Bill Gross Says the Fed Could Learn a Thing or Two From Monopoly

Today's global economy is a lot like a Monopoly, the Atlantic City-based board game, says Bill Gross. Because the bank caps the money players get every round, growth eventually fizzles.
By James Langford ,

Anyone who's ever played Monopoly know it's easiest in the beginning, when the players have the same amount of money and can move their tokens around the board's Atlantic City, N.J.-inspired properties free of charge because no one's had a chance to buy anything and start charging rent.

The game grows progressively more challenging -- or frustrating, depending on your perspective, as Boardwalk, Marvin Gardens and Baltic Avenue get snapped up and their rents steadily increase while the $200 in bank funding for each trip past "Go" stays the same.

That's one of the factors that limits growth and eventually brings the game to an end, says Bill Gross, the Janus Capital (JNS) portfolio manager who was nicknamed the "Bond King" after co-founding Pimco in the 1970s. Today's global economic growth is stagnating for much the same reason, he says.

While central banks like the Federal Reserve have lowered interest rates and repurchased government bonds to push money into the economy, that strategy only pays off if the money eventually moves from banks to consumers and businesses and gets spent.

"If banks don't lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn't increase," Gross wrote in July's monthly newsletter. "The system still generates $200 per player per round-trip roll of the dice, but it's not enough to keep real gross domestic product at the same pace and to prevent some companies/households from going bankrupt."

A significant problem is credit growth that has averaged 9% a year since the turn of the century but barely reaches 4% a year now, he said.

"A highly levered economic system is dependent on credit creation for its stability and longevity, and now it is growing sub-optimally," Gross wrote. "Credit is the oil that lubes the system, the straw that stirs the drink, and when the private system (not the central bank) fails to generate sufficient credit growth, then real economic growth stalls and even goes in reverse."

The Fed and other central banks should be paying more attention to that, Gross said, and worrying less about employment gains leading to excess inflation. In fact, inflation has yet to reach the U.S. central bank's goal of 2% despite job growth that averaged 200,000 positions a month in the first quarter, Fed Chair Janet Yellen told Congress last month.

Of course, the Monopoly analogy has its limits: There's no equivalent for political developments, such as Great Britain's decision to leave the European Union, which can slow global expansion, or for slowing population growth, an aging workforce and technological improvements that eliminate jobs.

Those are among the reasons that peak U.S. economic growth is now 2% compared with 4% to 5% a decade ago, Gross argues. Consulting firm McKinsey cited some of the same trends in a separate report arguing that investors today should expect far lower returns than their parents enjoyed during the three decades through 2014.

Returns in those years averaged 7.9% in both the U.S. and Western Europe, according to a McKinsey research team including Richard Dobbs, a London-based director, and Susan Lund, a Washington, D.C.-based partner. That's 140 basis points higher than the 100-year average for the U.S. and 300 basis points higher for Europe.

"We've lived in a world where the rising tide lifted all ships," Dobbs said in the interview. "We're now in a world where returns are going to be less."

The bottom line? To achieve the same wealth at retirement as their parents, millennials, the generation born between 1980 and 2000 with a population of about 92 million, will have to work seven years longer than their parents or double the percentage of income they save, McKinsey found. 

In the short term, "considerable uncertainty about the economic outlook remains," Yellen said in testimony before the Senate Banking Committee on June 21. That's likely to keep credit rates lower for longer, which will not only curb investment returns for consumers but pinch interest income for banks from JPMorgan Chase (JPM) - Get Report  to Bank of America (BAC) - Get Report , already feeling the bite of seven years of near zero short-term rates.

One remedy, Gross said, is for governments to start spending money, replacing "the animal spirits lacking in the private sector."

Until then, there will be, at best, "a ceiling on risk asset prices -- stocks, high yield bonds, private equity, real estate -- and at worst, minus signs at year's end that force investors to abandon hope for future returns compared to historic examples," Gross wrote. "Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.

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