Bill Gross fears our borrowing could doom us

The bond king is worried that massive credit expansion -- not just deficit spending -- is a threat to the global economy. His advice includes buying hard assets like gold.

By Charley Blaine Feb 1, 2013 3:31PM
© Andrew Harrer/Bloomberg via Getty ImagesEven as the stock market is at five-year highs and the economy is looking stronger, Bill Gross is gloomy about the future. Very gloomy.

The problem the managing director of PIMCO sees is that the domestic economy is going to be suffocated by debt. Not just government debt. But by consumer debt and corporate debt as well.

The result will be that everyone will be working just to service their debts, and the economy won't grow. Everything will just stall out.

That's what he told readers of his popular Investment Outlook essay, released this week.

Actually, he uses T.S. Eliot's famous lines from "The Hollow Men" to focus the point:
     This is the way the world ends…

     Not with a bang but a whimper.
This isn't an articulation of an anti-liberal point of view. It is the point of view of a bond guy concerned that real interest rates are too low and suggest a dysfunctional financial system.

Moreover, in Gross' view, the modern banking system is set up to produce inflation and generate real threats to the economy. Hence the title "Credit Supernova!"

If you deposit money in a bank, the bank keeps some of the money as a reserve and lends the rest out. The borrower, in turn, deposits the money he's been loaned, and the money gets loaned out again. The process repeats itself again and again. That's how money gets created and an economy expands.

Until the system gets out of control with way too much borrowing. Which is where Gross thinks it's headed.

The modern banking system in the United States and elsewhere moved through a period of self-sustaining credit to speculative credit expansion and now is into what the late economist Hyman Minsky called Ponzi finance. That's where everyone needs additional credit just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

More important, in Minsky's view, the banking system encourages so much speculation that the result is ruinous boom-and-bust cycles.
And, of course, Bill Gross says, you end up with an economy that can't expand. The math, he says, works like this: In 1980, it took $4 of new credit to boost gross domestic product by 1%. Since 2006, it takes $20 of new credit to achieve the same result.

Partly that's because the economy has actually grown (as has the global economy). But he sees the bigger problem as just ridiculous expansion of all forms of debt. The U.S. economy has seen the percentage of lending going to productive forms of investment dropping to around 15% of GDP from 21% or so in 2000.

Gross doesn't offer much in the way of how to stop the drift to Ponzi finance. He also concedes the end is not yet nigh.

But he offers some thoughts on what investors might do:
  • Protect yourself against inflation with securities like Treasury inflation-protected securities.
  • Get used to slower real growth.
  • Invest in global securities with stable cash flows.
  • Dump financial assets in favor of hard assets. "Gold, other commodities, anything that can’t be reproduced as fast as credit."
  • Make sure you understand your property rights in any country where you invest.
  • Appreciate what Gross calls the "supernova" character of the existing credit system. It will morph into something else.

I'm not sure I buy everything Bill Gross says. He seems to echo what a bond investor might have said in the late 1970s. Don't get me wrong, however. He is a very smart and successful man.

The catalyst that will set off a wild round of inflation is not yet apparent. I suspect if job growth accelerates rapidly, inflation pressures will reappear. Another catalyst might be an an eruption in energy costs as growth in the global economy takes off. A third would be chaos around oil and gas fields in the Middle East and Africa.

More on moneyNOW

Feb 1, 2013 8:16PM

Barry and company are waiting for someone to find the "National Treasure" to bail them out. There are sooooo many factors that are aligned against us.  We are soooooo screwed and all the washington crown want to do is make political hay. The debt level is unsustainable and barry just wants more without even talking about cuts.  If I didn't know better I swear he is intentionally trying to bankrupt the country and force a revolution so he can impose Martial Law and do anything and everything he wants without anyone being able to stop him. 


"Change you can believe in"

Feb 1, 2013 8:10PM


I share your fears. I don’t see an easy way out either. Of course there will be change; I just hope it doesn’t involve pain. The old system is breaking down and I think trying to exactly recreate it as it was before 2009 isn’t the answer. The old ways are dying. Banking as it is done today is archaic. The “Volker Revolution” supply side debt driven liberalization of markets is sputtering. I am a supply-sider but it isn’t happening presently as all things stand. That China line is insightful and yes why would they keep the debt cycle going with ever cheapened dollars. Sure the QE’s are strategic, better we own the debt, better to make US bonds unattractive so they are cheaper and easier for Treasury to buy and carry. Short term US government debt has to be paid.  As a side effect it is propping up a broken debt system. Why not change a few rules, does it need to be another two by four across our heads before we say ah shucks that didn’t work.

I support the QE’s but obviously that is not an answer into itself. The investor side is too efficient and there needs to be some faction applied and a power shift back to the consumer sector to provide more balance in the credit debt cycle.  Remember E 101, one sector always tries to gain efficiencies at the expense of the other, it’s the law. I think, better the tinkering now as the investor sector ascends then later when it free falls.  A clue to what real economists are thinking is the US corporations are holding on to assets. Why in the world would you go into any market just to get back less in real terms, remember Bill Gross’s commit about to many pick pockets in the US market?

Feb 1, 2013 7:58PM
This trend has been going on for most of the last 40 years. Government needs to spend less and all of us need to pay more to the government. Unfortuntely, not to many people like this combination.
Feb 1, 2013 7:55PM
Debt has been priced into the market. DOW 30,000 in June.
Feb 1, 2013 7:52PM
I want a new car,  I don't have the money so I go home and fire up my copy machine and print up Ben Franklins, hand them over and drive out with a new car,  this is what your GOV is doing with the bond market 
Feb 1, 2013 7:49PM
Our borrowing may "doom" us? Yeah, right. But the market will go to 20,000.
Feb 1, 2013 7:48PM
If most people live paycheck to paycheck, and they see their paycheck is less do to taxes and SS deductions not to mention healthcare expenses.  With inflation at the gas pump and grocery store, I don't see how the lower to middle class can get ahead.  

All I see is more pain and misery in the future.  I don't believe that housing is recovering do to the fact that supply is limited and not enough people have jobs.  Everyone that had a short sale or foreclosed home is not going to get a loan for at least 7 years.

I live in a condo.  H.O.A. fees are going up.  State taxes are going up.  I live in CA.  Need I say more?
Debt should be Obama's middle name, he believes that he should spend until then next three presidential terms are unable to spend anything, then of course he has never concerned himself with just who and how it will ever be paid back.
Feb 1, 2013 7:13PM
What really surprises me is these wall street schills are trying to make us believe investors are buying bonds with really low returns just so they won't lose as much when the market goes bust. What a pile of garbage. The only one buying is the fed. China can't really be that foolish to loan us money just to by their c**p. All we are doing is exporting inflation and soon it will be so high that even China won't be able to sell us stuff. We are in trouble folks, and I don't see any way out of it.
Feb 1, 2013 6:34PM
Glad I'm in the market making money.  Whether it is propped up or not, money is rolling in.  Companies have been hoarding their cash for the last 4 years.  Money is now being spent.  Economy is going to grow no matter what.  Nothing to do with the Obama so do not give him credit.  If you are sitting back watching, I hope you enjoy.  I know I am!
Feb 1, 2013 6:25PM
at 51 percent of you guys voted for obama
Feb 1, 2013 6:23PM

The Federal government 2.8 trillion each year in 2008 today OBAMA's "budget", if he had one, or spending is 3.8 trillion.  They claim we don't have a spending problem!  And they say the deficit is caused by the Iraq/Afg war and prescription drug bill of Bush.  If, may I remind people, the Democrast said the prescription drug bill was TOO SMALL!  Remmber the donut hole?  Even at that the program costs less than 80 billion each year.  And the Wars cost less than 100 billion each year.  SO these lying BASTrds say Obama's 1.3 trillion annual deficits are caused by Bush.   How long can we borrow 1.3 trillion each year?  This is Obama's plan!  You say no it is not?  Well, what is his plan?  And look at his ten year projections.  HIs projections show him adding 8 to 10 trillion in debt over the next ten years.


AND you woted for this disaster!!!!  Your children are screwed, whether on welfare or looking for a real life.  Obama has screwed us all.  But blame Bush.

Feb 1, 2013 6:16PM

I am seeing one drag on the credit/debt swap is the the debt side has invented a few debt expansion instruments (self contained wealth expansion mechs) that is eating up a % of wealth outside normal or healthy expansion and so when the credits are being given back to the savers(consumer investments) they are at an inflated rate relative to real value. That net drag weakens the consumer sectors ability to give back those credits at an equal value given. Either the debt side needs to more realistically reflect value in the swap or a productivity spike on the consumer side to make up the deference. I think the former is easier to do at this juncture. Maybe look outside the US to seek out more equitable debt/credit  trades. The QE is making up the difference but hey...


These Liberal (their market view) pundits dare not breath this as they drone on about the (necessary under current market realities) QE's.

Feb 1, 2013 6:15PM
I think we are in a vicious cycle right now.   The govt is basically lying to us, saying that they are keeping interest rates low to help stimulate the economy.  I think the reality is that they are only doing it to keep the govt afloat, because if the rates go up, they won't have any money to service the national debt.  

They can't raise interest rates to something reasonable until the debt is paid down, but they aren't able to pay down the debt either!

The result is now that money doesn't have much time-value to it, and people around retirement age are hurting.  Think of the economic stimulation that would occur if people with money in a savings account could make even 4% interest.
Feb 1, 2013 6:09PM
Don't like the looks of this guy, we better investigate !
Feb 1, 2013 6:00PM

It dosen't matter anyway.  Noblaba will simply cut down more trees and convert the leaves to worthless greenbacks. 


Think about it.  There isn't enough gold here in the US to cover all of the green notes out there now.  What's the difference whether Noblaba just orders the Treasury to print more money?


In fact, why dosen't (since fiscal responsibility dosen't fly here anymore) Noblaba just have the treasury print enough money to quash the 16 TRILLION that WE ALL ARE IN DEBT TO???


Simple solutions people....Like I said. 


Just saying...




A dis-satisfied customer and voter...


Feb 1, 2013 5:55PM




Feb 1, 2013 5:48PM
The federal reserve's choreography called for their bank surrogates to buy stocks and push the dow over 14,000 today. What a joke!
Feb 1, 2013 5:46PM
You have to remember that economic principles in general are extremely right wing and therefore hate Obama. 

Also mathematics are racist.
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