Negative rates destroy capitalism – Gross

Added 1st September 2016

Not only do zero or negative interest rates fail to provide an “easing cushion” in a recession, but they destroy capitalism’s business models, according to Bill Gross of Janus Capital.

Negative rates destroy capitalism – Gross

The models in question are those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending.

Moreover, zero or negative rates also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism, Gross noted. 

“Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” he said. “$11 trillion of negative yielding bonds are not assets – they are liabilities,” he said. Yellen’s old model will likely not “renormalize” the economy over the next few years, in Gross’s view.

“Japan is the petri dish example for the past 15 years,” he added. “Other developed market economies since Lehman in 2009 are experiencing a similar fungus,” he noted and added that investors should know that they are treading on thin ice.”

The high global debt and out-of-date monetary and fiscal policies hurt rather than heal real economies, concluded Gross.

As an example, Gross mentioned recent ideas by San Francisco Fed President John Williams suggesting a 3% inflation target and a focus on nominal, instead of real GDP growth. He pointed out that Warsh instead suggested a “numeric change in the inflation target isn’t real reform,” while the Fed refuses to acknowledge that their policies have “unfairly increased asset inequality.” 



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