The US Federal Reserve is widely expected to announce its second round of quantitative easing (“QE2”) next Wednesday. Quantitative easing is basically a euphemism for creating money out of thin air, so it is not surprising that people have called it by various other less respectable names. PIMCO’s Bill Gross breaks new ground in this respect by writing that the Fed’s strategy over the last two years amounts to the most brazen Ponzi scheme ever.

PIMCO’s most recent investment outlook was titled “Run Turkey, Run” and included the following:

Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.

Bill Gross, whose PIMCO manages over a trillion dollars of investor funds, is surely the ultimate self-interested commentator on finance and economics. With the global economy having degenerated over the years to little more than a game of Jenga Blocks, Bill Gross nowadays can’t possibly have any bigger priority than keeping the wheels from flying off the cart. Which may be why his article is so candidly preoccupied with this very point.

Reading about Bill Gross calling the US Fed a perpetrator of the world’s most brazen Ponzi scheme I can’t help but recall the story of Gerald Ratner, whose careless talk led an otherwise successful 2,500 shop chain into bankruptcy:

Nobody fell from corporate grace quite like Ratner. Not even Fred Goodwin. Ratner is the Icarus of the bling business. In 1984, at the age of 34, he took over the family firm, Ratners. It had 100 shops, most of them loss making. The shares were worth 27p – but within a couple of years they rocketed to £4.20. He streamlined and accumulated, discounted and marketed, mounted audacious takeover after audacious takeover and, by the time he was 40, Ratners was the biggest jeweller in the world with 2,500 shops, and he was a master of the universe. Then he made the speech.

It was supposed to be one of the greatest days of his life – the then 41-year-old north Londoner, who’d left school with no qualifications and had struggled in the family business for 20 years, was addressing 5,000 members of the Institute of Directors at the Royal Albert Hall. All of them there, just to listen to his pearls. He showed the speech to one of his own directors. Not bad, he said, but why no jokes? So he reinstated a joke: “We do cut-glass sherry decanters complete with six glasses on a silver-plated tray your butler can serve you drinks on, all for £4.95. People say how can you sell this for such a low price? I say because it is total crap.” Then another: “We even sell a pair of gold earrings for under £1, which is cheaper than a prawn sandwich from Marks & Spencer. But I have to say that the sandwich will probably last longer than the earrings.” Boom boom! Two jokes. And his world fell apart.

If the US economy really does require the most brazen Ponzi scheme ever to keep growing, then surely the collapse of the paper pyramid over which asset managers like Bill Gross preside is only a matter of time, and a reset to a lower level of wealth is likely in the cards for our our future. Was this post a Gerald Ratner moment for PIMCO’s Bill Gross?