Bill Gross (PIMCO) - For Wonks Only
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.
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Frequently Asked Questions about this Article…
Bill Gross believes that credit growth is necessary but not sufficient for economic growth. He emphasizes that economic growth depends on the productive use of credit growth, which he argues is currently lacking.
Bill Gross is critical of the European Central Bank's recent interest rate cuts and asset purchase plans. He believes they are not doing enough to develop a sustainable credit-based financial economy.
Bill Gross argues that a credit-based financial economy is crucial because it relies on an ever-expanding level of credit for survival. Without it, economies risk falling into a cycle of debt deflation and recession.
Bill Gross praises the US Federal Reserve and the Bank of England for successfully expanding private and public market credit over the past five years, which he believes has helped stimulate economic growth.
According to Bill Gross, failing to expand credit can lead to a vicious cycle where interest on existing liabilities cannot be paid without selling assets, resulting in debt deflation, recession, and potentially depression.
Bill Gross criticizes the ECB and Bank of Japan for not successfully stimulating economic growth through credit expansion, unlike their counterparts in the US and UK.
Bill Gross suggests that a sustainable financial economy requires the productive use of credit growth, rather than relying solely on cash-based transactions.
The ECB's interest rate cuts are seen as a reaction to faltering European growth, but Bill Gross believes they are insufficient for developing a sustainable credit-based economy.
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