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The CEO of the Biggest Bond Fund Says the Government Has Rigged the Game Against Investors

Written by Gary North on May 13, 2013

Bill Gross is the CEO of Pimco, the largest bond fund on earth. In his latest newsletter, he lays it on the line. The government is working against all investors. In the language of finance, the government will give investors a haircut.

During and after World War II most countries with high debt overloads resorted to artificially capping interest rates below the rate of inflation. They forced savers to accept negative real interest rates which lowered the cost of government debt but prevented savers from keeping up with the cost of living. Long Treasuries, for instance, were capped at 2½% while inflation was soaring towards double-digits. The resulting negative real rates together with an accelerating economy allowed the U.S. economy to lower its Depression-era debt/GDP from 250% to a number almost half as much years later, but at a cost of capital market distortions.

Today, central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing. The Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1% because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation. Large holders of U.S. government bonds, including China and Japan, will be repaid, but in the interim they will be implicitly defaulted on or haircutted via negative real interest rates. . . .

Uncle Sam with his rather dapper white hair and trimmed beard serves as a good example for this type of haircut, if only to show that even the U.S. can latch on to your money or capital. Back in the 1930s, FDR instituted a rather blatant form of expropriation shown above. All private ownership of gold was forbidden (and subject to a $10,000 fine and 10 years in prison!) if it wasn’t turned into the government. Today we have less obvious but similar forms of capital controls – currency pegging (China and many others), taxes on incoming capital (Brazil) and outright taxation/embargos of bank deposits (Cyprus). Governments use these methods to keep money out or to keep money in, the net result of which is a haircut on your capital or your potential return on capital. Future haircuts might even include a wealth tax. Are gold and/or AA+ sovereign bonds good as money? Usually, but capital controls can clip you if you’re not careful.

The investor has to find assets that exceed the rate of price inflation. He needs a positive rate of return. But he cannot get it in conventional investments.

The cost of big government is big losses, but imposed slowly. Those who trust the government will be fleeced.

Continue Reading on www.pimco.com

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2 thoughts on “The CEO of the Biggest Bond Fund Says the Government Has Rigged the Game Against Investors

  1. F.N. ignorant says:

    It is not the true function of money to make money on your money without the addition of labor. Anything that attempts to do so is called gambling. A lot of people got rich in the something for nothing scam called fiat currency and fractional reserve banking. Those same people will now be effectively taxed out of their paper profits via the mechanism of negative interest rates. The only solution is to remove your long term stored wealth from the obviously corrupt and illegal system and to store it in gold and silver. These metals retain their purchasing power over time. They have never gone bankrupt in the history of man. If gold goes down, so will the price of oil, wheat, corn, cars and houses. In other words, gold is real money and it will retain its real purchasing power. Do not fear government stealing the people's gold again. The populace is faaaar too well armed for that anymore. An armed people cannot be illegally pushed around by criminals no matter if they are private individuals or government employees.

  2. >>Do not fear government stealing the people's gold again. The populace is faaaar too well armed for that anymore.

    Um…actually, when FDR did it, I think that the ratio of firepower of civilian to government leaned much farther toward civilian than it does now. The difference is not firepower, the difference is 1) the internet, and 2) people with gold/silver are such a tiny portion of the whole that taking our gold/silver away from us would do nothing good for the government and only be a public relations negative.