by R.M. Schneiderman Info
R.M. Schneiderman is a reporter for Newsweek.
Standard & Poor’s may have cut its outlook for the U.S., but Bill Gross, head of the country’s largest bond fund, tells R.M. Schneiderman we won’t default on our debt—though it may take a fiscal crisis for Washington to solve our deficit problems.
For all the talk of Republicans gutting entitlements and Democrats raising taxes on the rich to solve America’s long-term budget deficits, the head of the country’s largest bond fund says the gridlock in Washington will not ease over the next two years—and that a fiscal crisis may ensue before any real progress occurs. But a U.S. debt default, he says, will not be the end result.
In an interview Wednesday, Bill Gross, co-founder of the California-based Pacific Investment Management Company, or Pimco, said continued inaction on the budget deficit could lead to an erosion of wealth. “The negative repercussions would be a lower dollar, higher inflation, and artificially low interest rates,” he said. “All surreptitiously pick the pockets of investors.”
Earlier this week, Standard & Poor’s, one of the three main credit rating agencies, lowered its outlook on the United States to “negative,” triggering a wave of jitters among investors. In an effort to reassure them, Treasury Secretary Timothy Geithner and other White House officials said the nation’s credit rating would never fall below triple-A, the highest grade.
Yet Gross said S&P is only stating the obvious. The fiscal situation of the United States is “God-awful,” he said. “Washington talks a big game [but] then goes off doing what it always does—spending money.”
Gross, who has been in touch frequently with the White House and various government officials since the 2008 financial crisis, said he has a deep respect for the lawmakers who are trying to combat the nation’s debt problems. Yet at least in part because of the balance of power in Washington and the highly partisan climate, Gross is skeptical that anything constructive will happen before the situation becomes dire. Only a crisis, he said, is likely to break the impasse.
“The U.S. can’t and won’t default on its debt,” he said. “But if you buy U.S. Treasuries today you will be receiving a pittance relative to what you can get [buying] bonds in Canada or bonds in Germany.”
Tim Boyle, Bloomberg News / Getty Images
Whether Gross is correct remains to be seen. But the Pimco co-founder is certainly influential. His decision in March to sell all of his fund’s U.S. Treasury bonds generated considerable buzz on Wall Street, though the move, he said, was related to price, not credit, and investors ultimately did not react in fits and starts.
“The U.S. can’t and won’t default on its debt,” he said. “But if you buy U.S. Treasuries today you will be receiving a pittance relative to what you can get [buying] bonds in Canada or bonds in Germany.”
An eccentric, Gross reportedly has a penchant for wearing his Hermès ties unknotted and draped around his neck. Yet unlike Donald Trump, another wealthy eccentric, Gross said he is well past the age of political ambition. “I’m 67,” he said. “Although I do have better hair than Trump.”
In the end, Trump and other presidential hopefuls are unlikely to tip the balance in Washington, according to Gross. He said he believes Obama will “probably” win the 2012 presidential election, but that ultimately, the party that gains a legislative majority over the next two years will be the one to pass its vision of the future.
“If the public is swayed in the direction of reduced entitlements, then the Republicans will win the Senate,” he said. “If the public is swayed in the form of raising taxes on the rich, then the Democrats will win.”
Until then, however, the country’s fiscal reputation may continue to suffer.
R.M. Schneiderman is a reporter for Newsweek.
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Pimco has about 2 trillion dollars in assets under management.Pimco has 0 dollars in US bonds. 0.
gator, and of course Gross has a magic 8 ball wherein he can see the future.
When one buys a 30 year bond, he/she is making a prediction regarding the future. When one buys and sells up to $300 billion a day of 1day-30 years bonds for FORTY years at a professional level, he/she is making millions upon millions of individual educated guesses and opinions. Laypeople: please don't disregard the information gleaned from the financial markets (e.g., yield curves, credit spreads, Eurodollar curve, financial futures, currency curves and the forward market etc...) and the sage advice of a seasoned investor as "just a prediction" or "magic 8-ball" Personal: I've second-guessed this gentlemen on radical proclamations and predictions for over 20 years and was right when he was wrong only 10% of the time. The 90% error rate can't be ignored--and he is second (or tied) only to Bernanke in his economic importance and foresight. This is truly a bond god. Show respect.
This is naive and ill-informed. The AUM is closer to $1.0 Trillion and PIM has always had Treas exposure, albeit either indirectly or via competing spread product. The underweight (average duration of less than 1 year) is equivalent to ZERO treasury exposure, but is in fact significantly greater than $0.0.
The crisis Gross is calling for is in the pipeline. It's being engineered by chairman Biddle, oh wait, I mean Bernanke, at the Federal Reserve. He's already announced the Fed's intention to end quantitative easing (QE2) which will put downward pressure on bond prices and upward pressure on yields. That translates to higher interest rates going into a presidential election year, together with higher gasoline prices. My guess is that behind this "controlled" crisis, the strategy is to scare the administration into deeper cuts in the federal budget and , not coincidentally, improve Republicans' chances in next years national elections. With the Obama administration's borrowing prospects sharply reduced, they will have no viable alternative to deep cuts in social programs. Newt's economic strategy, if not his presidential prospects, prevail. And Barack will be left scratching his head, and planning another book.
Only a crisis will get Democrats to stop spending like Imelda Marcos at a shoe store. Will they see the light and stop pissing our tax dollars away before the crisis unfolds? Don't hold your breathe.
Pimco is another leftist tool who gets inside info directly from the fed.
What they get is limitless cash at .25% to invest in emerging economies.
Other way around.
Pulease, so now he is predicting the future. It isn't such a huge risk to say things will likely get worse. BFD.
Saying, perhaps.. But saying AND investing $1 trillion plus on that prediction IS a huge risk and represents more than just a prediction----conviction and action. Tell DC (they need a real world example of the real world).
GS Banksters and other fake investors with connections had/ve all their risks covered by taxpayers and were/are able to take over lesser bankster's territories, so what risks do they really take?
"Might take a fiscal crisis."--???? HaHaHaHaHaHa Ha
this default business is nothing but hyperbole. The idea that America will default because it cannot borrow any more is ludicrous. Do your creditors go away because you hit the max on your credit card? No, hell no, and America's won't either.
No but I can secure a loan at 4% whereas people borrowing against their paychecks must pay 15%. Want to see next years budget deficit top 2 trillion overnight? All it will take is an increase in the interest rate on government debt to 6%. In 6 years the government will be paying 1 trillion a year on debt interest. Bottom line: this is not hyperbole.
One thing I know for certain about American politics is that it will always come down on the side of Wall Street, big corporations and the wealthy--the people who really run the world. And one plus one equals two. If these interests oppose a default, there will not be one.
A second thing to understand about "Wall Street, big corporations and the wealthy" is that defaults can be lucrative as well. So logically: If these interests support a default, there will be one. Two sides to every trade--a third thing to know.
I think the overall result of a US default would be general chaos and instability in the international capitalist system, although it's difficult to predict since the U.S, has never defaulted before--not even partially. For a long time, since the decay of the British Empire, it has been the chief hegemon and guarantor of the world capitalist system. I agree that it's no longer strong enough to play that role and a major "adjustment" is coming.
Swim with the big fish. If only for the current break.
If America can't pay its bills, the Repukes will take that as a sign of divine disfavor, and will be expecting the wrath of God and the End of Days as punishment for a country that disobeyed God's Commandments.
The most pathetically inept, and monumentally incompetent President in American history. A grinning Jack Ass of a man, most at home lying to fools and sycophants.
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