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Shades of Greenspan: ‘Bond King’ Bill Gross Finds Huge Flaw in Global Economy

Aaron Task
Editor in Chief
Daily Ticker

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Stop me if you've heard this one before: U.S. stocks fell Wednesday morning as rising sovereign debt yields revived concerns about Europe's crisis.

"Europe's debt problem is having a huge impact on the global economy, and may hurt growth not just of Europe but of the world," Bank of Japan Governor Masaaki Shirakawa said, Reuters reports.

Against such a backdrop, and given the risk of "deleveraging, fiscal tightening and potential defaults...investors should be in a 'risk off' mode," Pimco's Bill Gross writes in a Financial Times op-ed.

Despite some recent stumbles and the poor short-term performance of the flagship Pimco's Total Return fund, Gross is one of the most successful money managers of his generation; his warning is therefore worth heeding.

But another part of Gross' op-ed is arguably more interesting than his market call. "What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it," he writes. (Emphasis added.)

When someone widely known as "the Bond King" says the global economy and financial markets are based on "a flawed business model" -- and suggests the financial markets no longer have the "appetite" for it -- that's an eye-opening (even alarming) statement.

As Henry as I discuss in the accompanying video, it appears the globe's ability to service debt—public and private - has reached a critical tipping point. Henry compares it to a ship piled with cargo (in this case debt); at some point one more piece of merchandise is going to cause the ship to capsize. If the global economy and banking system isn't about to be swamped by a mountain of debt, it's awfully close and financiers seem determined to challenge policymakers' willingness and ability to keep the ship afloat.

To me, Gross' op-ed is reminiscent of Alan Greenspan's famous "I found a flaw" mea culpa -- albeit lacking even the slight hint of contrition the former Fed chairman was able to muster. I wonder if Gross ever considered the debt-driven growth model was flawed before the financial markets lost their appetite for it.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com