The world's most important central banks have issued more than $6 trillion dollars' worth of "essentially free" money into the global economy since the financial crisis in a misguided recovery effort that could erode stocks, bonds and currencies for generations to come.
That's the view from PIMCO founder and co chief investment officer Bill Gross in his monthly Investment Outlook note to clients of the world's biggest bond fund. Gross argues that the quantitative easing and near zero interest rate strategies employed by central banks in the US, UK, Europe and Japan China and Switzerland have the potential to permanently distort financial markets and create significant long-term inflation risks.
"While they are not likely to breathe fire in 2013, the inflationary dragons lurk ... in cave of quantitative easing," Gross wrote. The tactics, he says, "destroy financial business models and stunt investment decisions which offer increasingly lower (equity and investment returns). Purchases of 'paper' shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice."
Gross also noted the central paradox in the strategies of fiscal and monetary policy in most of the world's largest economies, where central bank purchases of government debt create what Federal Reserve Chairman Ben Bernanke called "essentially costless" money at the same time politicians are demanding the most significant spending cuts in at least half a century.
"Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend," asked Gross. "Why the austerity push in the U.K., and why the possibly exaggerated concern by U.S. Republicans over spending and entitlements?"
Comparing the $6 trillion committed by the six biggest central banks in the world since 2009 to the South Sea Bubble of the 1700s, Gross argues that the future cost of such policies will come "in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold."
Gross also rounded on the practice of central banks - including the Bank of England - rebating the interest on government bonds purchased under the guise of quantitative easing back to the Treasuries that originally issued the debt.
"Should interest rates rise and losses accrue to the Fed's portfolio, they record it as an accounting liability owed to the Treasury, which need never be paid back," said Gross. "This is about as good as it can get folks. Money for nothing. Debt for free."