Bill Gross fears demographics will add to growth woes

In his latest investment outlook, Pimco founder Bill Gross says a return to the 'old normal' will be made all the more difficult by an ageing global population which current government policy is not accounting for.

Like his colleague, Mohamed El Erian, Gross thinks US politicians are acting as if the problems faced are cyclical, when in fact they are structural. 

Entering a 'new normal' era of deleveraging, reregulation, deglobalisation and slower growth, Gross thinks changing demographics are also going to play a key role.

He thinks capitalism itself is in part dependent on a growing population, and says population growth is slowing dramatically in Japan, Germany, the UK, the US and even China, as a result of its one-child policy.

'Capitalism, I would assert, thrives on more, more, and more, but not so well when there is less or an expectation of less.... capitalism depends upon final demand and that if there ever comes a time when population growth slows, then the world’s most efficient economic system will be tested... There will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production,' he said.

Gross, who runs the world's largest fund Pimco Total Return, points out that while older people spend a larger percentage of their income, they spend far less per capita than younger people.

'No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next five to ten years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise.'

He thinks governments would do well to listen to the likes of El-Erian and economist Jeffrey Sachs before continuing down the wrong path. 

'The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base,' Gross said. 

'Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services.'

His full investment outlook - which spends the first three paragraphs discussing using the toilet - can be found on Pimco's website here.