"Skunked": Bill Gross On How "The U.S. Will Likely Default On Its Debt"

Tyler Durden's picture

In a letter focusing on what has been well known to Zero Hedge readers for about two years now, Bill Gross' latest investment outlook does the usual attack of Beltway stupidity (as if Congress is in any way competent of making math-related decisions - they do what Wall Street - that's you Bill! - tell them to do, and you know it), emphasizing the impossible math of total US entitlement liabilities (on a net present value basis), which Gross estimates at $75 trillion. That Gross conclusion is predetermined from the onset is not surprising: "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
Then again, that America is bankrupt is not really news to anyone. Neither is it news, that Gross, as we first reported, no longer has any US bonds to dispose of. What will be news is the inflection point at which Gross starts purchasing Treasuries once again. And after all with $220 billion in AUM in the Total Return Fund, what else will he do: hold on to cash? Buy Netflix? Then the only question will be how Gross spins the inevitable capitulation of the re-hypocrisy trade, validating that he, in a narrow sense, and PIMCO in a broad one, is perhaps the biggest cog in the very system that Bill spends so many hours writing letters about and complaining against. But yes, even that won't be all that surprising to us. After all, in this bizarro world absolutely everything is now priced in.



  • Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
  • Previous Congresses (and Administrations) have relied on the
    assumption that we can grow our way out of this onerous debt burden.
  • Unless entitlements are substantially reformed, the U.S. will likely
    default on its debt; not in conventional ways, but via inflation,
    currency devaluation and low to negative real interest rates.

That adorable skunk, Pepé Le Pew, is one of my wife Sue’s favorite
cartoon characters. There’s something affable, even romantic about him
as he seeks to woo his female companions with a French accent and
promises of a skunk bungalow and bedrooms full of little Pepés in future
years. It’s easy to love a skunk – but only on the silver screen, and
if in real life – at a considerable distance. I think of Congress that
way. Every two or six years, they dress up in full makeup, pretending to
be the change, vowing to correct what hasn’t been corrected, promising
discipline as opposed to profligate overspending and undertaxation, and
striving to balance the budget when all others have failed. Oooh Pepé –
Mon Chéri! But don’t believe them – hold your nose instead! Oh, I kid
the Congress. Perhaps they don’t have black and white stripes with bushy
tails. Perhaps there’s just a stink bomb that the Congressional
sergeant-at-arms sets off every time they convene and the gavel falls to
signify the beginning of the “people’s business.” Perhaps. But, in all
cases, citizens of America – hold your noses. You ain’t smelled nothin’

I speak, of course, to the budget deficit and Washington’s 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. Once dominated by defense spending, these three
categories now account for 44% of total Federal spending and are
steadily rising. As Chart 1 points out, after defense and interest
payments on the national debt are excluded, remaining discretionary
expenses for education, infrastructure, agriculture and housing
constitute at most 25% of the 2011 fiscal year federal spending budget
of $4 trillion. You could eliminate it all and still wind up with a
deficit of nearly $700 billion! So come on you stinkers; enough of the
Pepé Le Pew romance and promises. Entitlement spending is where the
money is and you need to reform it.

Even then, the situation is almost beyond repair. Check out
the Treasury’s and Health and Human Services’ own data for the net
present value of entitlement liabilities shown in Chart 2.

The above four multi-trillion-dollar liability balls are staggering
in their implications. Remember first of all that the nearly $65
trillion of entitlement liabilities shown above are not some estimate of
future spending. They are the discounted net present value of current
spending should it continue at the projected demographic rate
(importantly ­– it is much higher than the annual CPI + 1% used as a
discounter because demand for healthcare rises much faster than
inflation.) And while some Honorable Congressional Le Pews would counter
that Medicaid is appropriated annually and therefore requires no
discounted reserve, those words would surely count as “sweet nothings,”
believable only to those whom they romance every several years at the
polls. The incredible reality is that the $9.1 trillion federal debt
that constitutes the next-to-tiniest ball in our chart is nothing
compared to unfunded Medicaid and Medicare. It is like comparing Pluto
to Saturn and Jupiter. The former (the $9.1 trillion current Treasury
debt) does not even merit planetary status in our solar system of
discounted future liabilities. It’s really just a large asteroid.

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, that’s 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 Pepé, you’ve got a stinker of a problem.

Previous Congresses (and Administrations) have relied on the
assumption that we can grow our way out of this onerous debt burden.
Perhaps we could, if it was only $9.1 trillion, as shown in Chart 2.
That would be 65% of GDP and well within reasonable ranges for sovereign
debt burdens. But that is not the reality. As others, such as Pete
Peterson of the Blackstone Group and Mary Meeker, have shown much better
and for far longer than I, the true but unrecorded debt of the U.S.
Treasury is not $9.1 trillion or even $11-12 trillion when Agency and
Student Loan liabilities are thrown in, but $65 trillion more! 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.

If so, and if the USA were a corporation, then it would probably have
a negative net worth of $35-40 trillion once our “assets” were properly
accounted for, as pointed out by Mary Meeker and endorsed by luminaries
such as Paul Volcker and Michael Bloomberg in a recent piece titled
“USA Inc.” However approximate and subjective that number is, no lender
would lend to such a corporation. Because if that company had a printing
press much like the U.S. with an official “reserve currency” seal of
approval affixed to every dollar bill, that lender/saver would have to
know that the only way out of the dilemma, absent very large
entitlement cuts, is to default in one (or a combination) of four ways:
1) outright via contractual abrogation – surely unthinkable, 2)
surreptitiously via accelerating and unexpectedly higher inflation –
likely but not significant in its impact, 3) deceptively via a declining
dollar– currently taking place right in front of our noses, and 4)
stealthily via policy rates and Treasury yields far below historical
levels – paying savers less on their money and hoping they won’t

If I were sitting before Congress – at a safe olfactory distance –
and giving testimony on our current debt crisis, I would pithily say
something like this:

“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.
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.”

Thank you, and like Pepé Le Pew, why don’t you try changing your
stripes or at least pretend you’re a French-speaking cat. The odor in
these chambers is all too familiar and a skunk needs all the help it can

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buzzsaw99's picture

Bill plays the fascist fiddle as well as anyone.

quintago's picture

14% interest rates
14% inflation
0% real rate

Bill makes it sounds like pick-pocketing, but inflation won't stay at those levels in perpetuity.

Shameful's picture

Your right, Zimbabwe Ben can kick this pig into at least 3 digits no problem.  If he really wants to hear the roar of the press maybe well get 4,5,6 digits.  Havenstein used to brag about his printing operation.  Wonder if Ben will brag about his computer scientists making an system that goes past quad precision floating point to keep track of the money supply.

Ray1968's picture

0% only if the IRS indexes capital gains to inflation... which they don't.

Its a lose-lose for everyone.

Harlequin001's picture

What about poor Dicky Fould, his faith in the banking system must be completely shot...


Bob's picture

He's a virtuoso, it seems.  I  now fully understand and support in a very big way Tyler's seething disgust for the snake.  What a despicable creature. 

YouBetYourLife's picture

Why is Gross saying this at this time?  What is his angle? How does PIMCO profit or position itself through these statements? 

Insiders like Gross don't go against FedSpeak, which would earn Bill a tazing if Ben thought he could get away with it, without having some reason for doing it.  Why wouldn't he just keep his thoughts to himself?

I agree with Gross - the U.S. will default - but can't figure out why he's speaking out this way.


chairsatan's picture

He just sold all his treasuries, he recognizes the inevitable, and he wants to be on record that he warned of the impending doom and distranced himself from it.  Otherwise his reputation would be destroyed in a mid-doom and post-doom world.  Enitrely self serving and consistent with everything we know about human nature... basically exactly what we'd do in his shoes.

DaBernank's picture

How entertaining would it be if PIMCO morphed into Berkshire 2 and began with a takeover bid for NFLX, tho?

Weisbrot's picture

positioning himself for something that has yet to become self evident or perhaps he's just doing the right thing and little more.

Pondmaster's picture

What does Gross hold that would benefit him from touting US default . Come on !, the guys is as much a crook as Madoff . So... his insider positions and benefits aside .

His second reason for speaking now is to start a "movement" amongst the congress crittters  to "austerize" the American working class .

A middle class society , having FOLLOWED the example of spend beyond ones means ,set by our doting Parents in Washington , have merely preceeded the parents fall .

Unserviceable debt !





tradewithdave's picture

Good question. This is what is commonly referred to as being the "bagman" or a messenger. Effective expectations management is crucial to a smooth transition to the new global basket/SDR currency.

No one will be surprised by the self-fufilling prophecy. This is Pygmalion central banker version. PIMCO will receive special consideration in the form of a warning prior to the flipping of the global reset switch.

Dave Harrison
WWW tradewithdave.com

NewThor's picture

Grozz bitchez!

I've got an idea.

How about the Fed allow each individual American to borrow

up to 1 billion dollars at a ZERO percent interest rate?

Economy fixed.

TeMpTeK's picture

How about world wide reset button.. All debts wiped.. everybody takes in a japanese family and re all rive happiry ever after..

Weisbrot's picture

lets import the Japanese and export the illegals to Japan. many problems solved.

Harlequin001's picture

Wouldn't work, you just end up with a bunch of Americans, all $1 billion in debt...

What do you do when you've all spent it?

on a pint of milk...

just thinking...

Harlequin001's picture

A better idea would be to just GIVE me $10 billion, or so, and you lot can all go back to work.

I'm sure I could find something to spend it on that creates jobs...

I know, gold. I would need TV cameras which require electronics for surveillance, security guards who buy food, transport from GM, keeps the govt happy don't you know...

I could go on....

Oh, and a Maclaren F1, two actually, one for each foot...

This new job's sounding better by the minute...

Harlequin001's picture

ok, we can swap the Maclarens for a fine pair of Bristols...

if anyone's got any...

IQ 145's picture

 Bristol City, as in Fine Titty;? Cockney slang?

Weisbrot's picture

I read somplace that president bj lewinski had created a supply of tungston core gold bars, perhaps you too could create some more of these and through your initiative, sell them at a 5% discount to spot. you would get good biased press miscoverage too.

YouBetYourLife's picture

Even at 0% interest, I think I'll pass. 

Let's see, at $100/month, how long would it take to repay $1 billion.

Umm . . . 10^9 divided by 10^2 . . . ummm . . . 10^7 months.

That's . . . ummm . . . 833,333 years and 4 months.

Nah.  There's gotta be a better deal out there somewhere.

Harlequin001's picture

there is. Take the money and go find a hedge fund. Leverage up a few times, take your stash out and go buy building number 666 in NY.

Then bugger off with your cash and watch it all go bang...

It's good for GDP, builds character...

NewThor's picture

building 666?

Isn't that the Marvel Comics building?

Good idea!

First thing i'd do is fire Brian Michael Bendis,

he's like the modern day Jim Shooter.

Harlequin001's picture

666 Fifth Avenue building...

Mr Lennon Hendrix's picture

The front page is reading like an epitaph for the neo Keynesian system. 

JLee2027's picture

We do appear to be there. TPTB will stay in denial of course.

Weisbrot's picture

if you are right, then a new game is about to begin. or has it already started?

gold mans sack's picture

We can't attack entitlements because that is racist.

tekhneek's picture

haha +5. that shit's hilarious.

+500 trillion unfuded, fuck it.

Henry Chinaski's picture

What comes after trillions?  Bet we find out.

JustPrintMoreDuh's picture

The Q in QE stands for quadrillions female dogz

Cursive's picture

After all, in this bizarro world absolutely everything is now priced in.

I feel like I'm in a Hieronymous Bosch painting.  I couldn't bring myself to read the tripe, even if only excerpted, from Shrill Bill.

Harlequin001's picture

It's a bit like living in Coronation street, where everything is planned for you, every crisis, every scandal and every bit of good luck...

and the best actor on the set is the budgie...

IQ 145's picture

 No, it isn't. It isn't a damn bit like Coronation street. It's a lot like a Hieronymous Bosche painting, and you'd better start taking it seriously.

Harlequin001's picture

what art or crashing bond markets?

Hieronymous Bosche sounds like Parsimonious Bitch,

How uncanny is that...

Tail Dogging The Wag's picture

We had the Opium Wars with China. Now bring the Dollar Wars with China. This time the Chinese will win, afterall, the Chinese love the colour red, as in red buttons.

Sam Clemons's picture

Everything is priced in...until the gap the next day, then it is because of whatever the media's flavor of the day is.

Shameful's picture

Chances of entitlement reduction, about 0%.  Chances of default on the debt via monetization and devaluation, about 100%.  Funny thing old people vote.  Much easier to keep them watching Dancing with the Stars and having Zimbabwe Ben wizard the money into existence.  At least then can pull out the boogieman of "Evil Speculators".  But actual cuts means it might get reported on and some blue hairs might read it.  Not going to happen.  If WI taught us anything is here in America we don't handle even tiny cuts well.

francis_sawyer's picture

I can picture it now...

A "million man" HOVEROUND march on Washington DC... - ror


IQ 145's picture

 Evil speculators were all the rage in 1979, when president Nixon decided to punish the dollar detractors by selling a shit load of Gold from Fort Knox; this failed; and nothing more was heard of the evil dollar speculators; look it up, it's a real tour de force of idiocy played out on the stage of the world.

OldPhart's picture

Most of your post I agree with.  But not all of us "bluehairs" watch the boob-box, some of us aren't even senile yet.

I know my memory's still sharp because over on that corner was nothing but open desert.  Across from it was one big-assed turkey ranch, and where that buncha stores are was the one house that had six girls between the ages of 15 and 19 and extremely friendly.

Used to walk the three miles from high school to the junior college and then at 10PM hitch-hike or walk the twenty five miles back home, praying to see a damned car come down the road.  Not like now, where there's a shitload of cars all day and all night.  I found this big fucking patch of cholla cactus quite unexpectedly on night walking home from somewhere as I took a moonlit shortcut across the dry lake and ......zzzzzzzzzz

dbTX's picture

You must have been in Utah

Weisbrot's picture

if that is true then the USA has become the USSA. now where was that slope the korrupticians slid down...........

bigdumbnugly's picture

pepe shouldn't have to stand for that libel.  gross should be getting a cease and desist odor from pepe's legal team soon.

tekhneek's picture

That highlighted part stinks of: "I was wrong last time... NOT this time! I'm going to get the goddamn collapse of the dollar right this time."

Jesus, even today Tyler you posted about concerns from countries (think during your bit on the recent Budget Deficit being passed) about our ability to repay the existing debt, and if we even would. That's existing. Not unfunded liabilities.

Or he finally saw meltup. Or read ZeroHedge. Or pulled his head out of his ass. Or... pulled his... head out of his... ass?

NOTW777's picture

right and as soon as Bush or any conservative attempts to reform SS or social programs Bill Gross is writing checks to Soros to slander the attempts to fix things

Mr Lennon Hendrix's picture

SH'nTF epically right now.  Boy do I have some reading to do.  Looks like I will be on here for awhile.  Thanks for all the work you do, guys and gals.  Big ups Ty guy.

fragrantdingleberry's picture

The U.S. can easily grow its way out the current morass by eliminating income and payroll taxes on adjusted gross incomes below 150K for two years and instituting a 20% surcharge on all incomes above 150K with a 2% annual wealth tax.