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Gross: US Economy Won't Shrink But Won't Grow Much Either

Tuesday, 02 Oct 2012 04:27 PM

The U.S. economy will likely avoid sliding into a recession but won't enjoy the more robust growth rates of decades past, said Bill Gross, founder of Pimco, the world's largest bond fund.

U.S. gross domestic product grew at a 1.3 percent annual ratein the second quarter and a 2 percent rate in the first quarter, according to official data.

Meanwhile, unemployment rates have improved in recent years but still remain over 8 percent.

"I don't think we are headed toward recession, we are at 1 to 2 percent growth and will probably stay there," Gross told CNBC.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

The Federal Reserve has unveiled a plan to buy $40 billion a month of mortgage-backed securities from banks on an open-ended basis, a monetary policy tool known as quantitative easing that pumps liquidity into the economy in a way that drives down interest rates to encourage investing and hiring.

When factoring in other Fed operations, over $80 billion a month is now flowing into the economy to spur recovery, though gradual fiscal reforms are needed to return to more robust growth rates.

Tax and spending uncertainty has kept investing in new job-creating projects on hold, and low interest rates won't boost confidence until companies and households know how much they will be paying the Internal Revenue Service, keeping demand at bay.

"We have an anorexic consumer — wages and compensation are down 5 percent over the last 10 years relative to GDP. Basically investment has nothing to sell to in terms of a consumer purse," Gross added.

Demographics are slowing back recovery as well. "The Baby Boomer is getting old, they don't buy as much," Gross said. Add reduced domestic demand to rising debt burdens and 3-4 percent growth rates typical of the past become tough goals to attain, meaning the country should get used to growth rates up to half of what they were before the downturn. "It's a new normal," Gross said.

So how does the economy improve?

Fiscal reforms are needed, but on a gradual basis that won't shock the economy.

"You can't necessarily cure it with easy money, which is what the Fed is trying to do, and you can't necessarily cure it with draconian fiscal measures, which eliminate a deficit in a short period of time. What you need to do is gradually, year by year, reduce that deficit gradually," Gross said, adding the Fed should raise interest rates on a gradual basis when the time comes.

Turning to elections, Gross said it doesn't matter who wins November's presidential elections, as the country's problems need longer-term solutions.

"I think basically that what we have here is a large deficit that won't be reduced significantly. We have an easy Fed that won't change its habits over the next several years, and the structural solutions required are five to ten years down the road."

All told, the U.S. is carrying $60 trillion in debt burdens, when adding entitlements like Medicare, Medicaid and Social Security to other debts the country constantly runs up.

"That is 500 percent of GDP, those are numbers that more than rival Greece and other egregious countries rated junk or below," Gross said.

While fiscal reforms may need long-term solutions, the Federal Reserve is keeping policy loose for the long term as well.

Some Fed officials want to see quantitative easing carry on through 2013 and possibly later, including John Williams, head of the Fed's San Francisco branch.

Growth must take priority if the economy is to improve even if it means pumping liquidity into the economy.

Quantitative easing often stokes fears that inflation rates will rise later on, when the economy picks up while still awash in liquidity.

"I would think that we would be stopping the asset purchases well before late 2014," Williams told reporters after a recent speech, according to Reuters.

Short-term interest rates will likely stay near zero until at least mid-2015, Williams said, adding inflation remains in check.

"I want to stress, in no way has our commitment to price stability wavered," Williams said.

"Inflation is something we watch carefully, and we remain determined to work toward our price stability objective."

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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The U.S. economy will likely avoid sliding into a recession but won't enjoy the more robust growth rates of decades past, said Bill Gross, founder of Pimco, the world's largest bond fund.
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2012-27-02
Tuesday, 02 Oct 2012 04:27 PM
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