Tuesday, April 5, 2011

"U.S. Will Default on Its Debt"

"U.S. Will Default on Its Debt"
By Steve Sjuggerud and Bill Gross

“I am confident that this country will default on its debt,” Bill Gross wrote this week. Bill Gross is not some anti-American crackpot… quite the contrary. He manages the world’s biggest bond fund. As the founder and chief investment officer of PIMCO, he’s responsible for over $1.2 trillion in assets – mostly in bonds. And last month, in his main bond fund, he got rid of all of his U.S. government bonds. “[I've] been selling Treasurys because they have little value within the context of a $75 trillion total debt burden,” Bill said. “Unless entitlements [namely Social Security, Medicare, and Medicaid] are substantially reformed, I am confident that this country will default on its debt.”

How would that happen? “Not in conventional ways,” he explained, “but by picking the pockets of savers.” He says the government will pick your pocket through “inflation, currency devaluation, and low to negative real interest rates.” These things are all happening right now…

The currency is already weak… The U.S. dollar index is right around the lowest levels it’s ever been since we went off the gold standard in the early 1970s. We already have low to negative real interest rates… The Fed is artificially holding short-term rates at zero. But officially, inflation is 2%. So your “real” rate of interest at the bank is a negative 2%. You can hardly blame Bill for not wanting to own government bonds…

Right now, if you’re willing to lock your money up for 10 years in a government bond, you’ll collect 3.5% every year in interest. The benefit (a small 3.5% interest payment) isn’t worth the risks that Bill writes about. Remember, Bill isn’t some wacko. He’s the “Bond King” – and that nickname comes from decades of extraordinary performance in his bond funds. If Bill is right, it’s dangerous to be a “saver” in the traditional sense… Low-interest bank CDs will have their value eaten away by the government’s stealth default on its debts. What to do instead is a story for another day...

Right now, the asset class Bill’s fund has the biggest exposure to is mortgage-backed bonds (like those held by longtime DailyWealth favorite Annaly). He’s putting his chips on a “real” asset as opposed to an asset that’s backed by the “faith and credit” of the U.S. government. U.S. government bonds are no longer good enough for Bill Gross, the best bond manager in history. If they’re not good enough for Bill, then they shouldn’t be good enough for you or me either.”
My friend Argentum Vulgaris teases me about stopping by here for his daily horror stories, lol.
If you truly understand the probable consequences of a default by the US you'll discover 
all the horror you want... the graphic above from Greece wasn't chosen by accident. - CP

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