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Thursday, November 1, 2012

Bill Gross Runs The World's Largest Bond Fund And He Has Some Valuable Insights To Share.  Here Is The Key Idea In His Latest Rant On Business Insider.

To confirm the point, let me introduce additional evidence for the prosecution, a chart that is periodically presented to our investment committee by PIMCO’s Saumil Parikh, who is turning out to be potentially a Pro Bowl replacement for recently retired All-Star Paul McCulley. It’s a little complicated sounding – “net national savings rate,” but it really speaks to the heart of the question. Net national savings is the amount of government, household and corporate savings that is left over after our existing investment stock is depreciated. Think of a building decaying and depreciating over 30 years so that you’d need to save each and every year to build and pay for a new one three decades down the road. If you don’t save, you can’t buy one: Net national savings.

Well, Chart 2 confirms the evidence. Over the past three years, our net national savings rate has been negative, and lower than it has ever been in modern history. The last time this occurred was in the Great Depression.
Aside from a little squiggle back close to 0% over the last year or so, there is no evidence that investment is being incented by quantitative easing. All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production. Admittedly, the chart shows this downward spiral has been underway for decades, but financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction. They have not. We have been using the lower interest rates, the $9,975 of free money, to consume as opposed to invest.

To be fair, Ben Bernanke has been operating with one arm behind his back and has been calling for cooperative stimulation from the fiscal side of this government. He has received little response – not from Democrats, not from Republicans. They have all focused on re-electing themselves as opposed to constructively plotting a way forward. That is why Election Day seems like such a futile gesture to me. Red/Blue; Republican/Democrat. What kind of choice do we have when we pull the lever? If monetary policy has shown its impotent limits, can we now trust Washington to constructively reverse a downward slide in our net national savings rate? I suspect not. I doubt if either Obama, Romney, or many of their economic advisors even know what the definition is, let alone how to reverse it.

William H. Gross
Managing Director

There are two take-aways here.

1) We don't have any money to pay back the Chinese, Japanese and Arabs we borrowed all that money from so interest will continue to consume a huge part of our national income.

2) Sooner or later, all those $100 bills that Ben printed, to no visible effect, will get released into the economy and that will really force asset prices higher, e.g., it is called INFLATION!!!  

Read his whole rant at

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