Tuesday, September 30, 2014
Betting On Interest Rates Can Be Bad For One's Career
Bill Gross was the CEO of the largest bond fund in America. He did well when he was bullish on bonds but he decided that interest rates would spike when the Fed ended QE2. He was wrong and that was not good for his career at Pimco. An article was written in sympathy for Bill Gross. The point of the article was Gross was a victim of quixotic behavior at the Fed which has interfered in the bond market. Paul Krugman, does not understand everything that was happening at Pimco which cost Gross his job, but he argues that there is a good reason why interest rates have not risen in response to government borrowing. Conventional wisdom suggests that government borrowing will crowd out private borrowing and drive up interest rates. That is, there will be excessive demand for limited savings. That cannot happen when our problem is that private demand for savings is well below the supply of savings. Government borrowing simply absorbs the savings that are not demanded by the private sector. Interest rates won't spike until the private sector, which has been deleveraging, decides to lever up.