2009 June 28 Sunday
Bill Gross Sees More Debt And Lower Economic Growth

Pimco (really big bond manager) managing director Bill Gross says we are at risk of total federal government debt rising to 100% of GDP.

To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.”

The claim by the Obama Administration for an eventual return to fiscal probity is based on their assumption of a healthy recovery from the recession. They expect this recovery to kick in by the end of 2009 or thereabouts. But suppose the recession goes deeper than the Administration projects (it already has) and suppose recovery is slow for years (and Bill Gross expects a slow recovery - see below). Then what happens to the US federal budget? Spending goes up but revenue doesn't. It is as simple as that. So the deficit and accumulated debt go up even faster.

Gross says America's demographics with an aging population mean the problem is even bigger. I'll see him an aging population problem and raise him a declining skills population due to low skilled immigration. America's workforce in the future will be less capable and a smaller percentage of the total population. That spells declining living standards before we even begin to account for Peak Oil.

The current annual deficit of $1.5 trillion does not even address the “pig in the python,” baby boomer, demographic squeeze on resources that looms straight ahead. Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure – a number that resembles Latin American economies such as Argentina and Brazil over the past century.

Gross says funding the US government debt is going to become difficult. He expects higher interest rates. Now's not the time to buy a long term bond.

So the rather conservative U.S. government debt ratio shown in Table 1 will likely be anything but in less than a decade’s time. The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not.

Consumer spending is not going to ride to the rescue. Consumers are trying to cut back on their debt loads.

Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships.

Share |      By Randall Parker at 2009 June 28 12:57 AM  Economics Business Cycle

James Bowery said at June 28, 2009 6:49 AM:

One of the most risible aspects of the economic collapse is the juxtaposition of two "dilemmas" represented by the two peaks in the Google Trends graph of the keyword "stimulus".

The first "stimulus" was Bush's "stimulus check" which sent money directly and more or less equally to American households. This was widely denounced as having no effect because "consumers merely used it to pay down accumulated debt". This was something like $150 billion dollars -- a drop in the bucket compared to the consumer debt load. "Don't do it again, it will just be used by consumers to pay down their debt." was the reason it was not repeated.

Then the economy collapsed due to the inability of consumers to pay their debts and the entire financial pyramid fell with it.

Then the idea was to "inject liquidity", with an order of magnitude more money than the "stimulus check" sent to consumers, into the big financial houses to prop up all the "toxic assets" resulting from consumers being unable to pay their debts. This, of course, did nothing to solve the problem because the consumers were now merely committing suicide because the 2005 "reform" of bankruptcy law requires consumers to pay a lawyer to file for bankruptcy -- thereby urelentingly unleashing to locusts of the financial institutions upon them to pick their bones clean with professional techniques of psychological harrassment that few can tolerate.

Finally, the second "stimulus" peak in Google trends appears with the Obama administration's "economic stimulus" consisting of "injecting liquidity" into the Federal government. This is likely going to be even bigger. Still -- no one has considered the fact that maybe -- just maybe -- it wasn't such a bad thing that consumers used the original Bush "stimulus check" to pay down their debt over a year ago... Too busy lining their own pocket with a terminal currency, they are.

Aki_Izayoi said at June 28, 2009 7:28 AM:

I do not know... I actually expect lower interest rates.

Here is a detailed (and very good) argument for going long on Treasuries:


Chen Zhou said at June 29, 2009 9:40 AM:

Mr. Obama has brought about a qualitative change in the American economy in but a few short months. This is the revolution, the light switch that once thrown, cannot be unthrown.

It is a snowball escalating into an avalanche. The dustcloud of devastation will circle the Earth for generations. Americans are to blame, for they are those who elected this man.

Anonymouse said at June 29, 2009 10:35 AM:

Anyone want $100K?


Wolf-Dog said at June 30, 2009 5:14 AM:

Currently, in addition to subsidizing the lower class, the other function of the government deficit spending is to finance the trade deficit. Without trade deficit, a much lower government deficit would be needed.

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