Bill Gross Issues Dire Warning Veiled in Metaphor
Tweet
Share
E-mail
In the view of Pimco co-founder Bill Gross, the global economy is like a supernova. That is to say, it is a star that shines brightly but eventually burns out or collapses.
"Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a 'big freeze' trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence," wrote Gross.
To support his argument, Gross cited writings from economist Hyman Minsky. Minsky theorized that our credit system would include three phases, beginning with "Hedge" finance, leading to "Speculative" finance, and will eventually end in "Ponzi" finance – where additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.
"Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result," wrote Gross
In Gross's view, credit is now funneled increasingly into market speculation as opposed to productive innovation, and while he doesn't think the end of our credit system is upon us, but he does think time is running out.
"The countdown begins when investable assets pose too much risk for too little return," warned Gross.
The bottom line is Gross thinks investors should prepare for eventual inflation.
"The end stage of a supernova credit explosion is likely to produce more inflation than growth, and more chances of inflation as opposed to deflation," concluded the credit manager.
"Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a 'big freeze' trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence," wrote Gross.
To support his argument, Gross cited writings from economist Hyman Minsky. Minsky theorized that our credit system would include three phases, beginning with "Hedge" finance, leading to "Speculative" finance, and will eventually end in "Ponzi" finance – where additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.
"Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result," wrote Gross
In Gross's view, credit is now funneled increasingly into market speculation as opposed to productive innovation, and while he doesn't think the end of our credit system is upon us, but he does think time is running out.
"The countdown begins when investable assets pose too much risk for too little return," warned Gross.
The bottom line is Gross thinks investors should prepare for eventual inflation.
"The end stage of a supernova credit explosion is likely to produce more inflation than growth, and more chances of inflation as opposed to deflation," concluded the credit manager.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Rubric Capital Management Files Definitive Proxy Statement for Xperi (XPER) 2024 Annual Meeting
- Risk sentiment among fund managers highest since January 2022 - BofA
- GoPro (GPRO) Mentioned in Tweet Citron Research
Create E-mail Alert Related Categories
Hedge Funds, Insiders' BlogRelated Entities
William H. Gross, Pacific Investment Management Company, LLC (PIMCO)Sign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
