The Fed is driven to further easing due to low inflation and a threat of deflation, where falling asset prices, including home values, result in consumers and businesses that are less willing to spend and invest. Inflation, a rise in the prices of goods and services, would enable more value, production and consumer activity.
"This is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin," Gross wrote. "I call it a Sammy scheme, in honor of Uncle Sam and the politicians -- as well as citizens -- who have brought us to this critical moment in time. You and I, and the politicians that we elect every two years, deserve all the blame."
Volcker Fed
Policy makers have historically focused on containing inflation rather than preventing deflation. Core consumer prices, which exclude food and fuel, were little changed in September, capping a 0.8% increase in the past 12 months, the smallest year-over-year gain since 1961.
Inflation climbed to a 14.8% annual rate in March 1980, driving 10-year yields to 13.65% that year and to an all-time high of 15.8% the following year. Former Federal Reserve Chairman Paul Volcker broke the back of inflation by raising rates as high as 20%, even as the economy slipped into the longest post-World War II recession to win back confidence among investors.
By the time Volcker stepped down from the Fed in 1987, inflation slowed to 4.3% and benchmark borrowing costs were 6.75%.
'Liquidity Trap'
"We are, as even some Fed Governors now publically admit, in a 'liquidity trap,' where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there," Gross wrote. "Escaping from a liquidity trap may be impossible, much like light trapped in a black hole."
Under what PIMCO calls the "new normal," investors should expect lower-than-average historical returns with heightened regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.
"If QEII cannot reflate capital markets, if it can't produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity," Gross wrote.
As part of adjusting to a new normal, PIMCO began offering equity funds in April, and had inflows of about $1 billion, PIMCO said in September. The firm moved into stocks to allow customers to diversify their holdings as the global economy changes and areas such as emerging markets outperform developed regions.