Posted on 05/26/2010 7:35:53 AM PDT by blam
PIMCO's Bill Gross: It May Not Be Possible To Reduce Debt By Reducing Spending
Joe Weisenthal
May 26, 2010, 10:26 AM
PIMCO boss Bill Gross is out with his latest investment outlook.
There's not a lot new in it, but this part is important, as it represents the latest thinking on the benefits of so-called austerity, namely that it doesn't work in many cases:
Granted, sovereign debtor nations are now saying all the right things and in some cases enacting legislation that promises to halt growing debt burdens. Not only Greece and the southern European peripherals, but France, the U.K., Japan, and even the U.S. are sounding alarms that might eventually move them towards less imbalanced budgets and lower deficits as a percentage of GDP.
Still, credit and equity market vigilantes are wondering if in many cases sovereigns haven’t already gone too far and that the only way out might be via default or the more politely used phrase of “restructuring.” At the now restrictive yields of LIBOR+ 300-350 basis points being imposed by the EU and the IMF alike, there is no reasonable scenario which would allow Greece to “grow” its way out of its sixteen tons. Fiscal tightening, while conservative in intent, leads to lower and lower growth in the short run.
Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!
[snip]
(Excerpt) Read more at businessinsider.com ...
Bill Gross - served in Viet Nam and former Republican - has become too political to be believed in the last 5 years (since selling out to Allianz). Like many successful investors and corporate chieftains, he has been willing to bend his beliefs for political expediency. PIMCO has enjoyed many benefits from endorsing the Obama ascendancy. I just don’t believe he has the clarity that made him successful .
Disclaimer: That said, I still hold shares of the Total Return fund.
In theory what he’s saying isn’t true, at least not for the US. If we cut the government to 1/3 its current size in say 10 years, and ramped down borrowing,social spending, regulation and tax rates in that time frame we would be OK, IMO. We simply don’t need the level of government we have. Now is that politically possible? I don’t think so.
>The only way to reduce US masive government debt is by >default.
Not true.
Several other methods have been used in the past:
a. Inflation (steal from those that have saved. pay back old debts with dollars that are now inflated.
b. confiscate wealth outright. Hitler did it from the jews.
The US will do it from the dead. Estate taxes will be 100% of anything over a million.
c. take over other countries, use their wealth to pay debts
d. all of the above
Hard money is going to be restored - one way or another.
However it happens, a lot of people are going to die because of 97 years of monetary malpractice.
The only remaining question is, which body count will be higher - looters or producers?
There's the rub. What level of blood in the streets is tolerable?
“So he is saying its already too late to avoid a sovereign debt default?”
So, since everybody owes everybody else, why not just agree that now everybody is “even” and forget about the debts. /kinda sarcasm
More Keynesian B.S. If spending helped GDP why is’nt Greece
filthy rich.
You can’t spend into prosperity.
Gov. Chris Christie(R-N.J.thinks otherwise.
huh....up to 29 posts, and nobody has yet commented on how “my ex-wife tried that one on me once”.....
That may very well be true, but it’s damn well where you start.
Right! And I see two different possible mechanisms for that: 1. Outright default. US Treasury announces it will not pay back bonds. Unlikely. 2. Default through monitization. The Federal Reserve Bank simply creates enough money to continue buying the debt and servicing the interest. This, in turn leads to higher inflation, and perhaps even hyper-inflation. 3. The third option is that we suck it up, cut spending, raise taxes and repay it. I think that would be very bad for Americans. Do I want my kids paying taxes at 70% for their entire working life, and receiving almost no benefits, essentially making sure that the holders of US Debt run up under Clinton, Bush and Obama are made whole? Work as a tax slave for the heirs of JP Morgan and Goldman-Sachs, and the Chinese Communists? NO THANKS! I'll take option two. Which is why I don't like dollar denominated anything, except fixed interest debt.
Right! And I see two different possible mechanisms for that:
1. Outright default. US Treasury announces it will not pay back bonds. Unlikely.
2. Default through monitization. The Federal Reserve Bank simply creates enough money to continue buying the debt and servicing the interest. This, in turn leads to higher inflation, and perhaps even hyper-inflation.
3. The third option is that we suck it up, cut spending, raise taxes and repay it. I think that would be very bad for Americans. Do I want my kids paying taxes at 70% for their entire working life, and receiving almost no benefits, essentially making sure that the holders of US Debt run up under Clinton, Bush and Obama are made whole?
Work as a tax slave for the heirs of JP Morgan and Goldman-Sachs, and the Chinese Communists?
NO THANKS!
I'll take option two. Which is why I don't like dollar denominated anything, except fixed interest debt.
There! Fixed it.
“Bankruptcy of the entire developed world, pretty much all at once!”
Yep, that is pretty much the way i see it. At its most basic level this is how this all worked out.
1. Federal reserve creates huge multi-decade bubble buy printing money out of thin air, offering it to banks, who loan to consumers and businesses. These consumers and businesses spend money buying things which create jobs.
2. This artificial increase in the money supply over the last 50-60 years has created a huge multi-decade bubble that has never really popped. This has created millions of jobs and a society and economy that requires constant growth to maintain the jobs and way of life. Certain pieces of it popped along the way, but they were just bubbles inside the big bubble.
3. Meanwhile, post-NAFTA USA has been gutted regarding the ability to produce things of real value (energy primarily, timber, coal, commodities).
4. The Real Estate boom was the mother of all bubbles. Think about how much crap has to be created to build a house. How much energy and labor are required to obtain and move the materials to the site and all the appliances and hardware that are required to complete a home. This is what set the path for mass inflation of home prices and everything else.
5. Now that the artificial money is reaching its end, a long with the US Treasury’s ability to loan money, this is all coming to an end.
This was a 30 second break down of something that has been in the making for over 50 years.
So what i see coming is massive deflation that isn’t going to go away regarding most things we consider purchasing (homes, tvs, cars, appliances, etc.), and a massive inflation of the price of things that have real value and are needed to survive (energy, gas, timber, etc.)
So while the value of your home is not going back up, the cost of gas is.
Food for thought. thks
It's too late.
The general tone will be deflation but items that are perceived as true stores of value and stuff there is a shortage of will inflate. It could be a gentle inflation
We have the commodification of many manufactured and electronic and hi-tech items so their price goes down with China/Asian participation.. While ye old traditional commodities, foods, energy rise because there is a shortage in them. Manufactured items used to be in shortage and were dear but now commodities, energy and raw materials will be
We have had a decades long rising curve in knowing how to "make stuff". The whole world knows how to make a lot of the stuff that is essential such as refrigerators and washing machines and scooters and motorcycles. This is why we have high unemployment here. What only US/European/Japanese workers knew how to make, other can now also make and cheaper
There is a fourth option:
Take over the banks, expose the crap on their balance sheets for what it is, clean it up, restructure their tower of debt and restore confidence in the system.
Neither can I any more.
I think that all nations have tipped their hands by now: they intend to devalue their currencies and print money out of thin air to pour into holes on bank balance sheets.
Sorry I don’t get your fourth option? I think whoever suggested massive confiscation had an alternative.
But how would exposing banks balance sheet woes have any effect on the public debt? I don’t get it.
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