No Way Out of Debt Trap, Gross Says: U.S. Living Standards Doomed to Fall By Stacy Curtin |
Posted Mar 08, 2011 09:00am EST
Debt, debt and more mounting debt is plaguing countries
around the globe.
In the U.S., states across the country face a collective
$125 billion shortfall for fiscal 2012, while Congress is
facing a budget gap nearly 10 times that size.
PIMCO founder Bill Gross -- one of the world's largest
mutual funds managers, who focuses mostly on bonds -- has
previously said that if the United States were a corporation,
no one in their right mind would lend us money. For the
last decade, we’ve been “relying on the kindness
of strangers” to help cover our debts, he tells Aaron
Task in the accompanying clip.
By “strangers” he is referring to our foreign
counterparts, like China for example. Basically, for years
Americans have spent their hard-earned dollars on less-expensive
Chinese made goods. With great gratitude, China turned around
and used all those dollars to buy up U.S. Treasuries and
other dollar-denominated assets.
But now after years of reckless spending, America’s
debt level is nearing a breaking point and can no longer
rely on foreign capital as a last resort. “When a
country reaches a certain debt level, confidence in that
country’s ability to repay that debt becomes jeopardized,”
says Gross, citing the work of Ken Rogoff and Carmen Reinhart
in This Time Is Different.
The Way Forward...And Your Pocketbook
The budget crisis situation unfolding - at the state and
federal government level - does not bode well for working
men and women in this country. There are really only two
choices, says Gross. And, neither favors your pocketbook:
Option #1 – Keep spending and do nothing
Option #2 – Balance our budgets by cutting entitlements
House Republicans ran and won on a platform to cut $100
billion from the budget this year and last month managed
to pass legislation that would strip $61 billion in spending.
But for President Obama and Congressional Democrats, those
cuts go way too far at a time when the country is still
struggling to recover from the worst recession since the
Great Depression. Goldman Sachs and Bill Gross agree and
have warned that cutting too much could stifle growth. (See:
Gross "self sustaining" clip)
Meanwhile, neither side has gotten serious about reforming
entitlement programs like Social Security and Medicare,
which account for more than a third of Uncle Sam's budget.
If the country cannot come to grips and cut back on entitlement
programs, U.S. debt will continue to grow and governments
around the world will loose faith in the U.S. dollar. Foreign
goods would become more expensive, says Gross, while our
standard of living would drop.
Under the second option, if entitlement programs are cut,
many Americans would naturally have to learn to live on
less and take a hit to their standard of living.
“There is really no way out of this trap and this
conundrum at this point,” says Gross. From an investment
perspective his advice is to stay clear of “bonds
in dollar denominated terms” and to be “wary
of higher interest rates going forward.”