John Paulson, the hedge fund manager famous for making billions from bets that securities backed by subprime mortgages would prove worthless during the financial crisis, has also suffered as large bets on banks recovering have turned bad. Bill Gross, manager of the world’s largest bond fund for Pimco, has seen his widely followed call to avoid US government debt backfire. […]

According to a person familiar with Mr Paulson’s thinking, he was also exceptionally keen on gold. When the Fed began to buy bonds in 2009 in an attempt to stimulate the economy, he was advised by Alan Greenspan, former Fed chairman, that this would ultimately lead to higher inflation as the economy recovered. So his $35bn hedge fund decided to allow its investors worried about inflation to transfer their holdings from US dollars into gold, using derivatives that track the price of the precious metal.

Inflation was also on the mind of Pimco’s Mr Gross, co-chief investment officer for Pimco and another recipient of a Morningstar award – fixed income manager of the decade – for his stewardship of the $244bn Total Return bond fund. He spent the first half of this year warning investors that holders of US Treasuries were not compensated for the risk of higher inflation by the low interest rates on offer. “Bond holders are being duped into thinking that inflation will renormalise to justify existing yields,” he said when 10-year Treasury yields stood at 3.5 per cent.

To be clear: inflation can become a problem. It is not one now, and hasn’t been a significant problem for nearly thirty years. I find it exceptionally perverse that much of the financial and political establishments are paralyzed by fears of prospective inflation that they refuse to act to fix the actual problems we confront in our economy today, but this provides some evidence that these fears might not be entirely cynical. Merely irrational, and perhaps based on some sort of misremembered incident from years ago. Sort of like how people are so freaked about terrorism, right?

Anyway, it’s good to see inflation hawks put their money where their mouth is and lose. Maybe this will convince other finance industry types to cool it a little bit with the inflation talk? Also, listening to Alan Greenspan at this point in time is so misguided as to be simply baffling. It’s like the Romanovs asking Rasputin about how to manage the empire, isn’t it?

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