by Philip Haddon on Jun 30, 2010 at 16:08
The debt situations of countries around the world are too polarised for a global recovery and a return to the ‘old normal’ to happen, according to Pimco’s Bill Gross.
Some countries are in too much debt, while others do not have enough, he says in his latest investment outlook on the Pimco website.
‘There are 6.5 billion people in the world and will soon be 1 billion more,’ the Pimco founder said. ‘Many of them are debt-free and have never used a credit card or assumed a home mortgage.’
Why can’t lenders like Pimco lend to them, allowing developing nations to bring their consumption forward, developed nations to supply the goods and services, and the world to resume its “old normal” path toward future profits, prosperity and increasing standard of living?’ Gross asks.
‘To a certain extent that is what should gradually happen, promoting more rapid growth in the emerging nations and a subdued semblance of it in the G-7 – a “new normal.” But they – the developing nations – are not growing fast enough, at least internally, to return global growth to its old standards.’
As these countries are focusing on exporting, rather than building domestic demand, Gross thinks a huge gap in global aggregate demand has appeared. ‘Developed nation consumers are maxed out because of too much debt, and developing nations don’t trust themselves to stretch their necks for the delicious leaves of domestic consumption just above.’
If countries were able to act together, the problem could be solved, Gross thinks.
‘If policymakers could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable. They cannot. G-20 Toronto meetings aside, the world is caught up as it usually is in an “every nation for itself” mentality, with China taking its measured time to consume and the US refusing to acknowledge its necessity to invest in goods for export.’
The ‘new normal’ which he has frequently warned about is now upon us, as returns from financial markets are now at the ‘threshold of mediocrity.’
‘With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, surely a forerunner of returns to come. Stocks, long the volatile vamp of investor optimism, have not yet adjusted to the New Normal of half-size economic growth induced by deleveraging, reregulation, and deglobalisation and have low single digit prospects as well.’
His full outlook can be found here.