Pimco's Gross: U.S.
depends on credit growth but not occurring
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[September 03, 2014]
By Jennifer Ablan
NEW YORK (Reuters) -
Economic growth depends on the productive use of
investment and rejuvenation of "capitalistic animal
spirits," but that's not taking place now, said Bill
Gross, manager of the world's largest bond fund, in his
latest investment outlook letter on Wednesday.
"Economic growth depends on the productive use of credit growth,
something that is not occurring," said Gross, who manages the $223
billion Pimco Total Return Fund.
Gross said the U.S. Federal Reserve, the Bank of England and other
major central banks are now engaged in an "unmodeled experiment"
which involves: "What growth rate of credit is enough to pay prior
bills, and what policy rate/amount of Quantitative Easing is
necessary to generate that growth rate?"
Assuming the interest rate on outstanding debt in the U.S. is
approximately 4.5 percent, a Fed governor using this template would
want credit to expand by at least 4.5 percent per year to prevent
the necessary sale of existing assets, including debt and equity, to
cover annual interest costs, said Gross, who as Pimco's chief
investment officer helped oversee $1.97 trillion in assets as of
Put simply, if credit needs to grow 4.5 percent per year, the
private and public sectors must create approximately $2.5 trillion
of additional debt per year to pay for outstanding interest, he
"They are under achieving that target in the U.S., which is the
reason why GDP growth struggles at 2 percent real or lower and
nominal GDP growth seems capped at 4.5 percent or lower," he said.
"Credit creation is essential for economic growth in a finance-based
economy such as ours. Without it, growth stagnates or withers. Its
velocity/turnover is critical as well."
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Gross said central bankers are hopeful that fiscal policy, which
includes deficit spending and/or tax reform, may ultimately lead to
higher investment, "but to date there has been little progress."
"The U.S. and global economy ultimately cannot be safely delivered
with artificially low interest rates, unless they lead to higher
levels of productive investment," he said.
(Editing by Chizu Nomiyama and Bernadette Baum)
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