(Adds further comments from Bill Gross, Pimco background)
By Jennifer Ablan
NEW YORK, Sept 3 Economic growth depends on the
productive use of investment and rejuvenation of "capitalistic
animal spirits," but that's not taking place now, said Bill
Gross, manager of the world's largest bond fund, in his latest
investment outlook letter on Wednesday.
"Economic growth depends on the productive use of credit
growth, something that is not occurring," said Gross, who
manages the $223 billion Pimco Total Return Fund.
Gross said the U.S. Federal Reserve, the Bank of England and
other major central banks are now engaged in an "unmodeled
experiment" which involves: "What growth rate of credit is
enough to pay prior bills, and what policy rate/amount of
Quantitative Easing is necessary to generate that growth rate?"
Assuming the interest rate on outstanding debt in the U.S.
is approximately 4.5 percent, a Fed governor using this template
would want credit to expand by at least 4.5 percent per year to
prevent the necessary sale of existing assets, including debt
and equity, to cover annual interest costs, said Gross, who as
Pimco's chief investment officer helped oversee $1.97 trillion
in assets as of June 30.
Put simply, if credit needs to grow 4.5 percent per year,
the private and public sectors must create approximately $2.5
trillion of additional debt per year to pay for outstanding
interest, he said.
"They are under achieving that target in the U.S., which is
the reason why GDP growth struggles at 2 percent real or lower
and nominal GDP growth seems capped at 4.5 percent or lower," he
"Credit creation is essential for economic growth in a
finance-based economy such as ours. Without it, growth stagnates
or withers. Its velocity/turnover is critical as well."
Gross said central bankers are hopeful that fiscal policy,
which includes deficit spending and/or tax reform, may
ultimately lead to higher investment, "but to date there has
been little progress."
"The U.S. and global economy ultimately cannot be safely
delevered with artificially low interest rates, unless they lead
to higher levels of productive investment," he said.
(Editing by Chizu Nomiyama and Bernadette Baum)