PIMCO’s Bill Gross is out with his latest investment outlook letter, and he communicates a fairly simple message: economic growth depends on credit growth.
In his letter — called “For Wonks Only” — Gross writes that, “A credit-based financial economy depends on an ever-expanding outstanding level of credit for its survival.”
Gross doesn’t disappoint in walking through an argument that is, pretty much, only for wonks; but in its most distilled form, Gross’s argument is that if the outstanding debt of the U.S. carries an average interest rate of 4.5%, then credit growth needs to expand at that rate to pay for outstanding interest. Currently, we’re falling short of that.
Gross writes that the Fed is, “underachieving that target in the U.S., which is the reason why GDP growth struggles at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower. Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers.”
Gross includes this chart, which shows the tepid rate of credit growth since the financial crisis.
Gross writes that the current “global monetary experiment” being undertaken by central banks — holding interest rates near zero, and in the case of the U.S. and Japan and potentially the Eurozone, asset purchases — may support the economy and calm markets.
“Over the long term, however, economic growth depends on investment and a rejuvenation of capitalistic animal spirits — a condition which currently does not exist,” Gross writes.
Back in the spring, Liz Ann Sonders of Charles Schwab highlighted a chart showing the increase in total loans & leases, which accelerated in the early part of this year.
An updated version of that chart from the Fed shows that this trend has continued.
Bill Gross, it seems, remains unconvinced.