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 5:13PM
I've been saying the same thing for months! The stock market is just smoke-and-mirrors - it's propped up by the Fed.  We're ALL going to have to tighten our belts if we want to get out of this spot: rich, middle class, and poor, NO exceptions. Unless the 535 idiots in DC get serious, make the tough decisions and start doing REAL spending cuts, we're screwed.
Feb 1, 2013 5:04PM

I don't care what anyone says, I'm getting out of debt (even if it takes me a looong time).

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 5:36PM
All the QE's have been done to keep the interest payments on the government debt from putting the country into a death spiral.  The consequences have been low rates which is incentive for company's and people to rack up debt.  Put that together with student debt (about a trillion with just student debt) and man that's one big **** debt bomb.  Inflation on food and energy and taxes means stagnation at best for 75% of the country.
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 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 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 5:55PM




Feb 1, 2013 5:45PM
Mr. Blaine seems to disgard what Mr. Gross says by comparing him to "a bond investero in the late 1970's".  If you look at the real return of bonds in the '70's, you would be sadly rewarded with substantial losses.  The reality will come when somebody besides the Fed buys government bonds.  Would you touch them?  They have almost nowhere to go but down when rates go up.  Then, the people of America will have a hard time servicing their national debt.  Interest will take up a large portion of the federal take.  Then, the easiest option to make things balance is putting more ruin to the value of the dollar.
Feb 1, 2013 5:32PM

no shiiiit Sherlock! what do you mean 'could' genius, 6trillion added to our already stratospheric debt and I'm sure before this maniac marxist pig obama is thru he'll add another 6tril to the mix, meanwhile unemployment jumped up again, wow! nobody saw that coming huh?!! 157,000 jobs created (a joke!!) while 167,000 people left the workforce! but some good news, the lib loony left is burning right along side the rest of us, middle class tax hike just 'round the corner doo dah, doo da, marxist pig obama lied again, all the doo dah day, but I digress


oh and I suggest you azzwipe celebs and various dirtbag obamazombies that smoke, you might want to change your vice with a quickness since you'll be charged $5500 for the privilege of smoking hahaha!!! don't you liberal scum just luv when your right to choose dwindle and dwindle and dwindle, oh, right, but you're happy that the rich are taxed more! HAHAHAH!!!HAHAHAHAHHAHA!!HAHAH!!HAAHHAAAHAHAH!!!

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 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?
Feb 1, 2013 7:17PM
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 5:35PM
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 9:22PM

I agree.  The world now days is completely dependent on spending.  You are not really expected to save, interests rates prove this.  In fact the Presidents for years now have always made a big thing about spending.  Government spending, consumer spending, company spending.  And what has that gotten us?  In debt!  Nobody can afford to retire, why do you think they are trying to raise the official retirement age and why do you have people in their 50's and 60's still working?  Back in the day if you got a good job and worked up to 55-60 years old, you retired and had a very good retirement plan and you had it made.  No more.

Eventually it will collapse, history shows this.

Feb 2, 2013 8:52AM

"I don't care what anyone says, I'm getting out of debt (even if it takes me a looong time)."


Oog the Caveman said the same thing about Fire. His neighbor- Ug surmised that if he didn't stick his hand in it he wouldn't get burned, but if he stuck wild game on a stick and put it in the Fire, he got a tasty meal. You should probably snap out of your coma now and take a look at your credit, your debt, and how you live. Make a budget, account for debt, use credit to leverage living better and turn what you are afraid of into an asset. Sadly, household finance isn't taught in schools and yet, no one makes it through adulthood without knowing it. America STINKS with bankers and financiers right now. When we had legitimate LENDERS, we had prosperity. Think that one through before denying it.

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 3, 2013 9:46AM
I am close to being out of debt only owe $5000 + but I still have little disposable income. Good Income 85 K , 2 kids, 2-Homes ( 1 Purchased for older mother) both paid for. Do not have expensive hobby's ,2 cars paid for and over 10 years old. I quit playing golf because of expense. But it is still paycheck to paycheck. -- Then 2 weeks ago company decided on a 10% paycut on top of the 2.5 SS increase. Also employer announced a increase in Medical Insurance for which we pay $750 per month now. If this is the norm then Crap is getting ready to hit the fan. -- Dont forget Gas is going up too that's another hit.
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