Bill Gross: ‘schemes such as QE end badly’

2013-JAN-09

Precious metal prices have rallied over the last 24 hours, encouraged perhaps by talk of trillion-dollar platinum coins and various other ways of circumventing the US federal government’s laughably named “debt ceiling” (a strange type of ceiling that keeps moving higher and higher).

As we’ve said many times before on this site, confidence in a currency – or demand for it – is just as important a function as supply of the currency in determining its value. The US Treasury will in all likelihood not follow this mad platinum scheme, but this colourful idea has illustrated to many more people around the world just what bad shape the US government is in fiscally speaking – something that followers of the gold market take for granted, but which has not yet permeated into most people’s common knowledge (if it had, gold would cost a lot more than $1,660).

The mechanics of quantitative easing make many people’s eyes glaze over, but the idea of one arm of the US government ascribing a completely arbitrary valuation to a metal coin, and then using this as an excuse to spend as much as it needs to dodge its own debt-limit law is silliness in a very easily understandable form. Psychologically speaking, these stories are like the tide washing against the edge of a sand castle: the castle (a metaphor for the dollar) can only take so much of a drenching before we get a partial or total collapse.

PIMCO’s Bill Gross is one of the more influential and well-known voices warning of such dangers, noting in a recent strongly-worded analysis article for his firm that “ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly.” It’s only a matter of time.