PIMCO'S Gross sees U.S. economy on road to extinction

Thu Jan 31, 2013 12:13pm EST

Pacific Investment Management (PIMCO) founder and co-chief investment officer Bill Gross plays golf on the first hole at Pebble Beach Golf Links before the start of the AT&T Pebble Beach Pro-Am in Pebble Beach, California, February 8, 2012. REUTERS/Robert Galbraith

Pacific Investment Management (PIMCO) founder and co-chief investment officer Bill Gross plays golf on the first hole at Pebble Beach Golf Links before the start of the AT&T Pebble Beach Pro-Am in Pebble Beach, California, February 8, 2012.

Credit: Reuters/Robert Galbraith

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(Reuters) - Bill Gross, the PIMCO bond guru, said on Thursday a heavy reliance on credit has put the U.S. economy on a trajectory toward extinction, and he warned of an investor exodus from financial markets.

The level of credit needed to spur economic growth has grown five-fold since the 1980s, said Gross, who is a founder and co-chief investment officer of Pacific Investment Management Co. He likened the need for more and more government stimulus to produce ever-diminishing rates of growth to Japan's experience over the past decade.

Using a supernova as a metaphor for the U.S. financial system, Gross said the universe is expanding so rapidly now that in the far future it will end in a "big freeze." Dependence on credit for growth will produce similar results, he said.

"Our current monetary system seems to require perpetual expansion to maintain its existence," Gross said in a PIMCO investment outlook commentary for February posted on the firm's website. "The advancing entropy in the physical universe may in fact portend a similar decline of 'energy' and 'heat' within the credit markets."

Gross, who runs the $285 billion Pimco Total Return Fund, the world's largest bond fund, said a breakdown in credit markets will likely spur inflation, something he has warned against in previous letters. PIMCO, based in Newport Beach, California, had $2 trillion in assets as of December 31.

He again recommended inflation-protected Treasuries, gold and other commodities, and recommended investing in countries with less debt such as Australia, Brazil, Mexico and Canada, and in world equities with healthy cash flows.

U.S. government, corporate, household and personal debt is now $56 trillion, a monster that needs ever increasing amounts of fuel, Gross said, calling it a "supernova star that expands and expands, yet, in the process begins to consume itself."

Gross said in the 1980s it took $4 of new credit to generate $1 of real gross domestic product, while over the past decade it took $10, and since 2006, it has taken $20 to produce the same result.

The end of credit markets will begin, said Gross, when assets offer too much risk and too little return, causing an investor exodus into alternatives such as cash or real assets.

Gross also held to a claim he made in an investment letter last August that returns on both stocks and bonds weaken over time.

(Reporting by Herb Lash and Sam Forgione; Editing by Andrea Ricci and Leslie Adler)

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Comments (6)
DyingWorld wrote:
It definitely will go extinct at the rate that China is buying up American prized assets. By 2016, if our government do anything fundamentally solid to protect American interests, our citizens will be increasing in minimum wage jobs for “The Chinese Government” owned companies growing in the US. Suppression of the American people’s will will only bring devastating riots, protests and eventual destruction. When Japan woke up the “sleeping Dragon” what happened? We bombed 2 major cities in Japan. Suppress Americans too much and your mansions will not stand for very long either. The monetary system needs to be eliminated and equal distribution of “all global resources” must be used to benefit all of humanity OR we will meet our doom.

Jan 31, 2013 4:11pm EST  --  Report as abuse
ctman2 wrote:
Our multinationals morphed into transnationals with no allegiance to any country. They took the capital and jobs in the US and reallocated them to other countries diminishing our supply chain to the point that the US cannot support its previous lifestyle but is using borrowing to try to bridge the gulf for now in the hope that it somehow find a new source of wealth and revenue like the .Com era. The game will end when the dollar ends as the reserve currency and the gov cannot add to its global pool of dollars without igniting inflation. When that ends so does the endless borrowing we have seen so far. Give it another ten years or so………….

Jan 31, 2013 11:24pm EST  --  Report as abuse
jrj906202 wrote:
Bill Gross runs the world’s largest bond fund.Best to listen to him.This debt monster sounds like the population monster.I keep reading the “experts”,saying countries need a continuing larger young population,to support the retiring,older people.So,what is the end of that?Population,like debt,needs to just keep expanding,forever?What nonsense.

Feb 01, 2013 12:46pm EST  --  Report as abuse
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