Tuesday, January 20, 2015
Bill Gross via Barron's Roundtable:

"Human organisms want to grow. The nature of things is to grow. It is interesting to ask, why don’t economies grow? Why don’t people get hired? Why don’t corporations expand? Why don’t governments produce real growth? Typically, in the past 30 or 40 years, the answer has always been that inflation got a little too high, central banks raised interest rates to restrict credit, and recessions were produced. Today, it is different because we have no inflation. So why don’t we grow?
It is because we are at the end of a debt supercycle. In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk, relative to the private investment world. Why doesn’t the debt supercycle keep expanding? Because there are limits. Interest rates have reached zero, and governments still don’t want to borrow for infrastructure investment. Companies still don’t want to borrow for private investment. They simply want to buy their own stock at a 15 times earnings because investing in the real economy is too risky. Interest rates are so low and the amount of debt is so high that there are limits to the ability of monetary policy to influence what it has influenced for the past 30 years.

What are the implications of the end of this supercycle?
Gross: The implications are much lower growth, less inflation, lower interest rates, and less profit growth. Barter economies couldn’t grow rapidly, but once someone decided to save and invest and extend credit, growth became possible. Well, we overdid it. Now there is a limit not only to lenders’ willingness to extend credit, but their willingness to do so at an unacceptably low rate of interest.
I have called this slow-growth, low-inflation environment the new normal. Larry Summers [the Harvard economist and former Treasury Secretary] calls it secular stagnation. It is tied to high debt levels, low population growth almost everywhere in the world, and technology that promotes job destruction. We applaud U.S. growth of 3%, but it is an aberration. Structural growth in the U.S. is really just 1.5% to 2%, and in Euroland and Japan it is zero to 1%. We brought consumption forward and issued one giant credit card for the past 30 years. Now the bill is coming due. Investors need to get used to low returns, and low growth, inflation, and interest rates for a long time."

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