Catching Up With Jeffrey Gundlach

It's possible mark-to-market was suspended on a special-case basis–too big to fail. And reference notes, derivatives that refer to real securities, create leverage beyond what is in the economy: there is close to a quadrillion dollars, that's $1,000 trillion in derivatives, floating around in the world. The total M3 money supply is [only] $13 trillion. You can't have debt go to 700% of GDP. It's not possible. The house falls down. We have to stop spending. Government policies have to change.

We have 22% unemployment, not 10%, if you count short-term discouraged workers and long-term discouraged workers. That becomes very low growth. There's deflationary pressure, because of the debt burden, that may make an inflationary outcome seem like a good idea.

Where do you stand on financial services reform?

The unintended consequences are much bigger than the intended consequences. The problem is it could harm banks–reduce credit and lending, counter-stimulate and weaken the economy. Banks stopped lending to businesses 30 years ago; lent to consumers instead, leading to consumption and (sometimes) non-payment. Student loans are a good idea; you have something better after that, someone who can earn more.

What's the rosiest part of your outlook?

It's still possible–through austerity–to ease back from the trends over a three- to four-year window. We've already had the inflation. Issuing debt over the last 30 years created inflation, and paying it back creates deflation. Pay back the debt, money becomes scarce, prices go down. We're seeing it, though gold, Toronto real estate, and vintage wine are up; oil and real estate are down. Socrates says you have to understand that you don't know everything.