BILL GROSS: Investment Banks Have Morphed Markets With 'Ponzi Finance' — And Time Is Almost Up

TBI ^ | 1-31-2013 | Matthew Boesler

[blam]

BILL GROSS: Investment Banks Have Morphed Markets With 'Ponzi Finance' — And Time Is Almost Up

Matthew Boesler
January 31, 2013, 9:52 AM

Bill Gross, the PIMCO fund manager known as the "Bond King," is out with his February investment letter, titled "Credit Supernova!"

This month, Gross tackles the relationship between credit expansion and real growth. He channels the late economist Hyman Minsky, saying the economy is now in Minsky's "Ponzi finance" phase, "when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result."

Gross writes that new credit is providing diminishing returns: "Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result."

The reason, Gross says, is because more and more of that credit is being channeled into market speculation, driving a wedge between markets and the real economy. "Investment banking, which only a decade ago promoted small business development and transition to public markets, now is dominated by leveraged speculation and the Ponzi finance Minsky once warned against," he writes.

Below is an excerpt from the letter (emphasis his):

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

REPEAT: THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.

Visible first signs for creditors would logically be 1) long-term

(snip)

[Travis McGee]

[An Old Man]

Blam,

Nice read. Now I have to figure out how to save the rest of my fortune.

An Old Man

[familyop]

Who can creditors loan money to for real production, with zoning regulations and other regulations in so many sparsely populated counties against starting small manufacturing or repair shops on a private, rural properties? It’s a game of keeping residential “property values” high, until those properties will be nearly worthless.