PIMCO (Pacific Investment Management Company) was founded in Newport Beach, California, in 1971 by Bill Gross with $12m in assets under management and has more than $1trn in assets under management. It has more than 1,200 employees in offices in Newport Beach, New York, Amsterdam, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong and was acquired by the German financial group Allianz, in 2000.

Bill Gross, the 66-year old founder of the world's biggest bond fund at Pacific Investment Management Co (PIMCO) said in his monthly investment outlook this week that a lack of global aggregate demand, resulting from too much debt in parts of the global economy and not enough in others, is the essence of the current problem of global weakness.

Gross said global financial market returns stand at the threshold of mediocrity. With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, a likely forerunner of returns to come. Stocks, "long the volatile vamp of investor optimism," have not yet adjusted to the "New Normal" of half-size economic growth induced by deleveraging, reregulation, and deglobalization and have low single digit prospects as well.

The "New Normal" is the expectation in the global economy is one that will include new government regulation, lower consumption and slower growth in the coming years. US growth rates will slow to 2% or less over the next five years.

The term "New Normal" was coined by technology investor Roger McNamee and in recent times, it has been popularised by Bill Gross and Mohamed El-Erian - - the top two executives at PIMCO.

El-Erian says that firms and investors should question theories, which suggest that following a shock, markets will not revert to business as usual and be suspicious of forecasters who say the potency of policy measures are changing.

However, he argues that once the current phase of deleveraging, de-globalisation and re-regulation is over, investors and policymakers will “find themselves in a landscape that only partially resembles that which dominated the 2003-2007 period.”

Real US GDP rose an average of 3.4% per year from 1960 through 2007, according to economists at ratings agency Standard & Poor's. They expect growth to average only 2.6% over the coming decade.

Bill Gross said that many took on too much debt, which became a problem as the interest burden and probability of repayment "overwhelmed borrower and lender alike in near unison."

"We overdid a good thing and now the financial reaper is at the door, scythe and financial bill in one hand, with the other knocking on door after door of previously unsuspecting households and sovereigns to initiate a 'standard of living' death sentence," hewrote.

Gross said: "while technological innovation - - much like Moore’s law - - seems to have endless promise, population growth in numerous parts of the developed world is approaching a dead end. Not only will it become more difficult to transfer high existing debt burdens onto the smaller shoulders of future generations, but the overlevered, aging 'global boomers' themselves will demand a disproportionate piece of stunted future goods and services  - -  without, it seems, the ability to pay for it. Creditors, sensing the predicament, hold back as they recently have in Greece and other southern European peripherals, or in the US itself, as lenders demand larger down payments on new home mortgages, and other debt extensions."

The bond fund manager noted that there are many in the world who are debt-free and have never used a credit card or assumed a home mortgage. "Why can’t lenders like PIMCO lend to them, allowing developing nations to bring their consumption forward, developed nations to supply the goods and services, and the world to resume its 'old normal' path toward future profits, prosperity and increasing standard of living?" he asks.

Gross said if policymakers "could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable." But they can't, he said, as the world is caught up in an "every-nation-for-itself" mentality.

Finfacts article: June 2010; Credit and debt are essentials of the modern economy

Bill Gross on the "New Normal" June 17, 2010:

The bond market is pricing in a near-depression. Is it right or wrong? Bond guru William Gross, of Pimco, shares his view July 01, 2010: