Close Close

Financial Planning > College Planning > Student Loan Debt

Bill Gross Compares ‘Damaged’ Fiscal Situation to Own Amnesia

Your article was successfully shared with the contacts you provided.

When Bill Gross says he has amnesia, maybe it’s time to panic. He is the head of the world’s largest bond shop, after all, and could easily miss a decimal point.

His monthly investment outlook for October is typical Gross, the founder of PIMCO, a meandering mix of personal anecdotes and professional numbers that eventually (somehow) get to a point. This month it’s all about doing something about taxes and sending before it’s too late.

“I have an amnesia of sorts. I remember almost nothing of my distant past–a condition which at the brink of my 69th year is neither fatal nor debilitating, but which leaves me anchorless without a direction home,” he writes. “Actually, I do recall some things, but they are hazy almost fairytale fantasies, filled with a lack of detail and usually bereft of emotional connections. I recall nothing specific of what parents, teachers or mentors said; no piece of advice; no life’s lessons. I’m sure there must have been some–I just can’t remember them. My life, therefore, reads like a storybook filled with innumerable déjà vu chapters, but ones which I can’t recall having read.”

Comparing his damaged long-term memory to the damage of the debt peril in which the country finds itself, he concedes, “Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. 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. These “authoritative and mainly non-political organizations “describe the financial balance sheets and prospective budgets of a plethora of developed and developing nations.

“What they’re saying is that when it comes to debt and to the prospects for future debt, the U.S. is no ‘clean dirty shirt,’ ” before colorfully continuing “The U.S., 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 organizations try to compute a “fiscal gap,” a deficit that must be closed either with spending cuts, tax hikes or a combination of both which keeps a country’s debt/GDP ratio under control, he explains. But he notes the fiscal gap differs from the deficit in that it includes future estimated entitlements such as Social Security, Medicare and Medicaid which may not show up in current expenditures. Each of the three reports target different debt/GDP ratios over varying periods of time and each has different assumptions as to a country’s real growth rate and real interest rate in future years.

“The important thing, though, from the standpoint of assessing the fiscal ‘damage’ and a country’s relative addiction, is to view the U.S. in comparison to other countries, to view its apparently’ clean dirty shirt’ in the absence of its reserve currency status and its current financial advantages, and to point to a more distant future 10 to 20 years down the road at which time its debt addiction may be life, or certainly debt, threatening.” After assessing the three studies, he concludes we must cut spending or raise taxes by 11% of GDP, “rather quickly over the next five to 10 years. An 11% ‘fiscal gap’ in terms of today’s economy speaks to a combination of spending cuts and taxes of $1.6 trillion per year.”

To put it in perspective, he adds the CBO has calculated that the expiration of the Bush tax cuts and other provisions would only reduce the deficit by a little more than $200 billion.

“As well, the failed attempt at a budget compromise by Congress and the President–the so-called Super Committee “Grand Bargain–was a $4 trillion battle plan over 10 years’ worth $400 billion a year. These studies suggests close to four times that amount in order to douse the inferno.” He concludes by asking, “How can the U.S. not be considered the first destination of global capital in search of safe (although historically low) returns?

“Easy answer: It will not be if we continue down the current road and don’t address our fiscal gap. If we continue to close our eyes to existing 8% of GDP deficits, which when including Social Security, Medicaid and Medicare liabilities compose an average estimated 11% annual “fiscal gap,” then we will begin to resemble Greece before the turn of the next decade. Unless we begin to close this gap, then 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 within the ‘Ring of Fire.’ ”


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.