PIMCO's Bill Gross has said US debt to GDP could accelerate towards 800% over the next five years if all actual liabilities are taken into account.
The manager of the $259bn PIMCO Total Return fund said the US debt to GDP ratio, currently standing at around 100%, could jump to 125% in the next five years if existing trends continue.
But when social security and healthcare obligations ($66trn) and unfunded local and state government liabilities ($38trn) are taken into account, the ratio will move to 800% by 2015, according to Gross.
"America's debt/GDP at close to 100% is not near-term threatening, but if continued upward on trend could be absolutely debilitating," he said.
"Annual deficits of 7-8%, while alleviated and tempered by the financing of them with negative real interest rates, promise to raise that 100% number to 125% within five years if nothing is done.
"Yet as stunning and as Greek-like as that percentage is, it comes nowhere close to the actual liabilities of the US government. [These] would accelerate debt to 800% of GDP. And we look down on the Greeks?"
But Gross (pictured), who went short US government debt last year before later turning more positive, admitted it was foolish to underweight the nation during a debt crisis.
"The ultimate ‘safe haven', the cleanest of the dirty shirts, the champion of champions, rose of all roses, is the United States. I will not dispute it, market movements have confirmed it and my own experience in 2011 is a testament to it."
"Do not underweight Uncle Sam in a debt crisis. Money seeking a safe haven will find it in America's deep and liquid bond and equity markets," he said.
That does not change the fact that US finances resemble a "giant Payment In Kind bond", according to Gross.
"[New York] Mayor Michael Bloomberg was on to something when he told Albany legislators to look for anyone or any firm with a name other than Madoff to seek out their vaunted 7% return."
"What he did not say is that our US President - past, present and future - heads a financing scheme that has similar characteristics.
"Think of the US balance sheet with its $66trn of liabilities as one giant PIK bond - Payment In Kind. The corporate bond market has PIKs, although they tend to be junk market rated."
This article was first published on Investment Week
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