08/24/2016 - Bill Gross*: Central Bankers Are Destroying The Engine Of The Real Economy
“‘You can pay me now . . .” counsels the sensible mechanic promoting Fram oil filters in the old-time advert, ‘ . . . Or pay me later,” interjects his pricier associate, as he tinkers with the broken engine of a customer who has ignored the advice. Central bankers should take heed. Dirty oil and artificially priced financial markets have much in common. Both can destroy engines eventually — and in the case of central banking it is the motor of the real economy that is at risk .. A negative effect of zero lower bound yields and interest rates can be observed. Investment — an important source of productivity growth — has never returned to the norms seen before the global crisis .. Corporations are using an increasing amount of cash flow to buy back shares as opposed to investing for growth. In the U.S., more than $500bn is spent annually to boost investors’ incomes rather than future profits. Money is diverted from the real economy to financial asset holders — where in many cases it lies fallow, earning little return if invested in government bonds and money markets .. Historic business models with long-term liabilities — such as insurance companies and pension funds — are increasingly at risk because they have assumed higher future returns and will be left holding the short straw if yields and rates fail to return to more normal levels. The profits of these businesses will be affected as will the real economy. Job cuts, higher insurance premiums, reduced pension benefits and increasing defaults: all have the potential to turn a once virtuous circle into a cycle of stagnation and decay. Central bankers are late to this logical conclusion. They, like most individuals, would prefer to pay later than now. But, by pursuing a policy of more QE and lower and lower yields, they may find that the global economic engine will sputter instead of speed up.”
– Bill Gross*
LINK HERE to the op-ed
LINK HERE to an alternative source
