PIMCO’s Bill Gross has an op-ed in the Financial Times in which he characterizes the strategy of economic growth via increased debt as “a flawed business model”:
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge.
He goes on to criticize producing growth simply by creating more money as unsustainable:
Investors, then, must be leery of the self-reinforcing dynamic that has many fathers and spreads much of the blame: ad hoc and insufficient policies from fiscal and monetary authorities; decades of balance sheet and savings abuse from the southern euroland periphery; unresponsive and insufficient support from supranational agencies, including the International Monetary Fund; a me-first attitude from developing nations that control global reserves.
I’m having a bit of difficulty reconciling these remarks of Mr. Gross’s with his earlier remarks in support of ordinary fiscal pump-priming. Is the United States one of the few nations that “are equal to the challenge”? Or, for some reason, do financial markets have an infinite appetite for American debt? Is what is unsustainable elsewhere sustainable indefinitely here?
I’m also disappointed that he, like nearly everybody else, doesn’t articulate a better, alternative business model.
I can’t speak to Mr. Gross’ previous positions. However, what he is saying is what I’ve been saying here and at OTB for a couple years now. And its receieved much derision from commenters and certain essayists, particularly, Doug Maticonis.
I always invoke the basic corporate finance concept of “debt capacity” – the terminal amount of debt an entity can take on before financial instability ensues. Doug takes me to task (I won’t bother with the ticks/commenters) invoking the sovereign nature of countries as opposed to corporations. Balderdash. Countries issue bonds until the point is reached that their credit standing – and the observation that the money is going down the sewer – stinks. Yes, technically they can then just print, but that’s called debauching the currency. That practice has a finite life. Doug’s a fine fellow, and I’m sure a fine lawyer, but a finance man he is not. ALL entities have a terminal debt capacity.
This is Mr. Gross’ point.
The USA may be the best able – as the “flight to quality” option – to hold on. But the clock is ticking.
Its a shame the USA under the current administration is doubling down on spend, spend, spend, borrow, borrow, borrow, but they are just playing pure politics – and have no idea what they are doing. Its just ticking the clock faster.
And after all, the Whole Foods CEO post and Michael’s response is illustrative. Dave, you are disappointed in proposed solutions. But just look at the dismissive response Michael gave.
As a nation we are headed like a bug at a car windshield. We have to come to grips with the fact that we have systematically transferred resources from a sector inherently more efficient to one inherently less efficient.
Just look at Greece, Italy and now France. You can argue all you want, but empirically the evidence is flowing in.
Mr. Gross is apparently unaware that:
A) A sovereign currency issuer can always pay its liabilities.
B) Debt in our system is not really debt. It is a monetary operation characterized by switching reserves back and forth from government to banks. As the Federal Reserve is the monopoly supplier of reserves, this means the government literally borrows from itself and then pays itself back.
Our public debt comprises private sector savings. Can Mr. Gross explain how that is a negative for the economy?
Ben –
Mr Gross is not stupid.
I suspect Mr Gross is fully aware of “A”
And I suspect that he also fully understands that if China, USA residents or whomever desire to finance spending through US bond purchases that that is a positive signal.
But where do we stand when a) flight to quality ends, b) credit considerations require interest rate increases and c) the printing presses must go into hyperdrive?
Seems to me that to ignore these issues is on par with “What? Me worry?”
Drew,
The Fed will not allow interest rate increases until the economy is in solid recovery. Until that happens the FFR will remain at the zero boundary, and that’s what Bill gets wrong: the Fed is the boss and the bond market its whipping boy.
As for printing money there’s just no need in terms of our public debt. The only reason China buys Treasuries is because we force them to. We give them dollars in exchange for their products, and those dollars go into a checking account at Department of Treasury. The Chinese can’t use those dollars to buy assets in the U.S. because Congress won’t let them and they can’t exchange them for another currency because it will hurt their trade balance with us. The only other thing they can do is put those dollars into a savings account which consists of Treasuries.
Good to know that the Fed sets interest rates for everyone in the world.
Good to know that the Fed sets interest rates for everyone in the world.
So, you don’t think we’ve de-coupled from Europe, China, Japan, the other BRICs? LOL