BILL GROSS: The economy is a Monopoly board, and everybody is losing
Bill Gross thinks the world economy is playing a losing game.
In his latest investment outlook on Wednesday, Gross said credit creation had reached its limits and there was nothing central banks could do about it. This means the global economy, which Gross said is based on credit creation, in turn is slowly grinding to a halt.
To illustrate his point, Gross compared the world economy to the board game Monopoly. Here’s how it’s supposed to work, according to Gross:
“But all of these elements are but properties on a larger economic landscape best typified by a Monopoly board. In that game, capitalists travel around the board, buying up properties, paying rent, and importantly passing “Go” and collecting $200 each and every time. And it’s the $200 of cash (which in the economic scheme of things represents new “credit”) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player “bankruptcies” become more probable.”
The rub, Gross said, is that to sustain economic growth in the real world the amount of credit extended by private banks — the $200 in the analogy — must continue to increase to fund new projects. If that doesn’t happen, then you end up with the classic ending to a game of Monopoly: frustration, bankruptcies for players, and, as Gross puts it, “dog eat dog with the survival of many of the players on the board at risk.”
All of this is a somewhat convoluted way of Gross making the point that for gross domestic product to continue to grow in the US and elsewhere, credit growth must continue. This, however, is not happening. Here’s Gross again (emphasis added):
“As shown in Chart I, credit growth which has averaged 9% a year since the beginning of this century barely reaches 4% annualized in most quarters now. And why isn’t that enough? Well the proof’s in the pudding or the annualized GDP numbers both here and abroad. A highly levered economic system is dependent on credit creation for its stability and longevity, and now it is growing sub-optimally. Yes, those structural elements mentioned previously are part of the explanation. But credit is the oil that lubes the system, the straw that stirs the drink, and when the private system (not the central bank) fails to generate sufficient credit growth, then real economic growth stalls and even goes in reverse.”
Additionally, it is not just aggregate credit growth that is falling apart, but also the rate at which credit moves around the economy, also known as its velocity. The turnover of credit paid back allowed lenders to go out and extend more credit, moving money through the economy and adding to GDP growth.
This velocity of credit is stimulated by lowering interest rates, Gross said, so central banks were able to get some GDP growth through lowering interest rates. Now with interest rates near zero, velocity will slow and the last bit of fuel for the economy will disappear.
So with total credit created slowing, slower turnover of credit, and little by way of stimulus from central banks left to boost either of those factors, the world economy is stuck in this growth stagnation.
“Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played,” Gross said.
All of this is fairly downbeat, but it is an extension much of Gross’ recent outlooks for credit specifically. Gross is essentially of the opinion that central banks can no longer help the economy (and may be actively harming it), investors will get nowhere near the returns they have become accustomed to over the past few decades, and long-term structural trendslike automation will leave people without jobs or income.
Basically, nothing good.