PIMCO’s Gross Questions Bernanke’s Zero-Bound Ideas

“Zero-bound money may kill as opposed to create credit” – that is at the core of Bill Gross’ argument in his latest monthly investment outlook.

Gross – manager of the world’s largest bond fund at PIMCO – provided a thorough critique of the Federal Reserve’s ongoing dovish stance and its decision at last week’s Fed meeting to extend the timeframe for its zero interest rate policy.

“My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic,” Gross explained. “When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences.”

The PIMCO fund manager went on to say that “At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill.”

As a result of this conundrum, Gross posed the question of what else can investors do with their money.  Besides holding cash and/or government bonds, Gross responded by noting that the Fed’s policies “may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

The full version of Gross’ piece is available below:

http://www.pimco.com/EN/Insights/Pages/Life-and-Death-Proposition.aspx