Mar 31, 2011 2:43 PM GMT
Gross runs Pimco, the $1.2 trillion investment manager that has spent recent months selling Treasury bonds, citing their low yields and poor prospects. He explains in his monthly investment outlook posted Wednesday evening that U.S. government bonds "have little value" in a world of bloated budgets.
"Without attacking entitlements – Medicare, Medicaid and Social Security – we are smelling $1 trillion deficits as far as the nose can sniff," he writes in stretching a lame skunk metaphor (see chart title, right) well past the breaking point.
The trillion-a-year habit obviously can go on only so long, though Gross doesn't expect the government to out and out refuse to honor its obligations. Such an outcome is "surely unthinkable," given the national prestige at stake and the fact that the Federal Reserve's got a printing press handy.
But Gross does say the U.S. is well on the road to effectively defaulting, by inflating away the value of the currency, letting the dollar's external value decline and holding down rates, impoverishing savers.
While the United States is widely reckoned to have a debt problem, thanks to a debt-to-gross domestic product ratio above 60% on its way to 80% and change, Gross says the real number is much higher.
While outstanding federal debt totals $9.1 trillion, he estimates the government's actual liability at $75 trillion, counting promises made under Medicare, Medicaid and Social Security.
"The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter," Gross writes.