Echoing similar sentiments made Sunday by his colleague Mohammed El-Erian, PIMCO’s CEO (before news of a budget agreement was offcially announced), Gross also notes, “Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.”
Using bold font for emphasis, Gross writes, “The press and most professional investors are accustomed to measuring “paper” debt as opposed to walking/living liabilities in the form of people. I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements–the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper.”
So how to reduce that $66 trillion? Gross isn’t all dark clouds and rainy days (to mirror his parlance), and offers up “prominent tools” government can use to reduce its debt, absent outright default. Of course, they come with a price, in that as government wins by shoring its balance sheets, investors lose with lower returns and higher taxes.
- Balance the budget/growth: “The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so.”
- Unexpected inflation: “Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword.… Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.”
- Currency depreciation: “High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy-conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars.”
- Financial Repression via low/negative real interest rates: “I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at 0.05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples.”
“Favor countries with cleaner ‘dirty shirts’ and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind,” Gross concludes. “Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by Congressional law makers that promise a change in Washington. The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality.”