UK a debt junkie, US like Greece by 2020 says Pimco’s Gross and he is right: we sleepwalk to destruction

Pimco boss Bill Gross is one for hyperbole. The bond guru said that equities were dead as an investment class just a few weeks ago. They have zoomed ahead since. But in his latest monthly newsletter he is bang on the money. Or rather the lack of it, among Western Governments.

Starting close to home. Amazingly the UK still has an AAA credit rating. Not for long. Gross compares the UK to a drug addict who is hooked on debt and struggling to kick the habit. He notes that:

“The problem becomes if [austerity] is too quick and leads to an economic contraction, which it appears close to in the UK – An economy that doesn’t grow, ultimately can’t resolve its debt crisis.”

Well up to a point. Actually it is worse than that. As we all know the UK Government is actually increasing its spending and thus will have the biggest Government deficit in the EU next year. The problem is that our high tax/high regulation economy cannot deliver private sector growth (in a troubled world economy) and thus tax receipts are not keeping up with increased Government spending.

But it is the comments made about the US which will grab the headlines. I have noted here before that if you take out the fudges US debt/GDP ratios are already at c101%. Italy is at 120%, Greece 160% or whatever. But there is no austerity programme in the US and so it is doing its best to catch up and overtake the PIIGs of Europe. Gross agrees warning that the US will turn into mighty Hellas within a decade if the government did not find $1.6 trillion (£990bn) of savings “over the next five to 10 years”. There seems no sign of that happening. As such he warns of “the possibility of a fiscal train wreck over the next decade” in the US.

Gross adds that the US, with its high level of national debt and government borrowing, belonged in the “ring of fire” with Greece, Spain, France, Japan and the UK, where “only gold and real assets would thrive” unless spending is cut and taxes rise.

Gross claims “The US and its fellow serial abusers have been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult.”

“Unless we begin to close this gap (the deficit), then the inevitable result will be that our debt-to-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. Bonds would be burned to a crisp and stocks would certainly be singed.”

The US has been delaying any decision on austerity until after November’s election. It is facing the “fiscal cliff” in January when a series of temporary stimulus measures first introduced by President George Bush (junior) start to expire. The automatic tightening of 45 of GDP will knock two percentage points off growth, economists warn.

Gross concluded that unless the $1.6 trillion of cuts are made ( which they will not be) “rating services, dollar reserve holding nations and bond vigilantes may together force a resolution that ends in tears. The damage would likely be beyond repair.”

This is all cheery stuff. But it is real. When you hear MPs squabbling about spending or saving £2.5 billion (Ed Balls crackpot new homes scheme) or £11 billion (scrapping the UK’s aid for despots programme) they are simply willy waving into a hurricane. There appears to be no grasp of the size of the problem and what needs to be done. Grasping the nettle means accepting things like: and end to free provision under the NHS (charge £2 just to deter time wasters), raising the pension age to 77, forcing local Government to slim down to core services, legalising drugs to shut prisons and cut crime/Police numbers, wholesale welfare reforms ( yes cuts), no State funded media, closing one third of the UK’s Universities (yes the piss poor new ones), etc and, yes, leaving the EU and so not sending a cent to Brussels.

If I sound like a deranged right wing loony in suggesting this there is no apology from me. The alternative is bankruptcy within a decade.

In the US it is the same issues (plus the urgent need to cut defence spending/stop invading places) but on a bigger scale. But do you hear Obama/Romney even consider this?

We sleepwalk to destruction.