Commentary on Political Economy

Wednesday 21 December 2011

Bill Gross on Gresham's Law

I wanted quickly to bring the article linked above to the attention of our friends because it illustrates marvelously the skewed, though perceptive, way of reasoning of a smart fellow like Bill Gross.
Gross is arguing here that "zero-bound" interest rates may actually discourage investment because "cheap money drives out the good" (a funny take on Gresham's Law that "bad money drives out good money" - which is silly because it depends on what the money is used for: people hoard "good money" just in case they may need it for "essential" transactions - so that in fact "good money drives out the bad" for essential transactions!).

But Gross never, never, never explains why "cheap money is driving out good money" - unless he is talking about "the Confidence Fairy", which by now is just as discredited as Father Christmas is for consenting adults!

Nevertheless, Gross still has some grey matter left upstairs, and so he does come to the right conclusion, though he hides it under a mountain of chaff:

Conceptually, when the financial system can no longer find outlets for the credit it creates, then it de-levers. The point should be understood from a yield as well as a credit risk point of view. When both yield and credit are at risk from the standpoint of ‘Gresham’s law’, the mix can be toxic.

Bravo, Gross! He has finally realized that the real reason why interest rates are at the "zero-bound" is that "the financial system can no longer find outlets for the credit it creates" - in other words, there is a crisis of profitability!

So why does Gross then go on to draw the wrong conclusion from the right premise and bury Keynes in the process?

"Fed chairman Ben Bernanke blames policy rate increases in the midst of the 1930s for an economic relapse, and a lack of credit expansion for Japan’s lost decades 60 years later. But all central banks should question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, de-levering and obstructing recovery. Gresham, as opposed to Keynes, may become the applicable economist of this new day."

Hang on, Bill! It is not excess liquidity or ultra-cheap money that is leading to "de-levering", you twit! It is "the crisis of profitability" that is doing it - and Bernanke and Keynes, like good bourgeois "economists" who want to save YOUR capitalist system, would do exactly what they are doing now: - provide cheap money to the financial system!