Global economy walking a tight rope, Bill Gross warns

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Bill Gross, the bond manager, on Thursday renewed his warning that high levels of debt across the world pose a rising risk of derailing the global economic expansion.

The portfolio manager at Janus Capital said that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

Mr Gross noted that the world economy has generated more debt relative to gross domestic product than it did ahead of the 2008 financial crisis. Credit across the US economy of $65tn equates to 350 per cent of GDP, while China’s leverage ratio has doubled over the past decade to nearly 300 per cent, he noted.

The so-called ‘bond king’ said that while the world economy and financial market continue to chug along — with global equity prices near all-time highs — sudden changes in interest rates could spark a damaging shock.

“If rates are too high (and credit as a per cent of GDP too high as well), then potential Lehman black swans can occur,” he said.

“On the other hand, if rates are too low (and credit as a per cent of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.”

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