Pimco’s Gross warns: Bonds will be ‘burned to a crisp’ if US fails to tackle debt

In perhaps his starkest warning about America’s perilous debt position, the head of the world’s largest bond investor Pimco says the asset class will be “burned to a crisp” if the US fails to address its existing ‘fiscal gap’.

American manager Bill Gross (pictured) says if his homeland does not address its current indebtedness and future liabilities, “the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline.

“Bonds would be burned to a crisp, and stocks would certainly be singed. Only gold and real assets would thrive.”

His warning may or may not be heard by the White House, but it will probably ring in the ears of institutional investors in Europe, who have traditionally put fixed income at the heart of their asset allocation.

Gross points to the 11% annual ‘fiscal gap’ the US is running, when public healthcare, social security and other future liabilities are included in calculations, as well as current expenditure.

He says his homeland will “begin to resemble Greece before the turn of the next decade” if it does not move to reduce this gap.

At the moment, he notes the US is still considered by investors as the world’s “cleanest dirty shirt”, and he does not believe Armageddon is just around the corner.

America’s federal debt/GDP is below 100%, it has Aaa/AA+ credit ratings, and benefits from being the world’s reserve currency – so its interest rates are structurally lower than other Aaa-rated countries.

“I don’t believe in the imminent demise of the US economy and its financial markets. But I’m afraid for them. Apparently so are many others, among them the International Monetary Fund, the Congressional Budget Office and the Bank of International Settlements.”

“When all of them speak, we should listen and in the latest year they’re all speaking in unison. What they’re saying is that when it comes to debt and to the prospects for future debt, the US is no ‘clean dirty shirt’. The US, in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine, and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard and dangerous one to break.”

The three bodies recommend, separately, that the US must cut spending or raise taxes by 11% of GDP over the next five to 10 years. Addressing the ‘gap’ is equivalent to spending cuts and taxes of $1.6trn per year.

The impending ‘fiscal cliff’ when tax cuts introduced by the last administration come to an end soon, would only reduce the deficit by about $200bn. Gross says what is needed is action four times more severe than the $400bn per annum ‘action plan’ agreed in the Super Committee ‘Grand Bargain’.



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