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June 18, 2012 at 08:32 AM
Whale-sized investors, financial market oceans, large fish (the Federal Reserve), small fish (banks)—PIMCO chairman Bill Gross certainly drinks his fill of briny metaphors in his June market commentary. Gross writes that, “Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low-cost funding increasingly a function of central banks as opposed to private market investors.”
This leads to a frightening conclusion: that both lower quality and lower yields of such “previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.”
“[This possibility wasn’t] considered feasible as recently as five years ago,” Gross writes. “Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales—as opposed to debtors—to support the existing system may soon descend.”
Gross adds that the global monetary system, which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, “may not be so beneficial for our ocean’s oversized creatures.”
So what’s to be done?
