Were the U.S. to include its current entitlement program liabilities and U.S. government bonds, the country would have an eye-popping debt burden that dwarfs Greece and could engulf the economy in a "ring of fire", Pimco founder Bill Gross said on CNBC’s "Street Signs" on Tuesday.
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Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO)
Investors have largely given the U.S. economy a pass — even as they lay siege to the government bonds of debt-saddled euro zone countries like Spain, Italy and Greece. In spite of this, the bond guru still doesn't believe the arithmetic will favor the U.S. in the long run.
“The stated current entitlements for Medicare, Medicaid and Social Security on a present value basis tacked on to the $15 trillion we owe on bonds produces a total debt of $60 trillion,” Gross said.
“That’s 500 percent of GDP— more than rivaling Greece,” he added
With a number that large, the U.S. needs to address its massive debt and deficits, Gross noted in his latest investment outlook. Otherwise, stocks and bonds will be virtually worthless and gold and hard assets will be the only investments worth having, he said.(Read More:US Is Debt Addict on 'Budgetary Crystal Meth': Gross.)
In the bulletin, Gross wrote: "Unless we begin to close this (fiscal) gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline."
U.S. Treasuries, he added, "would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the 'Ring of Fire.'"
The cure for U.S. debt woes is structural reform, Gross said.
“The U.S. needs to gradually reduce its deficits and reduce the Fed’sstranglehold on financial markets, and raise interest rates over time,” the bond fund manager said on CNBC. “In addition, focus from a fiscal standpoint on the structural financing and structural investing this country sorely lacks.”
Although inflation may be a risk in the longer term, Gross said Pimco is still buying Treasurys because "they represent value and safety in this period of stress."
He also repeated his call that investors should get out in front of what the central banks are buying and invest in mortgage-backed securitiesand Italian government debt. (Read More: We're Buying What the Fed and ECB Are Buying: Gross)
