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Dangers of quantitative easing

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Two top asset managers, Bill Gross, co-founder of Pacific Investment Management Co., and Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., lambasted the Federal Reserve's loose monetary policy and said renewed asset purchases are in danger of becoming ineffective.

 

The U.S. central bank's bond asset purchasing program "is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme," Gross, wrote in his monthly investment outlook posted on Pimco's website on Wednesday.

 

"It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up," said Gross, who manages the world's largest bond fund.

 

The Fed is expected to announce another round of large-scale asset purchases when it holds its next policy meeting on Nov. 2-3, after already deploying $1.7 trillion US to pull the economy out of the financial crisis.

 

Gross said the United States is in a "liquidity trap, where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there."

 

Gross's views came a day after Grantham, who helps oversee over $100 billion at Grantham Mayo Van Otterloo & Co., said Fed policy has resulted in "extraordinary destructiveness" and "ruinous cost."

 

"I would force (the Fed) to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times -- the Greenspan/Bernanke put," Grantham wrote to clients on Tuesday. He referred to Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan.

 

"It would be a better, simpler and less dangerous world, although one much less exciting for us students of bubbles," Grantham wrote in a report titled "Night of the Living Fed," in a play on the traditional scary Halloween season, Gross, who helps oversee more than $1.1 trillion in assets at Pimco, said the resumption of asset purchases by the Federal Reserve would squelch the bond market.

 

"The Fed's announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment," he said.

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