Colin Barr

Following the money in banking, economics, and Washington

Gross calls U.S. budget a Greek tragedy

March 31, 2011: 5:40 AM ET

Bond manager Bill Gross says he is "confident" the United States will effectively default on its debt unless Congress takes an ax to retirement and healthcare spending.

Gross runs Pimco, the $1.2 trillion investment manager that has spent recent months selling Treasury bonds, citing their low yields and poor prospects. He explains in his monthly investment outlook posted Wednesday evening that U.S. government bonds "have little value" in a world of bloated budgets.

Not drawn to scale

"Without attacking entitlements – Medicare, Medicaid and Social Security – we are smelling $1 trillion deficits as far as the nose can sniff," he writes in stretching a lame skunk metaphor (see chart title, right) well past the breaking point.

The trillion-a-year habit obviously can go on only so long, though Gross doesn't expect the government to out and out refuse to honor its obligations. Such an outcome is "surely unthinkable," given the national prestige at stake and the fact that the Federal Reserve's got a printing press handy.

But Gross does say the U.S. is well on the road to effectively defaulting, by inflating away the value of the currency, letting the dollar's external value decline and holding down rates, impoverishing savers.

While the United States is widely reckoned to have a debt problem, thanks to a debt-to-gross domestic product ratio above 60% on its way to 80% and change, Gross says the real number is much higher.

While outstanding federal debt totals $9.1 trillion, he estimates the government's actual liability at $75 trillion, counting promises made under Medicare, Medicaid and Social Security.

"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," Gross writes.

That starry-eyed talk is only the latest warning out of Gross. He predicted a bond market turkey shoot in October, while calling the borrow-from-the-future mindset of our elected leaders a "Sammy scheme."

He has since warned that the U.S. is losing its competitive edge thanks to a political failure to confront our structural problems, such as declining education standards and eroding infrastructure, and predicted the end of Fed bond buying will wrack markets of all kinds.

But now the gloves are off. To drive his latest point home, Gross compares the U.S. to Europe's least solvent nation, and not favorably.

"This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP!" Gross exclaims. "We are out-Greeking the Greeks, dear reader."

Quite an accomplishment it is.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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