February 15, 2013

How Modern Finance Works per Bill Gross

How modern finance works per Bill Gross.
First, Minsky on Ponzi Finance 
Economist Hyman Minsky did. With credit now expanding, the sophisticated economic model provided by Minsky was working its way toward what he called Ponzi finance. First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

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. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy.

The link has PIMCO’s investment advice for such an environment.

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