QE is like a Ponzi scheme, says Bill Gross

The American economy is facing 'D-Day' on 30 June this year, says Bill Gross. That's when the current bout of quantitative easing (QE) is scheduled to end. Gross worries that by "eliminating QE II, the Fed would be ripping a Band-Aid off a partially healed scab".

He admits that since QE was introduced in 2008, "stocks have nearly doubled", while the "US economy will likely expand by 4% this year". But he still wonders whether "quantitative easing policies actually heal", or just "cover up symptoms of an unhealthy economy".

The problem, says Gross, co-founder of PIMCO, the world's biggest bond fund, is that QE is like a 'Ponzi' scheme. "The Treasury issues bonds and the Fed buys them", in an attempt to "cure a debt crisis with more debt". That's all very well but when QE stops "who will buy Treasuries when the Fed doesn't?".

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Gross points out that the Fed currently buys 70% of Treasury bonds. When it stops there will be a big "void" in the market. There won't be a "buyers' strike. Someone will buy them". But yields will have to go up to "attract buying interest".

Private investors need to be prepared to step in and fill the gap left by the Fed. If "the private sector cannot stand on its own two legs issuing debt at low yields and narrow credit spreads, creating the jobs necessary to reduce unemployment and instilling global confidence in the sanctity and stability of the US dollar then the QEs will have been a colossal flop."

This isn't just an issue for bond investors, says Gross. "QE has affected not only interest rates but stock prices and all risk spreads. The withdrawal of nearly $1.5 trillion in annualised check writing may have dramatic consequences."