The Departure Of Bill Gross From Pimco Unmasks The Fed As A Credit Destroyer

Forbes October 1, 2014 0

As is well known now, Bill Gross resigned from Pimco last week.

As is well known now, Bill Gross resigned from Pimco last week. The market reaction to his departure was swift. Monday’s Wall Street Journal reported a $10 billion outflow from Pimco that some estimate could increase to $100 billion. Logic dictates that many of those billions will follow Gross to Janus.

Gross’s exit carries with it many implications, but arguably the least spoken of aspect of his departure is what it says about the machinations of the Federal Reserve. That billions will migrate with Gross is a powerful example of the obnoxious, and economy-sapping conceit that drives the Fed. In Gross’s case, the billions that will move with him won’t have far to go. Apparently his new office will be very near Pimco’s Newport Beach headquarters. But if he’d moved to credit-starved Bangladesh, the billions would have still traveled with him. Gross, based on his successful investing track record, is credit personified. Credit is always a very easy “get” for those who are expert at allocating it. That the latter is true speaks to the credit-contracting truth that is government spending, floating money, and the Fed itself.

Government spending is the opposite of “stimulus” simply because politicians, no matter their ideology, can’t possibly be as smart as the markets. It’s shooting fish in the most crowded of barrels to say that John Boehner and Harry Reid aren’t nearly as capable as are Warren Buffett and Peter Thiel when it comes to directing the economy’s resources (“credit” just another word for resources) to their highest use.

Leaving Buffett and Thiel out of the equation, markets remain pregnant with information that all-too-human politicians of all stripes lack. Even if the best investors in the world – including Gross – were to retire tomorrow, market forces would still allocate capital much more skillfully than would Mitch McConnell and Nancy Pelosi simply because the broad market (you, me, and the man down the street) operates with much better information.

Given the above tautology, when politicians spend with abandon they are contracting credit simply because their inability to invest with true knowledge means that the economy’s limited resources aren’t reaching those most capable of multiplying their impact. Politicians destroy capital with investments in housing, railroads and Solyndra, and while private investors similarly make mistakes, that they’re constrained by market forces means that their errors are naturally going to be limited in scope. Politicians are never going to find the next Steve Jobs toiling in a garage, but they are going to find politically connected businesses of the Fannie Mae variety. Government spending is anti-credit. End of story.

Considering money, floating money values logically amount to wealth redistribution by politicians and central bankers. If dollar policy favors weakness in the greenback, those long on land, art, rare stamps and gold are going to see an improvement of their wealth positions relative to those who own future dollar income streams in the form of company shares. If policy favors a strong dollar, those who own shares will see their wealth increase relative to those who own hard assets.

Applied to the last 12 years, cheap dollar policies have redirected all manner of investment into hard assets. Oil has been the most notable beneficiary, and the resulting economic weakness that followed the economy’s re-orientation into energy easy to understand. Political meddling with the dollar has driven billions into the relatively low profit margins enjoyed in the oil patch; all this at the expense of the higher, credit-boosting margins experienced in the technology sector, among others. Politicians and central bankers are lousy allocators of capital, and their pursuit of a weak dollar since 2001 has quite predictably resulted in relatively limp growth. Policies in support of a weak dollar are anti-credit. So are strong dollar policies anti-credit because either way the economy suffers politicization of resource flows. End of story.

Considering the Fed’s wholly na