An ultimate Ponzi finance

A quick look on Bill Gross’s monthly investment outlook

https://wordpress.com/post/investmentzero.com/2659

 

1. Our credit-based financial break down when investable assets pose too much risk for too little return.

central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return
low/negative yielding credit is exchanged for gold or cash in a mattress

(How can it be too much risk when no one actually would love to take risk? Credit may cease to work, but why should one in a negative rate and deflation environment care?)

 

2. Low interest rates destroy savings and liability based business models. [1] If maintained for too long, the real economy itself is affected as expected income fails and investment spending stagnates.

(This will lead to fiscal plan with higher government deficit that looks like not a big problem under NIRP. And there are also helicopter money. More importantly, in a new century with IT revolution reducing transaction cost and boosting efficiency, the investment-led business model may no longer be necessary for economic growth.)

 

3. QE can keep on going with technical problem of repo and negative interest rates. Central bank “promises” of eventually selling the debt back into the private market can never be kept. The ultimate end for QE is a maturity extension or perpetual rolling of debt.

 

4. The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income. Without principal repayment, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes.

(Theoretically Ponzi finance might last forever)

 

5. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.

 

[1]

Because banks, insurance companies, pension funds and Mom and Pop are stripped of their ability to pay for future debts and retirement benefits.