Bill Gross's monthly Investment Outlook is always informative and thoughtful; this month's issue "The Last Vigilante" is no exception. It can be summarized as follows:
1) In the past twenty years United states has been transforming itself from a manufacturing economy to a service economy and then to a finance-based economy, which "depends on more and more low cost money in order to thrive."
2) Total credit market debt is at all time high compared to GDP, now at 299% compared to 270% during 1930s and 140% at the start of 1980s. Bill predicts that "if debt stops growing at the same rate ... our economy will slow down."
3) For our finance-based economy, low rates (real Fed rate is below zero for now) is the real productivity, as real short rates starts to "climb from negative to only slightly positive," the lack of higher productivity is going to hurt the economy.
4) Bill further suspects that the reflationary attempts employed by Greenspan may not lead to "succcessful reflation in terms of economic growth." In the longer term, "Treasury interest rates may then ultimately fall instead of rise as reflation fails and debt deflation takes hold."