Bill Gross: The Case Against Inflation Dependency

A philosophical Gross considers why deflation is no longer acceptable, in his latest outlook for Janus Capital.

Central banks and financial markets have grown dependent on inflation although it is largely detrimental to the general public’s pockets, according to PIMCO-founder and recent Janus Capital recruit Bill Gross.

In the first epistle for his new employer, Gross considered why deflation, which had encouraged spurts of impressive growth in the US, is feared and avoided by those supposedly in control of the world’s finances.

“Prices change—and while they usually go up these days, sometimes they do not. We are at such a moment of uncertainty,” said Gross. “That one or the other should be favored, is a fascinating debate. Currently, almost all central bankers have a targeted level of inflation that approaches 2%. Some even argue for higher levels now that deflationary demons approach in peripheral Euroland. They argue that the 2% level is sort of like a firebreak. Once inflation approaches zero, goes their theory, the deflationary firestorm is difficult to stop.”

Gross argued that with interest rates at almost zero and quantitative easing approaching potential political maximums, there is little water left to pour on the flames.

“Best then to keep inflation at a reasonable 2% so that the zero hour never comes,” he said of central banks’ actions.

Gross admitted that he understands this reasoning, but questioned how they should explain to the average 30-year-old citizen that by doing so, his/her retirement dollar will only be worth half as much come 65. If inflation averages 3%, it will only be worth a third.

“Actually, a 30-year-old citizen of the 1970s (yours truly),” said Gross, “has experienced a 75% depreciation of his purchasing power. The cost of a firebreak can be expensive insurance.”

He cited financial historian Jim Grant, who wrote that economies weathered deflationary periods well in the 18th and 19th centuries. He suggested Grant would argue that targeting 2% inflation was just a “con” of central bankers “who know nothing better than to create money during a financial crisis and then to keep creating it during the inevitable recovery”.

The dilemma now is how inflation is sustained—to pay prior inflation, said Gross.

He added that the money created is not going where it should—and where it would sustain and be sustaining to the economy.

“Prices go up, but not the right prices,” he said. “Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end. One economy (the financial one) thrives while the other economy (the real one) withers.”

He concluded by urging investors to recognise that modern day inflation, “while a necessary condition for survival, is not a sufficient condition for increasing wealth at a rate necessary to satisfy future liabilities associated with education, health care, and a satisfactory retirement”.

The full outlook can be found on Janus Capital’s website.

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