Bill Gross looks on while playing golf at Pebble Golf Links in Pebble Beach
Bill Gross, the founder and co-chief investment officer of PIMCO, the world's biggest bond fund, says the US faces a debt mountain of more than $76 trillion that will destroy its status as the world's reserve currency if not addressed by lawmakers in the very near future.
Writing in his monthly Investment Outlook bulletin, Gross says total US debt, including the $16tn in outstanding Treasury bonds, sits at more than $76tn when future obligations including Social Security, Medicare and Medicaid are included. Gross says only a comprehensive programme of spending cuts and tax increases worth at least $1.6tn each year for the next decade - around four times larger than the current "Grand Bargain" proposed by the US government's bipartisan Super Committee - will succeed in lowering that amount.
"Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise," writes Gross. "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."
Gross describes what he calls a "Ring of Fire" - indebted nations around the world that includes Greece, Japan, Spain, France and Britain - and warns that developed nations' economic growth will suffer when compared to the learner structural deficits of emerging market powers such as China, Brazil and Mexico.
"The US and its fellow serial abusers have been inhaling debt's methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult," he writes. "The US, in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine. Uncle Sam's habit, say these respected agencies, will be a hard (and dangerous) one to break."
Gross, who manages PIMCO's $272bn Total Return Fund, has had his views consistently challenged by many economists, including Nobel Laureate Paul Krugman, who has argued for higher levels of government spending in order to ignite demand and accelerate US and global economic growth.
"The Great Depression taught policy makers the hard way that tight money and fiscal austerity were really bad ideas in the face of a deeply depressed economy," he said in his "Conscience of a Liberal" blog on the New York Times website.
"But, several generations on, all that was forgotten except by the economic historians, and policy makers were ready to resurrect the Treasury View, get all worked up about the dangers of inflation despite the absence of actual inflation, and in general to repeat their grandfathers' mistakes in full."
Earlier this month, global investors responding to a Bank of America Merrill Lynch fund manager survey said they were growing increasingly concerned about the impending "fiscal cliff" in the US, a reference to an automatic programme of spending cuts and tax increases worth more than $600bn that will automatically kick-in on 1 January.
Just over 35 percent of the respondents to the benchmark poll cited the impending fiscal trigger in the US as the biggest "tail risk" to their investment performance, two percentage points higher than the European debt crisis.
Gross's TRF, based in Newport Beach, California, has returned around 9 percent so far this year, according to Bloomberg data, beating nearly 97 percent of his global peers. Last month Gross cut the Fund's exposure to US Treasuries to a one-year low of 21 percent while the US dollar has gained more than 6 percent against a basket of currencies since last October.
Despite his concerns about hyperinflation and dollar devaluation, the US Federal Reserve has succeeded in maintaining headline consumer price increases at an average of 2.2 percent for the past five years even as more than $2.3tn has been pumped into the economy through two rounds of so-called quantitative easing since 2008.
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