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Paul A. Ebeling, Jnr

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ASEAN ANALYSIS  Asean Affairs  2 November 2010

PIMCO's Bill Gross says US dollar may drop 20 percent

By  Paul A. Ebeling, Jnr.

AseanAffairs     2 November 2010

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The greenback"is in danger of losing 20 percent of its value if the US Federal Reserve continues its unconventional monetary easing, Bill Gross, the manager of the world's largest Bond fund, PIMCO, said Monday.

"I think a 20 percent decline in the US dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors.

"When a central bank prints trillions of dollars of checks, that is a debasement of the US dollar in terms of the supply of greenbacks on a global basis," Gross said at his PIMCO office on Monday.

The US Federal reserve will probably begin a new round of monetary easing this week by announcing a plan to buy at least US$500 billion and a perhaps as much as US $4trillion of long-term securities, what investors and traders refer to as QE-2, according to a poll of primary treasury dealers.

"QE-2 not only produces more bucks but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold Dollars in current form or at current prices," Gross added.

To a certain extent, that is what the Treasury Department and Fed "in combination" want, said Gross, who runs the US$252 billion Total Return Fund and oversees more than US$1.1 trillion as co-Chief Investment Officer.

"The problem here is that our labor and developed economy labor relative to developing economy labor is so mismatched, China can do it so much more cheaply," he said.

Many Americans believe that the Chinese government is manipulating its currency and in effect stealing away American jobs and throwing the US in an ever-deepening trade deficit. But Gross said this is a byproduct of a globalized economy.

"It is a globalized economy of our own doing for the past 20-30 years. We encouraged all of this, and it is coming back to haunt us. To the extent that Chinese labor, Vietnamese labor, Brazilian labor, Mexican labor, wherever it is coming from, that labor is outcompeting us and holding down the US economy," he said.

Gross added: "One of the ways to get even, or to get the balance back, is to debase your currency faster than anybody else does. It's a shock because the US dollar is the world's reserve currency. But to the extent that that is a necessary condition for rebalancing the global economy overtime, then that is where things are headed."

"Other countries and citizens are willing to work for less and willing to work harder, and we forgot that Magic Formula somewhere along the way," Gross said.

In that regard, Americans should be investing a lot more overseas than they are to find growth as the US remains in a slow growth environment, he said.

"Pension funds and Americans, in general, have a problem because their liabilities are US dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is. All of which entails risk relative to the home country. But there's probably a bigger risk in simply staying comfortably within the confines of US dollar-based investments."

Paul A. Ebeling, Jnr., Co-Founder Ebeling Heffernan
Mr. Ebeling’s 45 year business career includes investment banking, market and business analysis across his wide area of interest, which include the world public markets in equities and commodities, design, engineering, construction, construction finance, real estate, planned community development, motion picture finance and production, art, literature and music. Mr. Ebeling’s dedication and effort with the Ebeling Heffernan executive team has led to many business opportunities worldwide.

Paul A. Ebeling, Jnr

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