Low interest rates hurt the economy.

By Mike Larson

Market Roundup Dow +89.39 to 17,918.15 S&P +5.74 to 2,109.79 NASDAQ +17.98 to 5,145.13 10-YR Yield +0.03 to 2.22% Gold -$18.60 to $1,117.30 Oil +$1.70 to $48.74 I’ve been saying for a couple years now that low or zero or negative interest rates — not to mention, QE — just aren’t cutting the mustard. They’ve inflated asset prices, sure. But they haven’t done squat for the real economy. But in a fascinating just-released research piece, “Bond King” Bill Gross goes even further. He says ultra-low rates aren’t just failing to stimulate the economy. They’re actually hurting it. I’m sure heads are exploding amid the Paul Krugman/Keynesian crowd today. After all, they believe low rates are exactly what you need to spur home and car buying, corporate borrowing, and so on. But former Pimco and current Janus executive Gross issued this indictment in his thinkpiece: Janus executive Bill Gross. “After nearly six years of such policies producing only anemic real and nominal GDP growth … it is appropriate to question not only the effectiveness of these historical conceptual models, but entertain the increasing probability that they may, counter-intuitively, be hazardous to an economy’s health.” His thesis, in a nutshell and trying to use as little econ-jargon as possible: Zero or negative rates cause the traditional lending and savings process to break down, while also causing the yield curve to flatten dramatically. That provides investors with little incentive to invest for the long term. It also crushes bank profit margins. That hurts overall corporate profitability and yanks the rug out from under the very same banks the Federal Reserve wants to get out there and loan money like mad. Pension funds are forced to cut benefits because they can’t earn adequate returns to cover past promises. Consumers and companies are forced to squirrel away more money because the yields on their savings collapse. That, in turn, saps disposable income, reduces corporate spending, and helps “Japan-ify” the economy. Gross proposes a solution whereby the Fed and its foreign counterparts would abandon six-plus years of ineffectual policy. They should instead dump long-term bonds to steepen the yield curve and/or adopt a higher inflation target. But in the same breath, he basically said that won’t happen because they are too “stubborn, and reluctant to adapt to a significantly changed finance based economy.” “Gross’ solution: The Fed and its counterparts abandon six-plus years of ineffectual policy.” My take? Gross’ comments won’t help explain or predict what stocks will do tomorrow, or over the next few days. But they seem right on target considering the news we’ve gotten about weakening corporate profits, slumping manufacturing activity, lousy wage growth, and widespread market divergences. So while many of the analysts on CNBC say everything is hunky-dory again, Gross’ comments probably serve as a nice reality check. So what do you think of his comments? Are low rates actually bad for the economy? Helpful? Somewhere in between? Why is that? Should we even care about the fundamentals in an environment where stocks have been rallying for five weeks? Let me know your thoughts over at the Money and Markets website.