Bill Gross: We Have 60 Trillion Dollars in Future Liabilities

Bill Gross spoke to Bloomberg about the debt-ceiling debate and the U.S. economy. Gross said that the debt-ceiling deal is a “Republican Tea Party victory” and that “we are at a tipping point” in terms of a recession.


Gross on the debt-ceiling deal what we should be paying attention to:

“Very few people have focused on liabilities over the longer term. We have a $10-12 trillion debt, but basically, we also have $60 trillion present costs in terms of future liabilities. We are talking about Medicare, Medicaid and Social Security.  I call those debt-men walking. That means in addition to paper, we have 330 million people who are walking around as future liabilities for this country. To the extent that we have promised them entitlements through health-care and Social Security, that total is $60 trillion, six times the existing debt. We have a whale of a program to go, not just in terms of this particular targeted program, but in terms of forward years, where $1trillion to $2 trillion has to come from the budget every year in order to maintain the semblance of a AAA country.”

On whether the U.S. can get to a balanced approach:

“It does seem like lawmakers can’t get to it and whether they will in November and beyond is a critical question. To our way of thinking, tax hikes have to be part of the equation, tax hikes for the billionaires and for the hedge funds in terms of carried interest, but we’re talking about corporations as well. Corporations have the lowest tax rate on a historical basis. 10% of GDP that they’ve had over the past century. Those that would suggest that corporations won’t invest unless their taxes are reduced are sadly mistaken.  It needs to be a balanced approach and it needs to be significant.”

On whether he is disappointment by President Obama’s role in the debt-ceiling talks in that he didn’t push further with Republicans and Conservatives:

“I think so. He had his chance long ago when he could have threatened to raise the debt-ceiling come hell or high water, come 14th Amendment or high water. This was not the case in terms of him following through. I am disappointed. I think there have to be tax increases. That was his main premise. He didn’t enforce that.  To me, it’s a Republican Tea Party victory.  Whether they can continue that momentum in 2012, we will have to see in terms of the elections.”

On how the markets would have reacted if we had gotten more significant spending cuts and tax increases:

“Probably not much differently. The markets, and you can take Pimco as an example, are very skeptical in terms of any plan… In any case, the markets are skeptical of what government can in this particular situation. It is true, from our standpoint, although we are recommending that there is a long way to go in terms of reducing deficits, that when you do it in the short run, as the Tea Party would not recognize, that’s very fiscally contractionary. Within the next year or two, the U.S. government even under this guise of this particular plan will be fiscally contractionary to the extent of 0.5% to 1.5% of GDP. That suggests that the private sector has to come in and fill the breach and we do not think they are going to do that.”

On Paul Krugman’s argument that this is not the time for spending cuts:

“I think even Krugman would agree that up until this point the stimulus programs have been misguided. They have promoted consumption and basically Chinese production as opposed to U.S. production. Future programs, if there are going to be future programs from the standpoint of fiscal stimulus, will have to be directed at jobs and promote infrastructure, green and technologically advanced programs so that we can export something to the global economy.  At the moment, we basically only import something from the global economy and that’s one of the problems we have.”

On whether Pimco is banking on another recession:

“Not yet. We are talking about it in an investment committee. Our numbers for the second half are 1% to 2% in terms of real GDP growth. They were 2% to 3%.  We have reduced that based on recent statistics. We are not looking at another recession yet, but we are at a tipping point. We are at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created. Therefore the economy sinks based on a stall speed concept in terms of airplanes.”

On whether the Federal Reserve should do more:

“The Fed is in the business of providing emergency liquidity and reducing the cost of credit. They’ve done a lot of that.  The 5-Year is at 1.2%. They 10-Year is at 2.65%.  They can do additional things. They have suggested that. They will talk about it next week and they’ll talk about it at Jackson Hole. There is the potential for a QE3. I suggest that that takes the form really of extended period language and some kind of cap in the 5-Year or 10-Year treasury securities, lowering the cost of credit even more. They are approaching a cul-de-sac, a dead-end, where all they can do has been done.”

On Gross’ monthly investment outlook issued today and whether he is continuing to look outside the U.S.:

“You want non-dollar based. As interest rates come down in the U.S. that basically suggests that the dollar is a less and less attractive investment.  You want countries with cleaner dirty shirts: Germany, Canada, Mexico (NYSE:EWW), Brazil (NYSE:EWZ) with interest rates at 2%, 3%, 4%, 5%, 6%. That’s on the bond side.  You want to look for commodities (NYSE:RJI) which benefit with a declining dollar (NYSE:UDN).  You want to look for global stocks that pay a consistent 3%+ type of dividend relative to the dramatically low interest rates we have in the U.S.”

On U.S. Treasuries:

“The call on U.S. Treasuries (NYSE:TLT) was always that there was something better.  We’ve benefited from Germany (NYSE:EWG) and Canada (NYSE:EWG). We are doing quite well in terms of the Total Return Fund – it’s up about 5%.  Treasuries can do what they do but we are in the cleaner dirty shirt types of countries.

“We have a small percentage of U.S. Treasuries.  The Total Return portfolio has about a 9% concentration in U.S. Treasuries and that’s up a little from last month.  Those numbers will come out in the next few days and I hope I haven’t disturbed our legal people.”