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In
his October Investment Outlook report, Gross wrote that the Fed,
which did not raise its benchmark interest rates at last week's
high-profile policy meeting, should acknowledge the destructive
nature of zero percent interest rates over the intermediate and
longer term.
"Zero destroys existing business models such as life insurance
company balance sheets and pension funds, which in turn are
expected to use the proceeds to pay benefits for an aging boomer
society," Gross said. "These assumed liabilities were based on
the assumption that a balanced portfolio of stocks and bonds
would return 7-8 percent over the long term."
But with corporate bonds now at 2-3 percent, Gross said it was
obvious that to pay for future health, retirement and insurance
related benefits, stocks must appreciate by 10 percent a year to
meet the targeted assumption. "That, of course, is a stretch of
some accountant's or actuary's imagination," he said.
Some Fed policymakers have described last week’s decision as a
close call and the central bank is still expected to raise
interest rates later this year. The Fed has kept its benchmark
interest rate close to zero since late 2008, when the nation’s
economy was at the depths of crisis.
"Do central bankers not observe that Detroit, Puerto Rico, and
soon Chicago, Illinois cannot meet their promised liabilities?"
Gross said.
The developed world is beginning to "run on empty" because
investments discounted at near zero over the intermediate future
cannot provide cash flow or necessary capital gains to pay for
past promises in an aging society, Gross said.
Gross said raising the federal funds rate to 2 percent will harm
corporate America "a little" and that stock and bond prices will
"most certainly" go down. "But like (former Fed chairman Paul)
Volcker recognized in 1979, the time has come for a new thesis
that restores the savings function to developed economies that
permit liability based business models to survive – if only on a
shoestring – and that ultimately leads to rejuvenated private
investment, which is the essence of a healthy economy,” Gross
said. “Near term pain? Yes. Long term gain? Almost certainly.
Get off zero now!”
(Reporting By Jennifer Ablan; Editing by Chizu Nomiyama)
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