Debt, debt and more mounting debt is plaguing countries around the globe.
In this U.S., states across the country face a collective $125 billion shortfall for fiscal 2012, while Congress is facing a budget gap nearly 10 times that size.
PIMCO founder and co-CIO Bill Gross has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been “relying on the kindness of strangers” to help cover our debts, he tells Aaron in the accompanying clip.
By “strangers” he is referring to our foreign counterparts, like China for example. Basically, for years Americans have spent their hard-earned dollars on less-expensive Chinese made goods. With great gratitude, China turned around and used all those dollars to buy up U.S. Treasuries and other dollar-denominated assets.
But now after years of reckless spending, America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort. “When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,” says Gross, citing the work of Ken Rogoff and Carmen Reinhart in This Time Is Different.
The Way Forward…And Your Pocket Book
The budget crisis situation unfolding at the state and federal government level does not bode well for working men and women in this country. There are really only two choices, says Gross. And, neither favours your pocketbook:
- Option #1 – Keep spending and do nothing
- Option #2 – Balance our budgets by cutting entitlements
House Republicans ran and won on a platform to cut $100 billion from the budget this year and last month managed to pass legislation that would strip $61 billion in spending.
But for President Obama and Congressional Democrats, those cuts go way too far at a time when the country is still struggling to recover from the worst recession since the Great Depression. Goldman Sachs and Bill Gross agree and have warned that cutting too much could stifle growth. (See: Gross “self sustaining” clip)
Meanwhile, neither side as gotten serious about reforming entitlement programs like Social Security and Medicare, which account for more than a third of Uncle Sam’s budget.
If the country cannot come to grips and cut back on entitlement programs, U.S. debt will continue to grow and governments around the world will loose faith in the U.S. dollar. Foreign goods would become more expensive, says Gross, while our standard of living would drop.
Under the second option, if entitlement programs are cut, many Americans would naturally have to learn to live on less and take a hit to their standard of living.
“There is really no way out of this trap and this conundrum at this point,” says Gross. From an investment perspective his advice is to stay clear of “bonds in dollar denominated terms” and to be “wary of higher interest rates going forward.” (See: Gross “Most Overvalued” clip)