Loading ...Gross also had some comments on Japan, and the entire central bank endgame.
He said that the only way for Japan to eventually cut its debt burden is for the central bank to acquire it and forgo repayment, a scenario that may play out in similar ways in other countries.
“I think that’s where they’re headed. I’m not endorsing that. I think at some point, Japan will basically buy up all its debt and the central bank will forgive the treasury and try to move forward with that. I see no other way out for Japan.”
“Ultimately, they could own all the market,” he added during his Bloomberg interview. “At that point they could say to the fiscal side, ‘Olly olly oxen free. You don’t have to pay us back. Or we’ll extend your debt to 50 years with a zero percent coupon and at that point we’ll essentially eliminate the entire obligation.’”
Gross said such a move would have dramatic and damaging consequences for Japan’s currency, savings rate and private sector. Japan has unique demographic factors that exacerbate its economic dilemma, but other nations will face similar choices, he said.
He believes it is also the endgame.
“Japan’s a pretty good picture for the rest of the world, maybe five or 10 years ahead. I have a sense that that’s the route central banks will pursue. They’ll keep on buying debt, keep interest rates low and then ultimately the treasury doesn’t owe them anything.”
What should central banks do?
Central banks, he said, need to start raising rates to restore the right incentives for investors. Gross said the Federal Reserve needs a leader similar to Paul Volcker, who raised interest rates in the 1980s despite popular opposition.
“We need another Volcker,” Gross said.
Unfortunately that won’t happen.