Bill Gross warns of deficit ‘pain aplenty’

PIMCO's Bill Gross warns of "pain aplenty" as the United States runs up fat budget deficits, with the risk of higher inflation, a weaker dollar and the loss of its Triple-A credit rating.

"The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion-dollar annual deficit," the managing director of Pacific Investment Management Co., who runs the biggest bond fund in the world, writes in his investment outlook on the company's website.

"As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that 'old normal' norms have returned. Not likely. There will be pain aplenty and it's imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow."

Among those costs:

- U.S. wages will lag inflation and increases in commodity prices: "Blame it on poor education, blame it on globalization, but an ongoing rebalancing of rich country/poor country wages inevitably will keep U.S. wages compressed as deficit spending serves to reflate commodity and end product prices in future years but not paychecks."

- A weaker dollar will bite into buying power: "The fact is that annual budget deficits in the trillions of dollars add a like amount to the stock of outstanding dollars, resulting in currency depreciation, higher import inflation, and a degradation of dollar based assets in global financial markets."

- With such deficits comes the need to finance them, at low rates for as long as possible: "Currently, the Fed is doing both, holding short term interest rates near zero, and engaging in Ponzi like Quantitative Easing II purchases of longer dated Treasuries in the open market. The combination offers bondholders about as an attractive situation as the one facing a male praying mantis: zero per cent interest rates if you stay in cash, or probable principal losses if you take durational risk by buying 5- and 10-year maturities."

- Such deficits can become unmanageable: "Witness Greece, Ireland, or a host of Latin American countries of generations past … Future generations pay the price for their parents’ mindless thrusting."

"Above all, remember that all investors should fear the consequences of mindless U.S. deficit spending …," Mr. Gross warns investors. "Higher inflation, a weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences."