Janus Capital bond manager Bill Gross says central banks’ zero and negative interest rates destroy capitalism’s business models by making bonds liabilities rather than assets and sustaining zombie companies.
“Not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models,” Gross says in his latest investment outlook.
He adds zero and negative rates “keep zombie corporations alive” and inhibit “creative destruction” – the theory “which many argue is the hallmark of capitalism” whereby innovation disrupts and replaces prevailing business models and industries.
Gross accuses US Federal Reserve chair Janet Yellen and “her contemporaries” of flipping $11trn of assets “from the left side to the right side of the global balance sheet”, referring to the dollar value of bonds currently delivering negative yields.
Addressing Yellen and her central banking contemporaries, Gross says: “In the process, you have deferred long-term pain for the benefit of short-term gain and the hopes that your ancient model renormalises the economy over the next few years.
“It likely will not. Japan is the petri dish example for the past 15 years. Other developed market economies since Lehman/2009 are experiencing a similar fungus.”
To date, the US Fed has not introduced negative interest rates and Yellen said in her speech last week at Jackson Hole that the case for raising rates had “strengthened”.
However, interest rates remain negative in Japan and the Eurozone.