Debt Fund Manager Says Focus on Growth, Not Debt

There’s a fascinating, post-debt-ceiling-fight op-ed in the Washington Post by Bill Gross, the Founder, Managing Director and co-CIO of PIMCO. Gross has been a veritable rock-star in the bond world since he co-founded the firm in 1971. His bond funds have outperformed many stocks for decades, but I first learned of him and his company in 2000 just prior to the internet bubble bursting.

As a computer programmer, I was keenly aware of the out of control “new economy” – the name given to the period from about 1995 to 2000 in which investors believed it no longer mattered whether a company was making a profit. If it involved the internet, you should bet the farm on it. Fortunately for me, I believed the warnings about the bubble and, at the same time, was reading about the PIMCO Total Return Bond Fund. The fund was invested in high-rated government and municipal bonds which, at the time, were earning 7 to 9%. They had years of positive performance and not one negative quarter. Of course not – the only way a government or municipal bond would go negative is in case of a default – pretty unlikely, since there were no crazies at that time thinking default was okay. In the fall of 1999, I moved my entire retirement account into the fund. My buddies thought I was crazy; internet stocks were returning 30% and more and I was going for bonds. Well, not only did the bubble burst, the bond market went on a rally that lasted years. Since then, whenever I hear the name “Bill Gross”, I listen-up.

Back to this op-ed. Bill Gross knows debt. His funds trade debt. So read on to see what he thinks of the debt ceiling deal…

The Bill Gross OpEd:

The debt crisis as it crests ultimately gives way to these growth-inhibiting, spending-contractionary secular forces. Having run up our credit card to keep on spending, we have reached market-enforced limits that force deleveraging. It is not the debt, however, but the lack of global aggregate demand that is at the heart of the crisis. As the entire world strives to put its own people to work before other nations do, policymakers constructively lower interest rates and delay sovereign, corporate and household defaults to provide breathing room. Fiscally, however, an anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.

The president and Congress must recognize that an AA-plus country, to remain AA-plus, must focus on growth, not debt reduction, in the short term.

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