US Downgrade, Inflation Years Away: Pimco's Gross
The US and UK both will be susceptible to a credit rating downgrade in about four years unless they change fiscal policy, Pimco co-CEO Bill Gross told CNBC.
While both nations have debt levels that are only a bit more than half of their gross national products, a trend of 10 percent added each year would push the countries into a danger zone relatively quickly, Gross, who helps run the world's largest bond fund, said in a live interview.
"At the moment the US and the UK are only about 55 to 60 percent of GDP. But if we're running deficits of 10 percent a year, it only takes four years before we approach that magical level when things start to change," he said. "The mystery of whether it's a triple-A or double-A becomes obvious to the marketplace."
Asked how he would solve the "debt trap" as he called it, Gross recommends cutting wasteful programs and increasing taxes.
"There has to be a burden borne either by cutting back in terms of services and programs--we can't do too much of that, I don't think--or by raising taxes," he said, while adding that "you have to be careful in that regard."
One area Gross doesn't think will be major problem for at least the next three years is inflation, meaning that the Fed can hold steady with monetary policy and won't have to worry about increasing rates for a while.
At the same time, Gross said investors shouldn't take government officials seriously when they talk about eliminating budget deficits.
"Global investors should be skeptical of administration and Fed claims that a balanced budget or least a significantly reduced budget lies around the corner," he said. "In fact, this recovery's being driven by a $2 trillion annualized deficit. To take its place in the economy would require at least a trillion-dollar increase in consumption and investment, an increase that is commonsensically challenged as boomers and other become more thrifty in the face of advancing retirement."