Bill Gross' Latest: Here Is How The "Debt Man Walking", aka Uncle Sam, Plans To Steal From You

Tyler Durden's picture

In his latest letter, Kings of the Wild Frontier, crushes the optimism of all those, roughly 4 altogether in the entire world whose combined IQ barely breaks into triple digit territory, who believe that the debt ceiling "compromise" does anything at all for US spending patterns, weather it is for total marketable debt, or the $66 trillion in NPV of future liabilities. Gross, however, does show us the 5 ways (well, 4 plus default) that the "debt man walking", aka Uncle Sam and his tens of trillions of future liabilities, plans to rob from you: dear taxpayer, in order to minimize the present value of these unmanageable future liabilities. To wit:

  1. Balance the budget and/or grow out of it
  2. Unexpected inflation
  3. Currency depreciation
  4. Financial repression via low/negative real interest rates

All of these guarantee that investor pocketbooks will be dramatically affected... Adversely. Let's dig in...


Kings of the Wild Frontier

  • Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
  • In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
  • Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.
 “Over the years we’ve had some fun together – killin some ‘bars,’ drinkin moonshine – some even in these chambers. (Whiskey that is – the ‘bars’ I’ve seen once or twice, but only when I was plum drunk). But the time for funnin is over. They’ll be no jokes from David Crockett today.” 
Davy Crockett Speech to Congress, 1830

Figurative coonskin cap on head, I echo the sentiments of Davy Crockett – Indian fighter, Alamo defender and Tennessee Congressman – not necessarily in that chronological order. The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They’ll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. “Shades of a Banana Republic,” as former Reagan budget director David Stockman opined somewhat harshly last week. We may not be Greece just yet, but Mr. Stockman is looking in the right direction.

Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit. “Out year” fantasies, as opposed to “current year” realities, is an apt description of the spending cuts that characterize this compromise. The Office of Management and Budget (OMB) estimates that future deficits will be reduced at most by .5%, and if so, it would be welcomed, but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”

Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are. In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near-unfathomable $66 trillion of future liabilities at “net present cost.” As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt. The press and most professional investors are accustomed to measuring “paper” debt as opposed to walking/living liabilities in the form of people. I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements – the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper.

Admittedly, as Meeker’s table (Figure 1) points out, we can address these liabilities by improving the efficiency of our healthcare system, reducing benefits, raising retirement ages, increasing tax rates or a combination of all of the above. We likely will. So reduce that $66 trillion if you care to, but the subjective remainder still hangs over financial markets like a Damocles sword. How will we meet these obligations as Secretary Geithner asked?


Aside from the unthinkable outright default, there are numerous ways that a government – especially a AAA rated one – can employ to reduce its future liabilities. Highlighted below are the prominent tools that can significantly affect investor pocketbooks:

  1. Balance the budget and/or grow out of it
  2. Unexpected inflation
  3. Currency depreciation
  4. Financial repression via low/negative real interest rates

Let me address each of them in brief:

  1. Balance the budget/growth – The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma.
  2. Unexpected inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.
  3. Currency depreciation – High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars.
  4. Financial Repression via low/negative real interest rates – I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck!
By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating. Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power. Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind. Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by Congressional law makers that promise a change in Washington. The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality. Davy Crockett, where are you? You may have been drinkin’ whiskey in those Congressional Chambers and those “bars” may have been half fiction, but you were a coonskin hero of a forgotten age, a hero the likes of which we have yet to see in 21st century Washington. We’re stuck with the new Kings and Queens of a wilder frontier.
William H. Gross
Managing Director

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topcallingtroll's picture

Ok even the troll can capitulate, so watch out!

All but point number one say "buy gold"

However we may be in for a slowdown.  Somehow I have to admit I don't think it will effect gold too much.

trav7777's picture

I feel lucky that Bill Gross has my back and is lookin out for me

TruthInSunshine's picture

I dedicate the Foo Fighters 'Hero' to Bill Gross.

Don't the best of them bleed it out,
While the rest of them peter out?
Truth or consequence, say it aloud.
Use that evidence, race it around.
There goes my hero,
Watch him as he goes.
There goes my hero,
He's ordinary!


Foo Fighters - My Hero



papaswamp's picture

I know the treasury puts out a sheet with on and off the books debt...anyone have that link? I'm too tarded to find it.

VisualCSharp's picture

At least one grammatical error in the write-up: weather -> whether.

El Viejo's picture

got dat right: there is a delay on my shift key that makes me miss capitalizing the first letter. drives me mad and if it were my keboard and not work's I would have tossed it long ago.

razorthin's picture

don't forget 5. Confiscate your retirement funds (all, 401K, IRA and defined benefit alike)

gbresnahan's picture

This is my biggest fear.  There is, I think, over $10 trillion sitting in 401ks, and there was at least one plan to create an annuity out of them (aka Social Security v2.0)

TaxSlave's picture

Most of these funds are held in the prison of mutual funds with no way out.

Already, the hft schemes are whipsawing them out of their value, silently whittling them down to nothing.  So why grab the low hanging fruit out in the open when the 'banks' can make all their profits in 'the market' instead of doing what people think banks are supposed to do?

There are two rules for 401K's.

1) They make all the rules.

2) They can change the rules anytime they want.

Takes a lot of faith to put your future into such a long line of unaccountable mountebanks.  Have ANY of them earned your trust?  Ha!

Smiddywesson's picture

All they have to do is remove the tax shelter status for 401ks that are not invested in government debt.  Instant sugar buzz as sheeple crowd into treasuries.  Then we can run up the debt to GDP to 260% like Japan.

I also see class warfare being waged by the government.  They will use means testing for everything, making it desirable to spend and become even more dependant.


TaxSlave's picture

Means testing will drive a lot more savings into tangibles. (Gold and silver)

Dr. Richard Head's picture

I know that my desire to be "cash poor" is strong and one that I have followed now for the past three years.  I have exactly zero stocks or 401k/IRA "investments" and the balance in the bank is merely for checking when required.  On paper I look awfully poor and have zero records showing where my excess capital has gone.  This is precisely why I love my stash of silver and gold.  No paper trail means limited ability for Uncle Scam to tap into my wealth, which is exaclty why I believe you to be right TaxSlave.

DCFusor's picture

That's also my basic strategy though I do have some land and vehicles that of course are paid and have paperwork associated.  Keeping a ton of money (whatever sort) in a place that's easy for someone to steal or confiscate doesn't seem real wise.  If they should ever go for that -- your cash is a phone call away for them, your car pretty easy to take and sell, land not so much, and whatever you have under the bed or buried -- they don't know to try for.  I really doubt they'd try to confiscate my machine shop either, just not worth the effort for that sort to monetize that, especially these days when manufacturing is not exactly booming.  Yet I get good service out of all those things in good times as well as bad.

grey7beard's picture

>> I also see class warfare

The war is over and we lost.

sun tzu's picture

I doubt it. Most people will simply stop putting money into the 401k. 

Debt Rolling's picture

Balance the budget: if your brain can seriously imagine the necessary 50% cuts in government salaries and pensions happening, then you should lower your chems intake.

Grow your way out: the dream of every crony government. But it's a dream for one reason.

So there's only one way left: transfer money from the sheeple to yourself. And that's called inflation. 

hedgeless_horseman's picture



Cuba approves economic reform plan


Changes will lead to elimination of more than a million government jobs and reduction of state's role in key sectors.

Those crazy Socialists! 

El Viejo's picture

Like it has been said, The public sector is there to support[not dominate] the private sector. When do you think we will finally learn that here?

sun tzu's picture

Cutting government salaries won't help much. Total federal pay, including all benefits is around $400B per year. Cutting them by 50% would only save $200B per year. Plus you have alot of people making $30K per year. Will you cut their pay to $15K per year? The better option is to fire 500,000 paper pushers who do nothing. Trim the rolls down the same way private companies do it. Buyouts for the old-timers who have been there for decades. Then attrition. Then finally start the layoffs until you cut by 500,000 within 5 years. Do the same with the military. End the wars and foreign aid. Cut useless and redundant government departments entirely. The government is not a jobs program.

DCFusor's picture

The government isn't supposed to be a jobs program.  Fixed that for you.  Nevertheless it is.  And as you point out, one where creating real value for the economy isn't job #1.

Ricky Bobby's picture

That's misinformation. Where did you get that stat from? Huffington Post

Cdad's picture

BlowHorn [CNBC] loud mouth extraordinaire Jim Cramer is right now complaining about spending cuts [where?] in Washington DC.  Another millionaire looking for the trough to be expanded.  Another so called capitalist who thinks that economic activity and job creation comes from the Federal government.  

What's the over under on when COMCAST finally projectile vomits the idea of putting this guy on in the morning? 

Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.

dogbreath's picture

I don't own a TV, but just who is Cramers audience

Cdad's picture

His human audience, as measured by his ratings, are very few.  His real audience are the sound bite trolling quant funds that fire off escalating and absurd buy orders on anything he specifically mentions on be followed by sharp reversals and short selling.

Cathartes Aura's picture

who needs a TV when you can read about who says what HERE, EVERYDAY - to answer your question about "audience" - reckon most here are still drooling over the presenters "with one hand" while typing about them with the other. . .

"Kings of the Wild Frontier"??? Adam Ant???

I feel beneath the white
there is a redskin suffering
from centuries of taming

"no method in our madness
just pride about our maner
Antpeople are the warriors
Antmusic is the banner!"

okay. sure.

FEDbuster's picture

CNBS has become un-watchable at this point.  Only one voice of reason, Rick Santelli, remains.  I have threatend to cancel my cable TV, if they don't provide an alternative business news channel (hopefully Fox).

Hasten the Collapse, OBAMA 2012

sun tzu's picture

Fox Business isn't much better. They are also cheerleaders and push for the status quo. Fuck them. Bloomberg is pretty good.

DCFusor's picture

And Bloomie is available online for free live if you have a decent computer.  While I find them amusing, and sometimes on top of the news that matters, I don't think anything major media out there is much other than a waste of your time.  In fact, I recall a study that showed people make less the more they watch that tripe.

FEDbuster's picture

Maybe RT (Russian Television) will start a business channel, seems Putin likes to tell the truth about US economy and the dollar?

Hasten the Collapse, OBAMA 2012

rustymason's picture

It's no wonder that the media keep pumping out that foul sludge -- people keep paying for it. 

Savvy's picture

Nothing less than a PR stunt to make Rove jealous. Maybe they could start a tv reality show called 'Be a congressman for a day' and each prize is one minute of prime time news...

Dr. Gonzo's picture

double post. sorry.

Dr. Gonzo's picture

Investing your money today is not about opportunity or growth anymore. It's about not losing it through inflation, taxes, confiscation or defaults. Everybody is focused on not being cheated, or not winding up the sucker in the room. Good luck with that everyone. This is the American financial system. One gigantic con game and fraud. Oh look Gold at $1640. Wonder why?

Debt Rolling's picture

I don't know why you've been junked. 

There is indeed zero absolute returns today, in the face of lacking technological innovation. Wealth is not created. The level of life of people does not increase significantly. Wealth is transferred. 

Buying gold preserves your capital, and makes you richer relatively (which is fine), but not absolutely. 

TaxSlave's picture

The armed brigands are roving through the countryside, pillaging as they go, and it's open season on the ignorant.

The savings rate is going up in the only place where it matters--in metal that cannot be confiscated or stolen from without them physically getting their grubby little pincers on it.

Dreamtime is coming to an end.

The biggest lie in all of mankind's history (well maybe the 2nd biggest one) is falling apart.

sun tzu's picture

When TSHTF you know that TPTB will make gold and silver illegal to own.

StychoKiller's picture

Yo Dude(tte), stop bogartin' and pass it around!  'Nuff said.

Oh regional Indian's picture

C'mon big Bill. Feeling so badly about all this?
Use your billions to change something. Do some shit. All this talk and everyone is happy. Ron Paul, good talker. Bill Gross, good talker. George Sorrows, best talker of them all.
Anyone followed the Sorrows story today?
He's returned all client monies.
That is news.

It's days now folks. Days/week or so........


falak pema's picture

reaping the wind of sorrows... as you borrow more n more...comes a time of reckoning when rocking the boat...rolls over into moronic law. Now balancing the budget is like belling the cat, or cutting the fat on a sacred cow,who is all skin n bones.

Nowhere to run nowhere to hide, as the crazy money takes a roller coaster ride. 

Precious metals are like the ancient gods; we believe in them but we can never reach them once we've bought into their cause. They are untouchable, and only good for pouja.

The world needs Hulwa! not hawa!

TaxSlave's picture

The purpose of the debt is not the spending.

The purpose of the debt is that it owns you.

Perpetual debt servitude, living under the whip of your masters, is your future.

Grow a set, repudiate it.  Declare that it's not your debt, that you will not be enslaved to pay it, and you might be able to control your own life.  Otherwise, your only choice will be to get in line, hold still, and shut the hell up for your own good like the rest of the obedient drones.

Archimedes's picture

hey, he stole my CAD idea! That is the ONLY fiat currency I would buy right now.



DaBernank's picture

I humbly vote for NOK as Fiat I might buy, but why not just buy more gold and silver instead?

johngaltier's picture

Here's an idea.

Good bank/bad bank

Canada is now responsible for Medicaid obligations. They pledge as collateral all unclaimed mineral and resource deposits, government land, etc.

If they don't like it, we get a chance to battle test the JSF F-35

tickertapeguide's picture

All your 401Ks are belong to us... GAME OVER

Smiddywesson's picture

All your 401Ks are belong to us... GAME OVER

No, that is not their way.  The methodology is, and always has been, to keep you ignorant, lull you to sleep, and slowly strangle you.  They will never evoke a confrontation with the American public by just taking their 401k money, not after spending the last 50 years telling them that these programs are the yellow brink road to wealth.

Confrontation is not their way.  They will slowly tap these funds through taxation and inflation.  They are in control, so they do not want confrontations or an examination of their methods through which they always win.

Silver Dreamer's picture

Problem, reaction, solution.  Imagine a massive crash.  401K's get crushed.  The government comes in and "saves the day."  We need the government to protect our 401K's afterwards after all, riiiight?

HoofHearted's picture

On my desk right now is a book by Jacques Rueff, _Le Peche Monetaire de l'Occident_. As we seem to say often around ZH, NOBODY could have seen this coming for the US. Nobody. I won't mention James Dines's _The Invisible Crash_ because it is back on the bookshelf and not on my desk.

We need to study the classics. Nothing is new under the sun. What is has been before. John Law, party of one....and we all know what John Law had in that carriage as he was trying to escape...