From Bill Gross, Portfolio Manager, Janus Capital Group, in a recent Barron’s Roundtable session (Barron’s 2015 Roundtable, Part 1, 1/19/15):
If a 2% nominal rate is about right, the 10-year bond is decently valued at 2%, as well. Is a zero percent real rate of interest a fair return on your money? It isn’t but it might be an acceptable rate in a world where there is too much debt.
Interest rates will be lower than the market thinks. Policy makers at the Fed have indicated that the policy rate will be 3.75% to 4%, longer term. They are dreaming. Money is being stolen from bond holders because of the repressive polices of central banks. That is what happens in a deflationary environment when a debt supercycle ends. The savers pay the price.
SLL is confused. If there is “too much debt,” shouldn’t creditors be in the driver’s seat? And if they are in the driver’s seat, why do they have to accept a zero percent real rate of interest? They have to do so because there is one group of buyers of debt who buy regardless of the real rate of interest they receive: central banks. Mr. Gross is correct: money is being stolen from savers because of central bank policies. To put it more crassly, would-be retirees are working at Walmart because they cannot get a decent return on their money while profligate governments borrow cheaply and hedge fund speculators finance their speculations with virtually free money. Stop the central banks of the world from repressing interest rates and monetizing governments’ debts, and for the first time in years savers would see an acceptable rate of return on their money. That is what it would take for the supply of true savings—as opposed to central banks’ money from thin air—to equilibrate with the voracious demand to borrow.
