Tags: Pimco | Gross | debt | Growth

Pimco’s Gross: Debt-Driven Growth is a Flawed Model

Thursday, 17 Nov 2011 08:19 AM

The idea that countries can continue to borrow to fuel economic growth is an outdated one and part of a flawed business model, says Bill Gross, founder of Pimco, the world's largest bond fund.

"What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it," Gross writes in a Financial Times opinion piece.

"In addition to initial conditions of debt-to-gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge."

The U.S. and European countries have borrowed heavily to kick-start their economies, including rolling out stimulus measures or expanding money supply through measures such as quantitative easing, in which Central Banks print money and buy assets from banks in order to fuel investment, stock-market gains and ultimately, hiring.

Bill Gross
(Pimco file photo)
Markets, it seems, are growing weary of such policies and will favor those who grow in a more organic fashion, while those who borrowed will be stuck paying down their debts for a long time.

"As a result, deleveraging, fiscal tightening and potential defaults are on the economic and investment horizon. Investors should be in a 'risk off' mode," Gross adds.

Many economists have been predicting the U.S. to finally put the threat of dipping back into recession behind them, but Europe's debt crisis is keeping that fear alive.

"A European sovereign debt default may well sink the United States back into recession," according to a recent Federal Reserve Bank of San Francisco report.

"However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.

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