The Wall Street Journal reports:
"The amount of credit and its growth rate are critical to asset prices, and of course asset prices in our modern economy are critical to growth and job creation and future prospects for investment. We have a fiat/credit/debt-based economy that depends on the continuous creation of more and more credit in order to thrive and some would say – even survive. We need those pigs and more of them. And they need to circulate and be traded – what some would call “velocity” – in order to keep the economy growing".
Bringing it all back to the real world, we have a problem: Credit is not growing, and certainly not fast enough to keep the economy moving. Business investment is anemic, and consumer demand is too. That’s been the case since 2008. But there are two new factors: the U.S. government is spending less, and so is the Federal Reserve.
Mr. Gross’s conclusion:
Our Pimco word of the month is to be “careful.” Bull markets are either caused by or accompanied by credit expansion. With credit growth slowing due in part to lower government deficits, and QE now tapering which will slow velocity, the U.S. and other similarly credit-based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume. Perhaps the whisper word of “deflation” at Davos these past few weeks was a reflection of that. If so, high quality bonds will continue to be well bid and risk assets may lose some luster.
