Bill Gross, founder and managing director of bond investment giant PIMCO, is sour on the idea that monetary policymakers can kick-start the economy through a series of policies that promote zero percent interest rates, quantitative easing and large-scale debt plans in the European Union. Gross, writing in a commentary Monday, says without growth in the form of jobs and a significant stock market pick-up, none of the quick fixes laid out in America or Europe will stir real growth. He says these policies work only if they generate growth. That is clearly not the case in this instance, he argues. “Growth is the elixir that seems to make every ache, pain or serious ailment go away,” Gross said. “Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure. But growth is the commodity that the world is short of at the moment … No country has enough of it — not even China — and many of the developed countries (specifically in Euroland) seem to be shrinking into recess.” He argues near-zero interest rates and discounted future cash flows make it difficult to gain more return if economic growth doesn’t occur across the economy. Furthermore, he advises fixed-income asset portfolios “should avoid longer dated issues where inflation premiums dominate performance.” Gross believes the lack of growth is the outcome of a rapidly changing economy that relies more on technology and less on a structured workforce. Not to mention, an aging global demographic. “The situation, of course, is compounded now by high debt levels and government spending that always used to restart capitalism’s private engine,” he wrote in a note to clients. He added that “economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80% to 90% of GDP acts as a barrier to growth. Because debt service and interest rate spreads start to rise at these debt levels, a greater and greater percentage of a nation’s output must necessarily be diverted to creditors who in turn become leery of reinvesting in a slowing economy. The virtuous circle becomes vicious in its reflexive counter reaction, spiraling into a debt/liquidity trap á la Japan’s lost decades if not stopped in time.” Write to Kerri Panchuk.
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