It seems like everyone has an opinion on quantitative easing these days, as the actions of the Fed and Ben Bernanke have riled up investors all around the world. Last Friday, some were waiting for Bernanke to announce QE 3 at his Jackson Hole speech, though he merely hinted that the Fed will step in if the economy worsens. Given all of the money printing and the fact that the U.S. economy is still sluggish at best, many experts are weighing in on the various asset-purchasing programs and whether or not they agree with the actions of the Fed [for more economic news and analysis subscribe to our free newsletter].
It seems to be widely accepted that QE 1 did in fact help jolt the economy, as it was implemented at the height of the recession, helping stocks to spike higher. But the programs that followed have largely been considered failures. Now, Bill Gross has thrown his hat into the ring by stating that he thinks all of the quantitative easing is actually hurting our economy, and will continue to do so for as long as it persists.
Gross cited zero percent interest rates and rampant money printing as the two key factors putting a damper on our current economic status. ”For the current shipwreck perhaps we have the Fed and other central banks to blame” said Gross. The low interest rates have created such low spreads that investments are being damaged, and if the damage continues, Gross feels that we could be in for a big pinch. “A lender will not easily lend money to an obese over-indebted borrower — that much is clear — but she will also not extend a check when the yield, carry and return on investment is so low that it cannot compensate for historic business model overheads” he stated [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].
His outlook for the rest of the year is anything but optimistic as he expects markets will struggle. What remains to be seen are the actions of the ECB today, as many are expecting a large announcement from Mario Draghi. Draghi is predicted to be unleashing a major bond buying program to help nations like Italy and Spain who are up to their necks in debt. But following Gross’ theory, this may only add fuel to the fire and simply prolong the inevitable. As the manager of largest bond fund in the world, it is hard to disagree with Mr. Gross on his opinions and theories of the current economy.
Disclosure: No positions at time of writing.