“Cross your fingers, credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.”
Bill Gross, Founder and CIO, PIMCO Overnight the European Central Bank (ECB) cut its official interest rates in reaction to faltering European growth. The ECB trimmed its three main interest rates, including the deposit facility (now -0.20%) that was already negative, while ECB President Mario Draghi also announced plans to buy private-sector assets, and suggested quantitative easing was still on the table and that rates are now at the lowest level they will go.
However Bill Gross from PIMCO believes that Draghi and his council are dragging the chain in relation to developing a sustainable credit-based financial economy as opposed to a pure cash economy. Gross argues that a credit-based financial economy depends on an ever-expanding outstanding level of credit for its survival. However, economic growth depends on properly using that credit growth to build the economy.
Without additional credit, interest on previously issued liabilities cannot be paid without the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression. It is this expansion of private and public market credit which the US Federal Reserve and the Bank of England (BOE) have successfully engineered over the past five years, while their contemporaries (the ECB and Bank of Japan) have until now failed, at least in terms of stimulating economic growth.
To read Bill Gross's article please click here