Bill Gross, co-CIO of bond-fund giant PIMCO, says the developed world is rapidly reaching a sort of economic "Maginot line" beyond which beyond which leverage dynamics begin to work in reverse, slowing growth instead of enabling it, promoting too much risk as opposed to potential gains.
"If the developed world was growing at 5 percent like developing economies, the risks would be far less," Gross writes in the Financial Times. "At 2 percent, however, 'stall speed' connotes an inability to behave like the historical capitalistic model should."
"Corporations lose incentives to invest because profit growth stagnates, unemployed workers are not rehired and the standard cyclical model of seasonal rebirth is jeopardized."
Central banks, Gross notes, apply a dose of liquidity and negative real interest rates that fail to stimulate investment, while fiscal authorities and political parties recommend balanced budgets in one year and stimulus packages in another.
These policies are reaching mathematical and political limits, leaving developed economies at the mercy of continued Chinese growth, commodity prices and the possible collapse of some European economies.
Stall speed causes volatility in risk spreads, including equity and corporate bond risk spreads.
“Investors should expect an extended period of ‘financial repression’ during which policy rates are kept extraordinarily low,” says Gross. “Picking the pockets of investors and savers is a historically validated maneuver to rebalance sovereign balance sheets.”
“Instead of an inflation plus 1 percent policy rate, which has characterized the past 30 years, we must get used to inflation minus 1 or 2 percent, a dramatic reversal in the fortunes of financial markets.”
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