Dec

22

 Bill Gross recently penned an essay in the FT entitled "The Ugly Side of Ultra-Cheap Money". He makes some provocative (and questionable) generalizations regarding the effects of zero interest rates on the real economy, but:

1. He importantly ignores the important differences between zero nominal interest rates and zero real interest rates. (Due to deflation, Japan has run a tight monetary policy for years, and the Yen's multi-decade appreciation to 78/$ provides a reasonable proxy of the relative inflation rates between the USA and Japan.)

2. He fails to openly acknowledge that ultra-cheap money is terrible for his business. He laments people keeping dollars under their mattress (because it pays the same as money market funds). Yet, he doesn't mention that the current interest rates out to the 5 year result in his management fees being rather larger than the investor's yield to maturity.

I submit that there IS a pretty side of ultra-cheap money:

Mr. Market (and foreign owners of US debt) are giving a gift to the US Treasury that is truly remarkable. A Bill (the paper, not the Gross) yields 0% (negative ~3% trailing real yield) and the 5-year yields .9% (negative 1% real). Most of the US debt maturities are 5 years and under. And the Fed owns about 10% of the total debt…soaking up the outter maturities. This means, with $15T in debt, the REAL static debt burden is decreasing by about 600+ Billion per year. (Of course, when Mr. Market grows angry with the US Treasury, this pretty picture could viciously swing the other way as various pundits, including Taleb, Grant, Mauldin, etc are warning.)

Here's a chart that shows the US Debt Maturity.

Yes, Viriginia, there IS a Santa Claus. If you pull off the long white beard, you'll see Santa is actually the people who are buying US Government paper and holding cash. And we should all thank them as they come down the chimney.

Ken Drees writes:

Forget Santa, what about VIXen? He is laid out, 5 months cold. Is it another Christmas in July for the VIX?


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