class retirees cannot speculate on equities and must depend on fixed income investment vehicles such as Certificates of Deposit and Long Term Bonds to satisfy their income stream. However, the Federal Reserve has destroyed these income producing instruments thereby taking away the disposable spending capabilities of all fixed income investors, while slowly destroying their net worth. I am not denying returns that equities can generate. Just that some people would prefer a modest return on their investments based on the confidence their portfolio won’t decline by 10, 25 or 50% by the next week.

    A Patriot

  11. In its attempt to maintain the Reaganomics/Bushomics enabled 60T debt
    monster, the Fed via QE and negative real interest rates is attempting
    to shovel out the ocean. Therefore QE and negative real interest rates, being hopeless, will never end. It’s making multi billionaires out of the 1% and paupers out of the 99%

    Bill Gross should point out that negative real interest is simply a tax on
    middle and poor class savers which goes directly to bank earnings. It
    removes any burden of the crisis from falling on bank stockholders,
    bondholders, and executive salaries and bonuses.

    It’s a stealth tax which not one man in a hundred understands. It’s a tax easily avoided by the 1%. It’s the perfect tax


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