PIMCO’s Ring of Fire

As our Harry White can attest, I’ve had occasion to dismiss PIMCO’s Bill Gross as something of a shill for the bond market.  He made a boat-load of money, after all, riding the artificial, Fed-fueled decline in interest rates over the past decade and, having hit bottom, was slow – in my opinion – to recognize (or at least publicly admit) the long-term implications of that policy.  

Such monetary tactics have a number of inevitable conclusions:  the accrual of excess debt, a devalued currency, improper asset valuation, and a stage set for massive inflation.  More to the point here, there may well be such a thing as “a point of no return” in this process.

Most of our readers, I would hope, are already well-versed in these fundamentals of good old-fashioned Austrian school economics.  (For more, please visit the Ludwig von Mises Institute.) Unfortunately, the seductive nature of the resulting “bubble-gum” sugar-rush of apparent economic growth leads, inevitably, to addiction and the need for ever larger doses of monetary medicine.  Like all addictions, there is a point at which the required dose is simply lethal.

The United States, in my opinion, is well past that point and it seems that Bill Gross has come around to something approaching that conclusion as well.  As covered in today’s issue of the Business Insider, Gross is now clearly identifying sovereign debt disasters in the making, as demonstrated by the above chart included in PIMCO’s latest investor letter.

This puts us, you’ll note, in the company of a number of states currently threatening the stability of the whole European Union.  By PIMCO’s analysis, public debt in excess of 90% of GDP might be expected to diminish annual growth by 1%.  Well, I call that a “best case” scenario, especially when you consider that this 90% is not a comprehensive tally and, in that context, is just the debt train’s next stop on the way to $60+ trillion (otherwise known as “north of 400%” of GDP) in unfunded Social Security and Medicare liabilities.

By the way, for another interesting take on the issues of “debt saturation”, you might be interested in Steven Keen’s excellent work on the subject at his DebtWatch site.  He may not be an Austrian in his orientation, but, he brings great insight into this particular problem.

Naturally, we’re only talking about public sector debt here…along with the government’s greater tolerance (errr, appetite) for excessive paracitic binging on the back of the private sector, which has already been sent to the hospital for it’s own bad habits.  Of course, you could say that our propensity for repeatedly voting for promised benefits at someone else’s expense is, in of itself, a very bad habit.   

Now, Bill Gross came a little late to this sort of truth-telling, which might be somewhat excusable when you’re out there on the street corner making a killing selling our society’s favorite drug.  (In the interest of reasonable disclosure, I’ve played my own small role in this debacle, but we’ll leave that for another day.)  

It may be reasonable to assume that Bill  is at least as smart as the Chinese, who appear to be (and should be) wondering how the heck they’re going to repossess an entire country.  If that’s a safe assumption, then, you might have to wonder why he’s not standing on the top of a building screaming “over-priced crap for sale!!!”, rather than merely warning his clients of the potential for slower growth, which – you should understand – tends to make all those bond yields look much more reasonable. 

Notably, the biggest problem that comes to this sort of “end game” is the discovery that improperly priced treasuries establish the “safe-rate” bottom of the risk spectrum, which is utilized in all yield-based asset valuation.  If treasuries are priced incorrectly, then so is everything else under the sun.  Seeing as how all those improperly priced assets serve as a backstop for all that debt, you might say, “uh oh”.  But, we’ll save that topic for another day. 

In the meantime, I suggest that we get well used to the idea that debt does not make a nation rich.  Most of us have been re-learning that bit of truth over the past year or two.  For those seeking “a reasonable life”, this has been a great opportunity to start getting our own houses in order (literally and figuratively).  Don’t be napping now, the patients are still running the asylum.  And, Bill, as the old sayin’ goes, “you can go to hell for lyin’ as well as cheatin’.”

Harry Tuttle

Debt and lies are generally mixed together“, Francois Rabelais


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