Pimco’s Bill Gross, one of the world’s leading bond strategists, in his monthly investment report indicates that the “natural outcome” of high federal deficit spending is inflation.
“Growing deficits and higher debt lead to weakened creditworthiness, higher interest rates and higher inflation,” notes Gross in the April 2010 edition of Investment Outlook, with the somewhat whimsical title of “Rocking Horse Winner.”
Gross notes that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures — such as Social Security and Medicare — was $46 trillion as of 2009, “a sum four times” its current outstanding debt.
“The trend promises to get worse, not better. The passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities,” writes Gross.
Long-term bondholders need to beware: the new health care bill will add $562 billion to the U.S. federal deficit over the next 10 years, writes Gross.
Other investment gurus agree. Kurt Brouwer of MarketWatch writes that Gross makes a “very important point” as high deficits and debt lead to higher interest rates and, ultimately, to higher inflation.
“Throughout the course of economic and financial history, we have seen plenty of evidence for this point. The only counter-argument would be that collapsing economic conditions could lead to deflation and thus to lower interest rates — temporarily. But, Gross is suggesting that higher debt, deficits and inflation are more likely. And, history is on his side,” writes Brouwer.
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