Oh my, when one of the largest investment fund managers in the world, and arguably the man controlling the largest bond investment conglomerate in the world says the above, you damn well better listen.
I speak, of course, to the budget deficit and Washingtons inability to recognize the intractable: 75% of the budget is non-discretionary and entitlement based. Without attacking entitlements Medicare, Medicaid and Social Security we are smelling $1 trillion deficits as far as the nose can sniff.
Yep. I have often written of this. You can argue all you want but the fact remains this: The Tea Party and Republicans are liars. Steve Southerland and Jeff Miller, do you hear me now?
This isn't opinion and it is manifestly and intentionally dishonest to stand before a group of Senior Citizens and proclaim that "nothing will change if you're over 50." That's a lie.
It's not a difference of opinion, it's not a perhaps, it's not wishful thinking. It's a lie.
Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a lockbox, much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, thats not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual lockbox tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pep, youve got a stinker of a problem.
Raising taxes $2.35 trillion, incidentally, would more than double them.
So that's obviously not a choice. You won't get double the income from doubling tax rates. We've been over that a bunch of times. You will likely get little or no improvement in tax revenue from raising taxes, but this much is certain: You can't continue to run a real deficit in terms of actual funds costs of more than $2 trillion annually on a permanent basis.
This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.
Yep. And just like the Greeks, we're lying. We have Non-representing "Representatives" who come into our schools and other public places and lie to our face. They stand with their pretty Powerpoint images and platitudes, and talk a nice game. Then they go back and fight over $60 billion, when the on-balance sheet portion of the deficit is $1,700 billion, and pretend that $60 billion matters. What's even worse of course is that at the same time Medicare is approving a ninety-thousand dollar a person drug for Prostate cancer that gives the recipient a whopping four extra months of life. Well, there went about another $9 billion out the door annually - before you cut anything.
Incidentally, Mr. Gross no longer holds Treasuries. Here is his reason. Would you care to have a polite little debate as to how long it will be before the Japanese, Chinese and Saudis are also no longer willing to hold them?
I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.
Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies inflation, currency devaluation and low to negative real interest rates. Our clients, who represent unions, cities, U.S. and global pension funds, foundations, as well as Main Street citizens, do not want to be shortchanged or have their pockets picked. It is incumbent, therefore, in order to preserve the integrity of the U.S. Treasury market along with its favorable global interest rates, and to promote a stable U.S. economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment. You must attack entitlements and make debt a four-letter word.
Best of luck Steve, Jeff, and the rest of the clown-car brigade in Washington.
You've been told where to stick your bonds by the largest bond-fund manager in the world in the private sector. It is only a matter of time before sovereign interests tell you the same thing, and once that happens it will be too late to fix the problem.
I repeat: $500 billion in cuts now, $500 billion more for fiscal 2012, and $500 billion more for fiscal 2013, with the balance, however much it is, in fiscal 2014.
Put an actual plan on the table to do that and pass it, or kiss this nation's debt-issuing capability goodbye at a time of our creditors' choosing, not ours. Such an event will cause a dislocation in government entitlements and the economy that will make September and October of 2008 look like a Girl Scout picnic and you will have no tools with which to address it.
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