US default on cards without reform of entitlements, says Pimco’s Bill Gross

America is “out-Greeking the Greeks” in its public liabilities levels, and will default unless public entitlements are “substantially reformed”, says Pimco managing director Bill Gross.

The US will not default in conventional ways, however, it will “pick the pocket of savers via a combination of less observable, yet historically verifiable policies [such as] inflation, currency devaluation and low to negative real interest rates,” he said.

Gross added, to maintain integrity in the Treasury market and economic stability generally, “it is incumbent that entitlement spending be reduced and future liabilities be addressed in terms of health care and social security cost containment”.

Gross said no lender would lend to the US were it a corporation in its present state.

He based his criticism of public expenditure on the statistic 75% of America’s public budget is “non-discretionary and entitlement-based”.

Medicare, Medicaid and social security account for 44% of $4trn the government is slated to spend this fiscal year, and the outlays are “steadily rising”, he said.

“The situation is almost beyond repair. Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, you have a stinker of a problem.”

America could grow its way of its problem were the public debt only $9.1trn – “well within 65% of GDP and well within reasonable ranges of sovereign debt burdens”.

But when the discounted net present value of current spending on Medicare ($22.8trn), Medicaid ($35.5trn) and social security ($7.9trn) are added in, the total comes to $65trn.

“The country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP,” Gross said “We are out-Greeking the Greeks”.

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