Pimco likens US to ‘Ponzi’ scheme
US authorities are operating a “brazen” Ponzi scheme in government debt by buying trillions of dollars of bonds to stimulate the economy, according to Bill Gross, managing director of Pimco, the world’s biggest bond house.
By Philip Aldrick
27 Oct 2010
In a bid to restart the stalling recovery, the US Federal Reserve is next week expected to unveil a second round of quantitative easing (QE) of as much as $500bn, on top of the $1.2 trillion already completed.
In typically robust comments, Mr Gross said the Fed had run out of other options but warned that more QE would in the long-term mean “picking the creditor’s pocket via inflation and negative real interest rates”.
“[Cheque] writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme,” he wrote on his investment outlook, arguing that creditors have always expected to be paid out of future growth.
“Now, with growth in doubt, it seems the Fed has taken Ponzi one step further,” he said. “The Fed has joined the party itself. Has there ever been a Ponzi scheme so brazen? There has not.”
More QE is a huge gamble, he said, but necessary because the US is “in a ‘liquidity trap’, where interest rates or QE may not stimulate borrowing or lending because consumer demand is just not there.”
Mr Gross is best-known in the UK for saying gilts were “resting on a bed of nitroglycerine” as a result of the nation’s high debt levels. Pimco has since reversed its position on the UK and advised clients to gamble on a British recovery.