Many investment professionals believe interest rates on US Government debt are too low given the current budget deficit and the future fiscal drain of Medicare and Social Security as presently constituted and the risks these problems present relative to our ability to pay our debt obligations. We are extremely fortunate that the market hasn’t forced us to pay higher interest rates yet, which is probably largely attributable to the reserve currency status of the US dollar and the fact that the world does not want to face the consequence of admitting that the issuer of the world’s reserve currency may itself be a financial house of cards!
Bill Gross manages one of the largest – if not the largest – bond funds in the World. In his recent “Investment Outlook” – when you get past the first part where he is talking about losing his memory, which is not a terribly compelling read – he offers a very thought-provoking perspective on these issues which is supported by 3 separate, objective and independent studies and findings. The two most interesting observations to me are:
1. The financial status of the U.S., if analyzed on the basis of our financial circumstances alone with the reserve currency status of our currency removed, places us in his “Ring of Fire” with other very familiar – and troubling – governmental debt issuers: Greece, France and Spain.
2. The governments of developing market countries have a much better financial outlook than those of developed market countries, whose budgets have been ravished by decades of out-of-control deficit spending.
It is a worthwhile read: Damages (PDF)
Just because Bill Gross manages a lot of fixed income doesn’t mean his ideas are necessarily right. In 2011 he famously pronounced a bubble in US bond prices early in the year and put his money where his mouth was by selling stakes his funds owned in US Government bonds. When rates instead declined by about 30% over the last half of 2011, he turned out to be galactically wrong (at least for the moment) and his funds had an uncharacteristically awful year relative to their peers. But the warnings he sounds in this article are ominous. I think they make a clear case for the urgency of getting the US financial situation under control and the consequences – rising interest rates and loss of bond values, poor stock market, cheapened US dollar (extended lackluster economic recovery?), and rampant inflation – of continued inaction and inability to address the pressing issue of our Country’s financial irresponsibility.
Irrespective of your political point of view, I think the vase majority of us recognize this is a HUGE problem and hope that the upcoming election results in a government that will actually take some action on these critically important matters.