“Why would someone lend money to a borrower with the certainty of getting less money back at a future date?”
That’s the question posed by Bill Gross from Janus Capital group in his March newsletter to investors. Comparing the contemporary state of the banking industry to the state of the Sun in about 5 billion years from now, Gross argues that something that once nurtured growth is about to blow up, taking all the good that it had done with it:
“Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.”
Gross’ point is that the mountain of debt generated by the banking system is unsustainable, but that the central banks will fight to prevent this fact from manifesting. Having tried – and failed – with zero percent interest rates and massive quantitative easing, first Japan, then Europe, and soon the UK and USA have moved to negative interest rates:
“Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects that I have warned about for several years now.”
Not only does Gross say that this will fail, but he warns that cash will be the next victim of central bank policy:
“There is a somewhat suspicious uniform attack on high denomination bills of global currencies. Noted economists such as Larry Summers; respected journalists such as the FT’s Gillian Tett, central bankers such as Mario Draghi – all seem suddenly concerned that 500 Euro or 10,000 Yen Notes are facilitating drug dealers and terrorists (which they are). But what’s an economist/central banker doing opining on law enforcement? It appears that the one remaining escape hatch for ordinary citizens is being closed. Money in a mattress will heretofore be associated with drugs/terror. The cashless society which appears over the horizon may come sooner than the demise of the penny!”
For now, Gross concludes, the Sun will still shine. It is just that banking’s long hot summer is over… we are now in the cold depths of winter.