Pressure Cooker
Led by Chairman Ben S. Bernanke, the Fed has purchased $2.3 trillion in securities in two rounds of quantitative easing since 2008. And it may extend its third round through 2013 and climb past a total of $1 trillion in purchases, according to economists interviewed by Bloomberg.
“You’re just going to build up pressure in the pressure cooker, and when it blows, the lid will blow sky-high, and that’s when you get to phase three,” Gundlach says.
His pessimism sets him apart from other prominent money managers, notably Larry Fink, chairman of BlackRock Inc. Fink says the U.S. banking system is in relatively good shape and the large supply of natural gas in the U.S. will create jobs. The economy grew at a stronger-than-forecast annual pace of 2 percent in the third quarter.
“In the long run, I’m very bullish on the United States,” Fink, 60, said at a BlackRock iShares conference in November.
Fiscal Cliff
Gundlach says he has no faith that President Barack Obama in his second term will reach an accord with Congress to make significant cuts in the $1.09 trillion deficit. He says the tax hikes proposed by Obama on the wealthy wouldn’t bring in enough revenue to have a significant impact and politicians probably won’t make major cuts in entitlement programs because the public overwhelmingly supports them.
Gundlach dismisses the chances of a grand compromise on the so-called fiscal cliff of automatic spending cuts and tax increases totaling $607 billion if an agreement isn’t reached by January. Rather, he expects politicians will find a way to push the deficit issues into 2013 and beyond.
“I don’t think Obama is likely to give on anything, and I doubt the Republicans are going to roll over because they failed to regain the White House,” Gundlach says.
In making his case to abolish the Fed, Gundlach cites an argument made by former Texas Representative Ron Paul in 2002. Paul said the U.S. Constitution grants Congress the authority to coin money and regulate the value of currency and that it doesn’t give Congress the right to delegate control over monetary policy to a central bank.