Bill Gross To 'President' Obama: Double The Deficit

In PIMCO Managing Director Bill Gross's monthly market commentary for July 2008, the 'Bond King' urges Barack Obama to double the federal deficit to $1 trillion by 2011 if he gains office:

While the Republicans will blame you for years and label you “Trillion Dollar Obama” in future campaigns, there is in fact not much that you or any other President can do. You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years. Foreign lenders have cooperated by purchasing Treasuries at yields which when combined with dollar depreciation have resulted in negative returns on their money. Even if these charades continue (and they may not), their stimulative effects – their magical powers to transform a 110-pound weakling into a Charles Atlas/Arnold Schwarzenegger mensch of an economy – are gone. What you need now is fiscal spending and lots of it. No ordinary Starbucks will do, Mr. President, you need to step up for a six-pack of Red Bull.

 

Now I know, Mr. President, that you’re already addicted to those nicotine smokes and I’m not trying to promote a caffeine habit here, but this economy will need an additional jolt of $500 billion or so of government spending real quick. It must replace both reduced residential investment and consumption whose decline has placed the U.S. economy near, if not in a recession. Some quick math for you Sir: gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.

Comments

[Dean Plassaras]

Delightful commentary. Whoever occupies the WH has an uphill battle on a multitude of economic issues.

[Jim Hawthorne]

Fantastic! Ditto!

[icandoitdon]

gross has analyzed the problem correctly...years of cheap credit and too much of it, and excess leverage. but his "solution" is ridicuous. he wants ben to drop money from his helicopter....literall...

every penny of marginal government spending comes courtesy of borrowing from japan, china and the mid-east. borrowing more isn't going to do a damn thing for the real economy other than fan inflation.







gross speaks out of both sides of his mouth here...

bring on the collapse.....

[kevinm]

Gross is a liberal weenie. Why does government have to spend more? Why not cut taxes and let the free market dictate the best use of the capital? It will be far more productive, far less corrupt, and no worse for the deficit.

[Xyrus]

KevinM,

Cut taxes? So the biggest deficit ever this year can be topped by an even bigger on next year?

Our government is currently spending a half-trillion more than what they take in and you want to cut taxes? Half the problem with the dollar is because of our massive debt and you want to make it worse?

No, what needs to be done first and foremost is to drastically cut government spending. After we balance the budget, then when can start talking about cutting taxes.

Or do you really like the fact that the only thing keeping our government running is foreign countries that are buying our debt?

~X~

[Sophisse]

KevinM, you've convinced me.

[punk_ash]

gross, you are a moron and are a complete idiot along with most other people in power, go spend a month in India and learn how they are doing it, government in India is corrupt, but the country is moving forward, you know why - yes via the working man. What we need is the working man to take responsibility of their own choices and act responsibly, who needs government spending. Gross you are a moron again.

[fxtrader07]

@punk_ash: true, but if the Indian govt. were to provide even a fraction of pension and healthcare benefits that the U.S. and european govts. do, then Chidambaram could declare bankruptcy right next february. I mean, the u.s. federal deficit is large by any measure- no doubt. but India's is not far behind when compared to the size of the indian economy and it#s federal budget. so you better not pick at govt spending because without it, the great Indian boom would have not materialized to the extent it did. That, btw, is exactly its major achilles heel imho: if govt is forced to cut back on subsidies and public spending, the infracstructure will remain a bottleneck for the next 4 decades and prices for food and energy would go up manifold on top of their recent steep rise.
The past 15 years may have seen a lot of spectacular success and achievement by the Indian people but make no mistake about it: a large part of it had not happened without government spending (besides liberalisation, deregulation and privatization)

[sliman]

Can't wait for Obama to RAISE taxes. Then the real fun will begin. GOLD going to $2,000!!!!!!!!!!

[theinvestingspeculator]

I don't think the S&p 500 will see 1400 again this year. Over the weekend Peter Schiff spoke to Barron's. He thinks the U.S is in trouble.

[John Angstrom]

The economy will be bad and the next prez will be a one-termer. So if you take the long view, maybe it's better if your party loses this time and you can blame it all on the other party.

[mrright]

Xyrus, I think you are connecting lowering taxes with lower tax revenues, but you would be incorrect. When a givernment cuts taxes and spurs growth, typically tax revenue to the government increases. But I agree that the governmnet needs to also cust its out of control spending as well.

[zimmyzee]

The world's largest bond manager is advocating an inflationist fiscal policy.
[ED: Comment edited for inappropriate language.]

[adoni]

YEP your right Billy Boy,
If Obama gets in with his HUGE tax hikes people who hold the economy and make money in this country will run to the offshores. Welfare programs drain the economy and if you think its bad now, do some math and see what the economy will look like with those tax hikes. There are many ways to push revenue but tax hikes are not the way to boost an economy by punishing success and rewarding welfare.

Foolish

We need FAIR TAX ACT!
When people have more money they will spend it. If the Fed taxes on what people buy and not their income they will not hold back from spending.

When you eliminate Welfare an make push people out of the Government nest, like a baby bird in a nest they will fly when they realize they are falling!

[this Bud's for you]

With federal government spending close to 1/3 of our economy, it seems it would be better to put the money into the hands of the remaining 2/3 by reducing government spending, first, and returning the windfall profit to the taxpayers.

To follow Groos would be to add a trillion of debt (which he could manage, of course) to the already 70+ trillion of unfunded liabilities out there choking the future economic freedom of our children and grandchildren.

A trillion here and a trillion there... we miss you Senator Dirkson.

[The Simple Accountant]

In all this arguing about whether to borrow and spend another half trillion, nobody has said mcuh about what to spend it on. If it's stupid stuff, like another foreign military adventure, then yes, it's a terrible idea.

If on the other hand, it's proper investment (more I, less C, funded through G), then it may be a good idea. Plow the money into sound energy and transportation policies; help rebuild some of the manufacturing base, infrastructure, etc; maybe do a little something on health care, insurance and pension reform.

Finance 101, take on projects with positive net present values, and it's OK to borrow money. Borrowing to spend on consumption for its own sake, not so much.

[Reinko]

Doubling the federal deficit sounds creative but is it enough?

In the year 2005 American home owners took about 750 billion from their home equity but the economy began smelling sour in 2006 when home prices began to decline.

So another 500 billion is far not enough, therefore my proposal is:

Each and every US citizen one million US$ every year...

[AvlGuy]

Sheesh, does anyone outside of the south side of Chicago know what the real Obama is like? Once Obama possesses something he fought hard to get, he will not take risks at losing it. He has told yall time & time again that he seeks compromises (so that he can keep his losses to a minimum). He will compromise on national security, on troop withdrawals (Samantha Powers let that cat out the bag), on Supreme Court appointments, on the Green Economy and on all economic matters. Take off the rose-colored glasses and look at his state legislative record: he never got too far ahead of the legislative pack at any point.
He does not take risks when he has something BIG to lose, he only does it when there's nothing left to lose. And political compromising never leads to BOLD actions.

Did you notice that the Republican campaigning effort to recapture seats in the 2010 mid-term elections will begin a mere 12 months from today! In Summer 09. If elected, Obama is not doing anything big & drastic that will frighten democrats up for re-election in 2010, or that will piss off and further organize republicans & conservatives & blue-dog democrats.
He’s told yall in his books that people don’t see the real him, they “see in me what they want to see”. What more does he have to say or write?

[AvlGuy]

Bill G. is revealing his age and his human-ness. Deep in their heart-of-hearts in the cold quiet of dark nights, tens and tens of millions of these guys fear still being around when countless economic and finance actions come home to roost. We still have within our midst two-plus generations that helmed (or stood in or near the wheel house) parts of the economy while they were CEOs, board directors, bankers, policymakers, economists, academics, elected/appointed officials, venture capitalists, fund managers, ad & marketing mgrs, sales managers, investors, and institutional investors. These guys (& gals) are realizing in horror that they're still around, sober and cogent and alive & kicking, while the value of their homes and vacation getaways home sink, their pensions and 401k’s sink, their dollars purchase less, their HELOCs fossilized, their credit card lines deactivated.
“Wasn’t this suppose to happen to not ours, but those generations coming behind us?”, they ask.
These two-plus generations articulate it in many ways but they still would rather postpone the roosting of their career chickens until they have consumed all the harvested fruits of their inflated assets in their golden years and have expired from the scene...or at least descended into a pain-numbing dementia.
Facing seemingly indisputable evidence that the roosting is occurring about 1-2 decades earlier than promised, they are piling atop bandwagons of mega-spending initiatives that simply postpone the inevitable (again, and again, as Shiller writes) until they are no longer around...so that they can escape from having every asset they’ve accumulated tossed in as ‘Skin in the Game” unfolding in 2008. Such a human response indeed.

[dougnhi]

This kind of article is irresponsible. Bill Gross, shame on you. Encouraging government debt to overcome excess credit expansion is just plain arrogant. We need fiscal responsibility and a dose of medicine in the form of a severe recession to reset people's bad habits. Americans are at their core hard working, good people. We've had a wild party for the last few years, and now it's time for the hangover. Suggesting that we fix the hangover by tying another one on is ludicrous. We'll get over the hangover and retrain/retrench for a new bull market, but first, we need to learn a few lessons about risk management. The sooner we get rid of "supposed" leaders such as yourself, exposing really aweful advice such as you suggest in this article, the sooner we can get back on the right track. This article should be disgusting to all readers who have a sense of integrity and responsibility. Don't you have a golf game to go to or party to attend? Haven't you wreaked enough havoc already?

[oldfolkdancer]

Whoever gets to be US President has to get our factories humming again. We've become a nation of paper pushers. The mining industry in Canada has great need of all sorts of equipment that we could manufacture in the US. If we allow energy to be produced off our coast we will get to keep more money here instead of sending it elsewhere. Where are the unions? They should be screaming about this. There is a great opportunity to create many many high paying jobs that don't require going years and years of listening to boring professors and impoverishing oneself wth education loans. Wake up America! It could make a return to the Fifties!

[Dean Plassaras]

Comments by The Simple Accountant above have earned him/her a promotion to The Good Accountant. BTW Bill Gross is not a liberal, rather a Republican. Go to PIMCO's website and read the full article. You will get a much higher appreciation of his intellect than reading the Seeking alpha excerpt above.

[Andrew Haak]

The overall federal debt is now above $9 trillion thanks to out of control spending and massive tax cuts for the wealthiest Americans (was about $4 trillion when Bush came into office---). The interest payments on that alone are running about $350-500 billion a year. Federal spending has to be trimmed where it can be, no doubt---but you're not going to cut it by 10-20%---which is what would be necessary if you wanted to start meaningfully chipping away at that federal debt number---much less the recurring federal budget deficit. The only other way to balance the books---if you're serious about it---is to do (and I truly hate saying this) is to bring in more revenue, realistically by raising taxes. The problem with the Laffer Curve (cutting taxes brings in more money via increased economic growth) is that Republicans will always argue that the ideal tax rate is some number less than what they're already paying. I do not recall the economy collapsing during the 1990's when the tax rate for the "wealthy" was at 39.6%, rather I recall a much stronger dollar, budgets drastically more balanced, a more fundamentally sound economy (because we weren't building our roads and fighter planes with borrowed money from Asia), and portions of the federal debt actually getting paid off.
If you had a large credit card bill, you wouldn't pay less of it each month in the hopes that you could reinvest that money at a higher rate and then eventually be able to pay it off in full. You'd devote as much as you could to paying the damn thing off as quickly as possible because its mere existence was destabilizing your personal balance sheet. And that is what is currently happening in this country.

[PIA]

Bill Gross has fallien back to failed Keynsian economics. Kevin M HAS LEARNED what sage Bill Gross' liberal political leaning has forgotton: Free Markets solve problems and deliver goods far better than Big Government.

Gross apparently listens to CNN, CNBC, CBS, NBC and ABC who have already 'annointed' Obama President.

Maybe an occassional FOX watch showing both sides, God forbid, might be adviseable for Big Government, failed Keynsian Bill Gross !

[Mike Cooper]

This is just what I told my wife this morning when she said she was worried about our huge credit card card. Huge debt?! Oh my God! Get your check book honey, and get to the mall right now! DOUBLE THAT DEBT!

[iThinkBig]

The Simple Accountant comment nailed it. I sent a 5 point plan of $300 billion to the President in March, specifically for subsidies for nuclear, biodiesel, coal and drilling ANWR/Offshore. The thoughts of my Boston based investment group was that to avoid depression the nation must go energy independant and start immediately. The $300 B will help next year, but it will likely be too late to avoid the worst of the pain. It is certainly necessary, but this government is beyond rational thought and it appears the do-nothing-on-energy Democrats are likely to stay in power. While they will do some, because they know heads on pikes will be coming soon to them if they don't, it will be far to little and far too late.

Thus far, since June 2007, my numbers identifying the scope of the massive problems and necessary painful correction has been dead on. I am preparing my physical back-up plans in September buying a place 50 miles from any major metro. It will dual nicely as a vacation home. My philosophy is hope for the best but plan for the worst.

Understand that our entire economic theory (Efficient Market Hyposis) of the last 15 years has failed utterly. Those in power at government who could harnass the commodities boom or prevent abuse, sell the globe what it wants in trade deals are napping (Not you, Mr. President and we all respect this effort).

I expect great pain and economic repositioning/rebuildi... for several years. Outsourcing and offshoring? Yep, going to be a necessity. Future hedges? Own gold and I mean accepting physical delivery in the form of gold coins. The financial system will collapse. Russia and the Middle East will be the new financial anchors for the next several years. That in and of itself is a troubling thought and creates dramatic new risks.

[daniela]

Wow, that's moronic solution. Obviously he does not believe in free economy. Maybe Hugo Chavez needs advisor. Go for it Gross. Don't try to ruin future of America.

[19709]

The way to get the American economy back on track is to employ a two prong approach: cut taxes while simultaneously reducing government spending. Tax revenues should actually increase as business men, not government officials, spur increased productivity. The initial spending reduction meant to match an incorrectly forecast reduction in tax revenues will ultimately result in a positive revenue flow.

By the way Dean Plassaras, Bill Gross is a liberal Democrat.

[devassocx]

For whatever reason, Gross has had this position for a while and
it seems to me that his position is probably the one that will benefit
Bill Gross and not necessarily anyone else.

I don't profess to understand why and it escapes me as to why further currency debasing is good for America.

That last round of 160 billion probably wound up going out of the US to china or the middle east or even to the pockets of Chavez.

Doesn't it strike everyone as odd that the cure for the ills brought on by deficit spending and lax credit is more deficit spending and lax credit???

[Marvin Clark]

During the great depression of the 1930's, Congress repealed prohibition on alcohol and tax it.

I agree with Bill Gross that it's time to dust off Keynesian economics and repair some of the damage our economic and industrial infrastructure has endured the last 30 years.

Maybe, we should even seriously consider legalizing and taxing marijuana. In addition to a reduction in law enforcement outlays, thus, easing budget pressures, and replacing tax revenue for falling property taxes, there are limited medical benefits, as well.

When you are facing a 1 trillion dollar problem, no solution should be off the table.

[icandoitdon]

bojen...

if you took the time to read his newsletter, gross states in the second paragraph that he is a registered republican. i can understand your confusion given his contempt for a republican administration that has overseen the crippling of our economy in 8 short years. many republicans feel the same way.

here's the article...have at it.

www.pimco.com/LeftNav/...

[punk_ash]

fxtrader07: good analysis, I agree with you, but the problems we are facing are due to mismanagement more at the micro level than at the macro level. India has a much better micro level discipline, Gross seems to fix a micro issue with a macro bandage, he is a moron though.

[punk_ash]

I am glad he is only demanding 500 billion for the 3 short paragraphs, had he written 30 paragraphs, he would have been asking for a 5 trillion spending. what a relief. Why hold elections, Gross has already selected the president for us.

[sbenard]

Hey you dipwits--

Bill Gross was KIDDING! He was saying those things tongue-in-cheek. He is really suggesting that Obama's plan is over-the-top irresponsible, and impossible to carry out.

[GUY FOX]

What? Double the deficit? Bill Gross is advising us to cut our throats for the $ake of endless growth that he calls progress. What a choice! Do we feed the cancer of endless economic growth (a.k.a.: the cancer of progress and consumption devouring the nation)... do we cut our throats and die with a smile? Eh? People like Bill Gross are idiots.

[Brian27]

Alas, what comes from an identity is another identity. One would expect a bond manager to understand this about the C+I+G=Y National Income identity that he chooses to use. Another identity is C=Y-T-S. Put these two identities together results in

I-S+G-T=0

From the national income identities it must be that an increase in G will cause I (investment) to decline or S (savings) to rise.

If one assumes that output depends on labour and capital and capital increases with I then a decline in I will cause future output to fall. Is this the solution the author had in mind?

On the other hand a decrease in taxes must increase I and/or decrease savings. This follows from the National Income identities.

The Author should be careful when using national income identities to justify his arguments.

[Shizbot]

For the real deal on debt and deficits, check out two recent books by Yarrow and Wright called Forgive Us Our Debts and One Nation Under Debt. To put a copy of each into the hands of the top 1,000 government officials would cost only about 50 grand and they are written at a level that even politicians and their minions can understand. Well, maybe not Gdub.