Gross to Central Banks: Take Lesson in Credit From Monopoly

Bill Gross Reacts to Fed Minutes, Brexit Impact on Bonds
  • Janus manager says central bankers worshipping ‘false idols’
  • Gross’s unconstrained bond fund has gained 3.3% this year

Billionaire bond investor Bill Gross has a message for Janet Yellen: Take a lesson from Monopoly.

Gross, in his latest outlook for Janus Capital Group Inc., likened the economy to the board game where players collect $200 every time they pass the “Go” square. That payment -- the game’s version of credit creation -- ensures expansion at the start, but it also dooms players because the amount is fixed and doesn’t grow, eventually leading to stagnation and bankruptcies.

Bill Gross
Bill Gross
Photographer: Patrick T. Fallon/Bloomberg

“If only Fed Governors and Presidents understood a little bit more about Monopoly, and a tad less about outdated historical models such as the Taylor Rule and the Phillips Curve, then our economy and its future prospects might be a little better off,” Gross wrote in the outlook, published Wednesday on Janus’s website.

Federal Reserve Chair Yellen and other central bankers, who have lowered interest rates to try to stimulate economies, have been unable to boost credit growth in the real economy, Gross wrote -- whether because commercial banks don’t want to take the risk, or consumers and corporations don’t want to borrow. While lower interest rates helped fuel economic expansion by increasing the “velocity of credit,” that’s coming to an end as rates turn negative, Gross wrote.

‘Sputtering’

“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,” he wrote. “They don’t believe in Monopoly as the functional model for the modern day financial system. They believe in Taylor and Phillips and warn of future inflation as we approach ‘full employment.’ They worship false idols.”

Economists John Taylor and A.W. Phillips devised models for guiding interest-rate policy based, respectively, on inflation and the unemployment rate. Those models disregard the importance of private credit in the economy, according to Gross.

Gross, 72, has warned for months about the limits of central bankers to spur growth and the risks of deflation. In September, he said the Fed needed to “get off zero” interest rates “and get off quick.” Cause for alarm has risen with $10 trillion of global government credit yielding negative interest rates, he said in Wednesday’s outlook.

QuickTake: Helicopter Money

“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,” he wrote.

Credit card debt and mortgages together are growing at about 2 to 3 percent a year, Gross said on Bloomberg Television Wednesday. And combined with the government sector, it’s not enough "to produce credit growth that’s necessary for even a subpar economy such as we have in the United States,” he said.

Gross acknowledged that fiscal policy has so far been “nonexistent,” leaving the job of reviving the economy to central bankers. He said earlier this year that “helicopter” money, showered into people’s pockets without new private borrowing or taxes, may eventually be the next step. For now, however, investors shouldn’t bet on that happening any time soon, he wrote in the outlook for July.

Other factors depressing growth include “de-globalization,” as exemplified by the June 23 Brexit vote for Britain to leave the European Union, slowing immigration and trade, aging populations, too much debt and job-threatening “robotization,” according to Gross.

Quick Take: Secular Stagnation

The U.S. economy is expected to expand 1.9 percent this year, down from 2.4 percent in 2015 and 2014, according to forecasts compiled by Bloomberg. Global growth is expected to slow to 3 percent from 3.1 percent last year and 3.4 percent in 2014.

The Janus Global Unconstrained Bond Fund, which Gross runs, returned 3.3 percent this year through July 1, outperforming 73 percent of its Bloomberg peers. Fund investors have gained 2.3 percent since October 2014, when Gross took over after his acrimonious exit from Pacific Investment Management Co.

“Worry for now about the return ‘of’ your money, not the return ‘on’ it,” Gross wrote in his outlook. “Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.”

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