In his February newsletter, Bill Gross of PIMCO surmises that from now on central bankers will target nominal GDP growth in their fight to prevent a systemic financial collapse.
Nothing new there, but Gross believes the threat of stagflation could be with us for a lot longer than investors expect.
The Bond King stated he believes that the “Fed provides assurances that short and intermediate yields will not change,” which therefore invites investors fearful of a total loss into an arrangement with the U.S. Treasury whereby the return of investors’ capital is “assured” but at the cost of declining purchasing power of their capital.
And for how long will this arrangement between investor and the Fed be extended? “We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time,” Gross wrote, as he expects 30-50 years of leveraged capital to continue to unwind for many years to come.
So the Fed’s plan is to trap fearful investors into a real loss for as long as they can tolerate it. Then, at some point, the pain of rising living expenses and no end to sluggishness economic conditions reaches a point of investors taking action. Austrian economist Ludwig von Mises (1881 – 1973) explains the reaction of investors to the “liquidity trap” the Fed has faced since Lehman and for an additional “long, long time.”
“Inflation can be pursued only so long as the public still does not believe it will continue,” wrote von Mises. “Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.”
