Bill Gross’ May Investment Letter: The Scariest Thing I’ve Read In Years

A friend recently sent me Bill Gross’ May investment letter and I haven’t been able to stop thinking about for days.  Now one cannot deny that Bill is a highly intelligent man which is clear when reading his letters.  He thinks differently than most and that comes out between the lines.  But this latest letter has me more on edge than I normally find myself and for two reasons.  First is that I cannot decipher if Bill is actually championing what he is discussing or simply suggesting it is a stark reality that we must accept.  Second is that it reveals that even the likes of Bill Gross does not understand free market capitalism.

The gist of the letter was discussing the fact that technology is accelerating the replacement of human capital with software and machines.  It is a fact.  Bill rightly suggests that if this continues on course (which he believes it will) we will find ourselves in a jobless society.  He describes a future where jobs are no longer part of societal life.  Bill includes an excerpt from Andy Stern’s Raising the Floor,

“a policymaker – a future President or Prime Minister – must recognize that existing government policies have “built a whole social infrastructure based on the concept of a job, and that concept does not work anymore.” In other words, if income goes to technological robots whatever the form, instead of human beings, our culture will change and if so policies must adapt to those changes.”

To this proposition Bill then proposes a solution,

“What should the policy response be?  Retraining and education sound practical and are at the head of every politician’s promised ticket for the yellow brick road, but to be honest folks, I doubt that much of it will be worth the expense. Four years of college for everyone might better prepare them to be a contestant on Jeopardy, but I doubt it’ll create more growth; for the Universities perhaps, but not many good jobs for the students. Instead we should spend money where it’s needed most – our collapsing infrastructure for instance, health care for an aging generation and perhaps on a revolutionary new idea called UBI – Universal Basic Income. If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it”….

“The question is how high this UBI should be and how to pay for it, not whether it’s coming in the next decade. It is. Strangely, the concept is endorsed more by conservatives than liberals and in Silicon Valley as well. Even with a theoretical $10,000 UBI per eligible citizen, the cost of $1-2 trillion dollars is seen as an income pool to consume many of the high tech products they produce.”

When I first read this it quite literally sent shivers down my spine.  An anthology of futuristic Sci-Fi movies flashed through my mind.  Not only are we being bombarded with calls for criminalizing physical money – negating our natural rights to private trade and also to private wealth in the sense I can no longer bury my money in a jar in my backyard in preparation for a cataclysmic event – but now we are being told by highly respected financial minds that we need to accept a mandate of being placed on a government allowance program (Universal Basic Income).  The amount of which will be decided by a committee of government bureaucrats and corporate lobbyists ensuring it meets the needs for basic survival plus some sufficient amount of discretionary consumption (tied to QoQ earnings growth estimates, no doubt).  I can only imagine how proud Jefferson and Madison would be should they see what we’ve done to their American ideology.

Now once the initial shock of what was being proposed by Mr. Gross had worn off, the left side of my brain kicked in.  It struck me like a woman scorned that we have deviated so far from free markets at this point that even the top financial minds no longer have any understanding of what is meant by capitalism.  It must be true, for anyone who understands capitalism could never have published such a letter.  The logic in Mr. Gross’s argument is beyond invalid, in fact, it is so ludicrous it borders on insane.  I mean this quite literally.  Let me explain.

I have not only written about the fundamental law of capitalism that is the natural bond between profit and labour, I have provided both theoretical and observable quantitative proofs to the law.  In a nutshell it goes like this – Investors seek profit, profit requires consumption, consumption requires income, income requires labour, labour requires investment, investment requires profit.  If we allow each aspect of this circuit of capitalism to exist without manipulation then the perceived issue of technology replacing rather than complimenting human capital cannot occur.  It is impossible because each is a dependent and precedent aspect in the circuit.  If you weaken one you weaken all.  That (dependent/precedent) circuit is the mechanism by which capitalism (unmolested) naturally creates a balance across these paramtres such that each is optimized (not maximized).

The so called ‘Free’ Trade Agreements are an attempt to circumvent capitalism’s inherent optimizing mechanism for the objective of maximizing profit by weakening labour (and negating the higher risks associated with lower labour cost regions).  The technology problem being discussed by Gross and Stern (and others including Kevin Murphy, a MacArthur “Genius” Award recipient and my former Economics Prof from Booth Business School, in the latest issue of the school’s Alum magazine) arises from the very same objective of maximizing rather than optimizing profit.

Specifically, the problem is that of replacing existing labour with lower cost labour while at the same time expecting the consumer to remain strong, which is a necessary condition to achieve the desired goal of profit maximization.  Whether it’s poor farmers in China or robots replacing the American workforce it is the same issue.  And I recently discussed this problem in an article where I defend Trump’s trade policies. Tariffs on corporations that attempt to take advantage of labour arbitrage created by trade agreements (i.e. agreements that negate the inherent higher risks of the chasing the lower cost labour) simply build back in the inherent risk cost i.e. the tariffs re-establish the true free market costs.  However, the trade agreements, while offsetting the risk problem, do not offset the income problem.  That requires subsidies.

In the end whether by way of trade agreements or technology, maximizing profits by weakening labour and thus distorting the natural balance of capitalism requires a subsidy to the consumer.  This is not up for debate, it is not an argument, it is an absolute logical syllogism.  Period.  If you weaken labour but do not subsidize the consumer profits actually deteriorate and the maximization strategy will naturally revert back to capitalism’s natural process of optimization.  What this suggests is that optimal profit is also maximum sustainable profit.

So let’s take a look at the subsidization process required by the profit maximization strategy as corporations chase cheaper labour resulting in weaker consumers (by way of lower income).  The subsidy will look to replenish the lost consumption resulting from the consumer’s lost income.  The subsidized consumption becomes a conduit for subsidized profit which is the real and ultimate objective.  Yes, we are in fact, subsidizing corporate profits.

Now in theory we know the subsidies can come via welfare (synonymous to Gross’ proposed Universal Basic Income), credit and population growth.  Looking at the observable data we see the subsidies did come through consumer credit, welfare and population growth (i.e. 15 million (undocumented) immigrant consumers).  The following chart tracks the increasing reliance on welfare and credit for consumption.

Screen Shot 2016-05-12 at 9.17.18 PM

NAFTA was signed in 1993.  This chart depicts the proportion of personal consumption (PCE) that comes from consumer credit and welfare.  You can see that the amount of consumption being subsidized has increased by 40% since the inception of NAFTA.  In nominal terms this year PCE is $12.5T.  That means the growth in welfare and credit above the 1993 levels allowed for an additional $1.25T in revenues for corporate America this past year.

And so to summarize, if we remove the condition that subsidies are, as Bill Gross appears to be suggesting, a given within our system of ‘free markets’ then the problem he discusses in his latest letter is not in fact a problem.  This is why I suggest the logic that Bill is using borders on the insane.  The problem he describes is only a problem if you allow the solution he proposes to solve the problem he proposes.  The profit maximizing objective attempted via lower cost labour strategies (poor farmers or robots), is impossible if we simply reject the concept of subsidization.  Capitalism will naturally optimize each aspect of the capitalism circuit.

*And just to respond in advance to the die hard socialists, rejecting profit subsidies does not preclude social assistance for the purpose of real social assistance.


16 thoughts on “Bill Gross’ May Investment Letter: The Scariest Thing I’ve Read In Years

  1. Time to move beyond the base “dog eat dog” mantra meme. The human condition deserves better, and can certainly do better.

    It’s high time we push the ball forward, as our founding fathers astutely did in their times……

    A good place to start would be breaking up the mega banks, creating a regional banking system, whereby banks actually earn their money by investing more locally in productive assets which they can evaluate close up, as opposed to playing high-stakes financial paper poker on our nickle……

  2. The answer is enlightened capitalism, as opposed to the strictly greed based capitalism of today, which is entirely captured and beholden to the abomination of a parasitical financial Borg.

    Reward actual productivity as opposed to simply dollar based earnings……………..pretty fundamental, everyone wins, if you think about it.

    You can make as much money as you want, you simply have to earn it, as opposed to legally stealing it.

  3. Mr. Iverson,

    I found your blog via ZH, a website I do not take seriously but for the occasional gem, such as this post of yours.

    I enjoy your analogy of the circuit, and while I wouldn’t call myself a capitalist (or any other “ist”), I do think you’re on the money (pun intended) regarding how *a* capitalist system is supposed to self-regulate and thereby self-perpetuate in a manner than enables most people to live a dignified and civilized existence.

    I also agree with your diagnosis that one/several of the nodes on this circuit have been corrupted–I believe you single out the Labor:Income:Consumption nexus which, in your view, has been bypassed by those seeking to maximize (for themselves ) profit, rather than optimize said profit (for the perpetuation of the system-aka the circuit). Is my understanding more or less correct?

    Where I feel lost in your argument is regarding solutions… You’re clearly ruling out the continued subsidization of labor/income/consumption via credit/pop. growth/welfare. I agree that this approach is bound to backfire (and probably is, right now). What I’m not seeing in your argument is an alternative to restore the circuit to its proper functioning. Is it tariffs? Taxes on certain kinds of labor-replacing investments? An ownership/ruling/investor class more interested in system/circuit preservation than their personal wealth maximization? Some combination thereof, or something else entirely?

    I’m starting from the assumption that it won’t correct itself; that is to say the circuit is just a metaphor for individual and collective economic and political decisions over time, and that restoring (or further destroying) it will be a result of such decisions. Do you share this assumption?

    Thanks again for the thought-provoking post.

    SB in StL

    1. SB in StL – I think you meant to address Mr. Beversdorf for his insightful blog.

  4. Subsidies have always been bailouts for poor economics or to promote new technology introduction. On the latter point, that has changed over time such that subsidies are to promote current government agendas aka solar, electric cars, etc. and now we have anti-subsidies which also promote the current government agendas of which the EPA is the primary vehicle for this promotion aka coal and other fossil fuels. And it seems once a subsidy or a welfare (social assistance) is put in place, it can never be taken away.

    Actually our social infrastructure evolves around our personal need to survive AND thrive not around something called a job. Our ultimate “fix” will be painful as it will force our civilizations back to the survival mode as I don’t think we, as a total society, are smart enough to face that stark reality of “if you don’t contribute, you don’t stay”….

  5. Ironically, you seem to be making an assumption very similar to those made by socialists – namely, that there is such a thing as “society” (or in this case “capitalism”) and that somehow this system will act intelligently to preserve its normal working.

    If greedy shareholders and bosses try to increase their own wealth by underpaying workers, in the fairly short term they will undermine the system on which everyone depends. As you have clearly explained, if workers don’t get paid enough, then in their role as consumers they won’t be able to buy enough.

    The question I think you have overlooked – because you overestimated those responsible – is “what makes you think the rich give a rodent’s fundament for what happens to the system in the long run?” They have got theirs.

    1. Good point, whether we like it or not, there are always those who consider themselves elites and above the fray of the masses. Throughout history, we have seen several cycles of the elites making their moves, literally, against the masses. The “trusts” of the late 1800’s and early 1900’s as just one example.

    2. Actually my point is the rich would not foresake labour unless government provides the subsidies because doing so would hurt profits not help. It is a mathematical certainty. The implication is that we the people have (although rarely utilize) the power to legislate. And so we could reject the notion of subsidizing profits. If we did capitalism would keep the capital allocators on a path of optimization because optimization is maximization when subsidies are not available.

    3. What does it profit a man to gain the world and lose his soul. I have a feeling all this stuff is moot

    4. There is a society, whether viewed through liberal or socialist lenses, is society is defined as a group of individuals. It’s that simple. Nobody claims that a society or its individual components act intelligently. In fact, socialism seeks to prevent those from acting in their own best interests while capitalism uses this fact of human nature to society’s benefit (Adam Smith’s invisible hand). Both systems (in theory) preserve themselves, although it’s easiest to argue socialism does not.

      What is underpaying in your example? A free market in labor allows for the workers to contract with employers freely. If they can make more somewhere else, they will quit and move on. This keeps the employer competitive with the rest of the industry. Your essentially arguing for demand management a la J. M. Keynes – make sure the workers have enough to buy products and lift GDP.

      I don’t think the author overestimated anything. I think you have overestimated your understanding of his subject. A capitalist system – not even pure, but reasonably free – does not depend on what the rich do. This point has been made by economists for 120 years or longer. If the rich are truly greedy, they will seek return on their riches. That means it must be invested, even if that investment is in a demand deposit at a bank (which gets loaned out to the not-so-rich) or a money market account (which drives down short-term rates for the not-so-rich to pay less in costs). Or the rich will invest in government bonds (which benefit the poor), or corporate bonds (financing the rising tide) or corporate stocks (again, financing the rising tide). Only when the rich put cash under their bed – assuming that’s all they do and have no job which provides value to society – do they provide nothing to society. But if they did that, I’d guess we’d have to conclude they’re not that greedy after all.

      1. Interesting but I think you missed the point of the article. Try a small thought experiment, remove the gov’t subsidies to income (i.e. Take gov’t completely out of the equation thereby creating a true free market) and explain to me how the circuit of capitalism can exist after we reduce labour costs to zero. Remember, absolutely no gov’t in this theoretical economy.

  6. This newspeak is evolving. Before socialism was considered bad like STD – a stigma of no self-discipline and bad principles, nothing to be happy about. Today welfare is trendy, be it food stamps at their record high numbers or corporate subsidies (Tesla). I don’t know why people bought into it but now society is so complacent that only a big crisis can change that. For investment there is also limited choices – unless you are willing to go outside the US with your money then there is plenty low-debt, good demographic, decent-growth countries with cheap markets and currencies.

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