In
his September Investment Outlook report, Gross wrote that his
concept of a neutral policy rate closer to a nominal 2 percent
"now cannot be approached without spooking markets further and
creating self-inflicted financial instability."
The neutral rate is the point at which the rate is neither
stimulative nor contractionary.
The Fed seems intent on raising the fed funds rate this month if
only to prove that they can begin the journey to normalization,
said Gross, who runs the Janus Global Unconstrained Bond Fund <JUCAX.O>.
"They should, but their September meeting language must be so
careful, that 'one and done' represents an increasing
possibility – at least for the next six months," Gross said.
"The Fed is beginning to recognize that 6 years of zero bound
interest rates have negative influences on the real economy – it
destroys historical business models essential to capitalism such
as pension funds, insurance companies, and the willingness to
save money itself. If savings wither then so too does its
Siamese Twin – investment – and with it, long-term productivity,
the decline of which we have seen not just in the U.S. but
worldwide."
Gross said: "The global economy's finance-based spine is so out
of whack that it is in need of a major readjustment. In this
case, even the best of chiropractors could not even attempt it.
Nor would a one-off fed fund increase straighten it out."
He suggested that major global policy shifts – all in the same
direction – should emphasize government spending as opposed to
austerity, and that countries recognize that competitive
devaluations do nothing but allow temporary respite from the
overreaching global problem of too little aggregate demand
versus too much aggregate supply.
"It is demand that must be increased – yes China must move more
quickly to a consumer-based economy – but the developed world
must play its part by abandoning its destructive emphasis
on fiscal austerity, and begin to replace its rapidly decaying
infrastructure that has been delayed for decades," Gross said.
Overall, Gross said "super-size" August movements in global
stocks are but one sign that something may be amiss in
the global economy itself, China notwithstanding.
(Reporting By Jennifer Ablan; Editing by Chizu Nomiyama)
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