Pimco details a plan for Washington, suggests Beijing read more Shakespeare

Pimco founder Bill Gross has set out an extensive plan for Washington to tackle its debt mountain, but still suggested Beijing stop lending more to the US.

As he set out four “life rafts” that the US and other AAA-rated nations could take to reduce their borrowings, Gross (pictured) nevertheless recommended investors avoid American debt and currency.

He counseled Beijing to “read Shakespeare, not Confucius, especially the second half of ‘neither a borrower nor a lender be’ when it comes to US dollars”.

However, a statement from China’s official Xinhua news service suggested Beijing well understands the danger.

Failing to rein in US borrowing would “jeopardise the well-being of hundreds of millions of families within and beyond the US,” it said, adding that the haggling in Washington “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.”

Gross named Germany and unlikely bed-fellows Mexico, Brazil and Canada, as countries preferable to the US. Investors should favour “countries with cleaner ‘dirty shirts’ and higher real interest rates”.

In light of this week’s deal in Washington to allow more sovereign borrowing, he also recommended various “precautionary or even retaliatory measures for investors to preserve purchasing power”.

In an implied warning over the Greenback, one measure was shifting equity and fixed income allocations from dollar-based indices “towards those of developing nations with stronger growth prospects”.

He also suggested beating “reserve surplus nations” – primarily growth economies at present – to buy real assets.

“And above all do not be lulled to sleep by Congressional law makers that promise a change in Washington.”

The US had its sovereign AAA credit rating approved this week by Moody’s and Fitch, but awaits judgement from the most influential, Standard and Poor’s.

Gross said the agencies could still downgrade America and fellow AAA-rated sovereigns, especially if they did not avail themselves of four measures.

“By using four life rafts available to the US and other AAA sovereign borrowers, one can almost imagine half a century from now that they remain solvent, although chastened perhaps with a lower credit rating.”

The first is “trillions of further spending cuts and trillions of tax hikes to stabilize [America’s] ‘official’ debt to GDP ratio of 90% or so”. Gross said projected deficits of 7% to 8% of GDP for next year and 2013 were based on economic growth forecasts of at least 3%, whereas Pimco predicts 3% or below.

He added a 1% rise in current interest rates adds 1% to the deficit, “erasing any hope for gains”.

The second measure possible is allowing inflation, fuelling public coffers to handle debt burdens.

The third is currency depreciation through high trade and fiscal deficits combined with low interest rates for extended periods. The dollar’s 15% depreciation over 12 months was “an explicit tax on Americans’ standard of living, [but] Uncle Sam the government overseer benefits enormously”.

Gross’s final tonic for Washington is “financial repression via low/negative real interest rates.


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