It would be much more pleasant if this was about the movie “The Untouchables” but sadly, it’s about different kinds of Untouchables, namely Social Security, Medicare, Medicaid and Military Spending a.k.a. entitlements. This warrants a revisit to our previous commentary on the state of USA Inc.
With $1.2 trillion under management, PIMCO is one of the biggest players in the investment world. When its founder Bill Gross speaks, the investment world usually listens. Granted, one can never completely disregard the fact that a large market player is talking his book, but there seems to be a genuine concern by Mr. Gross that the business of capitalising ever-increasing amounts of debt is driving this country over the edge. In his Monthly Investment Outlook he notes:
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.
His quote may sound far-fetched at first but it is not inconceivable that the Fed may face much higher borrowing costs if current discussions about the debt ceiling and budget deficits continue to focus on lame budget cuts which amount to no more than a tiny fraction of the current deficit. Just to remind ourselves, a typically highly publicized debate on cutting say $10bn is only about 0.6% of the current $1.6 trillion deficit – meaningless. In all this, politicians on both sides of the political spectrum continue to display a frightening lack of numerical proficiency.
But fear not, the ongoing deficit discussions will eventually focus on the “Untouchables” not by choice but by necessity. Who knows when that tipping point arrives. For now, let’s look at the 10-year treasury yields of some of the troubled European nations and take this as a reminder that our leaders are playing with fire and with the financial future of this great nation.
10-year Greek Yields
10-year Irish Yields
10-year Portuguese Yields
10-year Spanish Yields
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