Begin forwarded message:
From: dasg...@aol.com
Date: January 9, 2009 12:31:56 PM PST
To: ramille...@aol.com, rac...@msnbc.com
Cc: ema...@aol.com, j...@aol.com, jim6...@cwnet.com,
l...@legitgov.org, christian.r...@gmail.com, h...@daegis.com, countd...@msnbc.com
Subject: Federal Reserve's Dollar Czar: "The Entire US Economy Is One
Big Ponzi Scheme"!
Bill Gross: We've Got a "Ponzi-Style Economy"
http://georgewashington2.blogspot.com/2009/01/bill-gross-weve-got-ponzi-style-economy.html
Bill Gross is managing director of the world's largest bond fund,
Pimco, which manages some $790 Billion Dollars in assets. Pimco also
is managing the commercial-paper assets for the Federal Reserve as
part of the government's Commercial Paper Funding Facility program.
As such, Pimco is in many ways an insider.
In his January 2009 Investment Outlook, Gross writes that it is not
only Bernie Madoff who ran a Ponzi scheme, but the entire U.S. economy
is a Ponzi-like scheme. He calls it "our Ponzi-style economy".
This may be obvious to many of us. But the fact that Gross said it is
news.
Andrew Mellon vs. Bailout Nation
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/IO+Gross+Jan+09+Andrew+Mellon+vs+Bailout+Nation.htm
Investment Outlook:
Bill Gross | January 2009
2008 was the year when the United States led the charge of bailout
nations, lending and literally guaranteeing trillions of dollars of
private liabilities in an effort to avoid the advent of another Great
Depression. Nothing, with the possible exception of George Bush’s IQ
was the subject of greater debate. To begin with, the rescue plan
itself was controversial even amongst its implementers: Congress voted
against it, then a week later voted for it; Treasury Secretary Paulson
designated it “TARP” (short for “Troubled Asset Relief Program”), then
a month later did a 180°, refusing to buy subprime mortgages and
asserting his right to change his mind because the facts themselves
had changed. But the broader question reached beyond politics and into
the realm of the dismal science itself.
Was it necessary and productive to mutate 21st century American-style
capitalism into a thinly disguised knock-off of the New Deal?
Better, some thought, to have followed the advice of early 1930s
Treasury Secretary Andrew Mellon: “Liquidate labor, liquidate stocks,
liquidate the farmers – purge the rottenness from the system.” The
Mellons of the world argued that bailouts were akin to pouring
gasoline on a fire, adding trillions of dollars of new debt to a
domestic and global economy that had broken down because of, because
of, well, because of – too much debt.
Wall Street, the Fed, and Newport Beach took the other side. Those
steeped in economic history felt that the Great Depression and more
recently the “lost decade” in Japan had both experienced a “liquidity
trap,” a monetary black hole where lenders, savers, and ultimately
consumers were frightened into stuffing their money into a mattress
rather than circulating it in classic capitalistic fashion. Sensing a
freezing of credit markets following the default of Lehman Brothers,
policymakers decided it was better to become a bailout nation than a
sunken ship.
The debate, of course, can never be resolved. You can’t prove a
negative nor recreate history to show what might have been. What we do
know, however, is that even with U.S. and indeed global bailouts,
almost every major economy entered recessionary territory in 2008 and
that the “D” word, while unmentionable in official policy circles, was
nevertheless on the tip of their tongues and at the forefront of their
contingency plans. As we closed the year, “quantitative easing” was
the publically acknowledged future policy of the Federal Reserve,
which in short meant “buy assets, support Wall Street, and in the
process, hope that some of it might trickle down to labor and the
farmers.” Ben Bernanke is no Andrew Mellon. There may be rottenness in
the system, but our Chairman surely doesn’t believe in starving a
cold, or pneumonia for that matter. The Fed’s willing accomplice was
the United States Treasury and the FDIC, extending not only $350
billion of TARP money but literally guaranteeing three quarters of the
liabilities of U.S. banks. For those who fear nationalization of our
financial system, the destination seemed just over the horizon.
Still, while such a transformation is, to put it mildly, undesirable,
the policies are necessary. As outlined in these pages, the U.S. and
many of its G-7 counterparts over the past 25 years have become more
and more dependent on asset appreciation. Under the policy-endorsed
cover of technology and somewhat faux increases in financial
productivity, we became a nation that specialized in the making of
paper instead of things, and it fell to Wall Street to invent ever
more clever ways to securitize assets, and the job of Main Street to
“equitize” or, in reality, to borrow more and more money off of them.
What was not well recognized was that these policies were hollowing,
self-destructive, and ultimately destined to be exposed for what they
always were: Ponzi schemes, whose ultimate payoffs were dependent on
the inclusion of more and more players and the production of more and
more paper. Bernie Madoff?
As with every financial and economic crisis, he will probably go down
as this generation’s fall guy – the Samuel Insull, the Jeffrey
Skilling, of 2008.
But Madoff’s scheme has a host of culpable look-alikes and one has
only to begin with the mortgage market to understand the similarities.
Option ARMs or Pick-A-Pay home loans allowed homeowners to make
monthly payments that were so small they did not even cover their
interest charges. Two million mortgagees either chose or were sold
this Ponzi/Madoff form of skullduggery, believing that home prices
never go down and that shoppers never drop. One can add to this the
trillions in home equity/second mortgage loans that extracted
“savings” in order to promote current instead of future consumption,
and one begins to realize that Bernie Madoff and our cartoon’s Wimpy
had company all these years.
What about the shabby performance of the rating agencies? Were they
not equally at fault for perpetrating a giant charade that was bound
to end in tears? Of course: Aaa subprimes structured like a house of
straw; Aaa monoline insurers built like a house of sticks; Aaa credits
like AIG, FNMA, and FHLMC where only a huff and a puff could expose
them for what they were – levered structures dependent upon asset
price appreciation for their survival. Ponzi finance.
I will go on. Municipalities with begging bowls now extended for over
a trillion of Federal taxpayer dollars, based their budgets and their
own handouts on the perpetual rise in home prices, the inevitable
upward slope of sales taxes, and the never-ending increase in
employment and personal income taxes. To add injury to insult, they
conveniently “balanced” their books with a host of accounting tricks
that Bernie Madoff could never have come up with in his wildest
imagination. Now, with cash flow insufficient to meet current
outflows, they are proving my point that we have met Mr. Ponzi and he
is us – all of us: auto companies that siphoned sales dollars to make
labor peace instead of research and design expenditures; hedge funds
that preposterously billed investors for 2% and 20% of nothing; a
President and politicians who thought they could fight a phony war for
free and distract the nation’s attention from $40 trillion of future
social security and health care liabilities. Ponzi, Ponzi, Ponzi.
Still, future policymakers must confront the reality that is, not the
one that should have been. And investors must do likewise, casting
aside personal philosophies for a clear-headed view of the future
horizon. PIMCO’s view is simple: shake hands with the government; make
them your partner by acknowledging that their checkbook represents the
largest and most potent source of buying power in 2009 and beyond.
Anticipate, then buy what they buy, only do it first: agency-backed
mortgages, bank preferred stocks, and senior bank debt; Aaa asset-
backed securities such as credit card, student loan, and auto
receivables. These have been well-advertised PIMCO strategies over the
past 6 months but there are others in clear sight. An Obama
administration will quickly be confronted by the need to provide those
hundreds of billions of dollars to states and large municipalities.
Their requests total nearly a trillion dollars and to think California
or NYC would be allowed to fail is, well – unthinkable. Municipal
bonds then, selling at historically high ratios relative to U.S.
Treasuries, offer attractive price appreciation potential, or at the
very least a defensiveness with high carry that a 2½% 10-year Treasury
cannot.
Here’s another thought. While TIPS or inflation-protected securities
cannot logically be a recipient of Uncle Sam’s checkbook over the next
12 months, they can benefit if and when the government’s efforts to
reflate begin to take hold. 2½% real yields cannot possibly be
maintained unless deflation as opposed to inflation becomes the odds-
on favorite. What bond investors know as “breakeven inflation rates”
are currently signaling a future where the U.S. CPI averages -1% for
the next 10 years. Possible, but not likely. As an additional
strategy, global bond investors should recognize the value in high-
quality investment-grade corporate bonds in many markets. Yields of 6%
+ for intermediate maturities are still common and readily available.
There is legitimate concern as to the ultimate destination and outcome
of our “bailout nation.” Realistically, quantitative easing, a two-
trillion-dollar expansion of the Fed’s balance sheet, and the near
certainty of future budget deficits approaching 6-7% of GDP should
alert bond investors to once again become vigilant as was the case in
the 1980s and 90s.
Vigilantes we should be, but that is a battle to be fought in the
Treasury market where low yields offer little reward and increasing
risk. For now, our Ponzi-style economy and its policy remedies
encourage bond investors to mimic Uncle Sam and its global
compatriots. Buy what they buy, but get there first. Andrew Mellon
would surely have disapproved. Liquidation was his game.
Wimpy? Well, he’s gonna have to start paying for those burgers on
Monday, even in a bailout nation.
William H. Gross
Managing Director
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