Friday, February 3, 2012
Welcome back, Ari!! If you don’t know ARISTOTLE, that’s probably because he took a brief hiatus of 7 years and 3 days from posting comments about Freegold. And that was after 6 years of posts and comments prior. So needless to say, I’m THRILLED to have him back!
Ari wrote me an email the other day including this: “In the meanwhile, I’m happy to note that Bill Gross has (yet again) stepped up to the challenge of carrying some water for us today. Begins folksy and ends golden. Now that’s what I call having a worthy waterboy(!),,, he being manager of the largest mutual fund on the planet (i.e., PIMCO’s $242 billion Total Return bond fund).”
Here’s the quote with which Bill Gross begins his latest and greatest, Life and Death Proposition:
Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember
Virginia Woolf, “The Hours”
With this lead-in he draws a comparison between death and the hereafter, and the death of our financial system built upon the lending of real savings to debtors with what comes next. He goes on to explain, “The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter.” But at least he gives it a shot with a little help from Virginia, ending with, “Where does credit go when it dies? It goes back to where it came from.”
Now, while I can’t help you very much with the pearly gates, I can indeed help you imagine the monetary and financial hereafter. It matter little to me if you believe me or not, because I still think there is value in sharing this vision either way. Someone (who incidentally named his band Third Eye Blind) once remarked, “I don’t really believe in crystal balls, but I respond to the need for them.” And so now I’ll dust off my own very special crystal ball with a wink and a nod to a few of you who understand this need.
I do recommend reading Bill’s entire piece as he lays it out nicely how hitting the zero-level floor in USD interest rates is inevitably leading to a “liquidity trap” for earned savings. It sounds to me like the inescapable gravitational pull of a black hole singularity that, perhaps, creates similar difficulty in trying to see through to the other side.
Bill Gross is in the business of helping savers lend their savings to debtors through the use of bonds. And he has done very well in this business, which is why he is acutely tuned in to the implications of zero interest. With zero interest, you can’t earn a yield or a capital gain as you can when interest rates are high and falling. And so there is no reason for savers to lend money to debtors for the longer terms necessary in order to run an economy. In fact, it is terribly risky for savers to do so in a zero rate environment.
Thanks to BrotherJohnF