Bill Gross: $66 Trillion Debt Hangs Over U.S. Like a Damocles Sword

4 Ways U.S. Might Reduce Current/Future Liabilities

Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. [That being said, what options does the U.S. government have to reduce/eliminate its current $10 trillion of outstanding Treasury debt and an unfathomable $66 trillion of future liabilities? I have identified 4 likely courses of action all of which will lower the standard of living of every American.] Words: 1374

So says William H. Gross (www.pimco.com)  in edited excerpts from his original article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Gross goes on to say:

Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit…The Office of Management and Budget (OMB) estimates that future deficits will be reduced, at most, by .5%… but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”

Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness [issue] has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are…

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As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt…

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

Let me address each of them in brief:

1. Spending Cuts, Tax Hikes, GDP 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. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma. [This article (1) addresses the liklihood of higher taxes.]
2. “Unexpected” inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” 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. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. 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. [Future inflation is hardly “unexpected as these articles here (2) and here (3) attest.]
3. 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. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars. [See here (4) for an excellent article on just what the government has planned for you in the years ahead.]
4. 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 .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck! [See here (5) for an excellent article on just how future “financial repression” will adversely affect your standard of living.] 

By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating.

How Best to Preserve Your Purchasing Power

Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power [by doing the following:]

• Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind.
• 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…

1. Get Ready: More Taxes/Less Tax Breaks are Coming!  https://www.munknee.com/2011/07/get-ready-more-taxesless-tax-breaks-are-coming/
2. These Indicators Say Inflation to Go to 4% Soon – and 6% by 2014  https://www.munknee.com/2011/06/these-indicators-say-inflation-to-go-to-4-soon-and-6-by-2014/
3. Understanding Inflation: It’s Here – and It’s Going to Get Worse, Much Worse!  https://www.munknee.com/2011/03/understanding-inflation-its-here-and-its-going-to-get-worse-much-worse/
4. “The Great Dollar Devaluation Disaster” is Only Just Beginning – and the Intended Victim is YOU!https://www.munknee.com/2011/01/the-great-dollar-devaluation-disaster-is-only-just-beginning-and-you-are-the-intended-victim/
5. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why  https://www.munknee.com/2011/06/%e2%80%9cfinancial-repression%e2%80%9d-may-soon-become-our-worst-nightmare-heres-why/

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above