The View From 1776
Friday, May 29, 2009
Bond Investment Guru Predicts Dollar to Lose International Reserve Status
Interest rates have begun to rise, and there is little the Fed can do about it without triggering further rapid decline in the exchange value of the dollar.
In the 1970s stagflation, it was bond investors who called the changes on the financial markets. The stock market was flat or down for roughly a decade. But interest rates soared, in tandem with inflation. Bond investors were in the driver’s seat, and they demanded ever higher interest rates to compensate for the inflation that continuously reduced the purchasing power of the dollar.
Extremely high interest rates coupled with inflation made for falling value of the dollar, low profits, stagnant business, and high unemployment. All of it came as a consequence of the regnant Democrat/Socialist belief in Keynesian economics: the view that unemployment can be combatted only with higher wages (read, labor union pressure) and more government deficit spending.
Those are conditions already in evidence today, or conditions that will become dominant within the next couple of years, if President Obama’s budget plans become reality.
PIMCO’s Bill Gross is a titan of the bond investing world. PIMCO’s Total Return Fund is the world’s largest bond fund. His economic perspective is thus worthy of consideration.
Read about his latest assessment of the economic future for the United States.
“Growth will be stunted,” he said. “It will be a different type of world and we have to get used to that.”
The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. “That will make a significant difference for corporate profit growth,” he said.
Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around “for a long time to come.”
Gross added that inflation would also start to accelerate in about three to five years’ time…
Gross also said, with certainty, that the dollar will lose its reserve status. “We simply have too much debt,” he said.