Gross Says Fear ‘Mindless’ U.S. Deficit Spending

PIMCO's Bill Gross is parroting what I've been ranting about for years.  PIMCO funds have over $1 trillion under management.  When the world's biggest bond fund manager says to stay away from US Treasury bonds, one may want to heed his advice.

http://www.bloomberg.com/news/2011-01-05/pimco-s-gross-says-investors-should-fear-mindless-u-s-deficit-spending.html

“The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit,” Gross wrote in a note on Pimco’s website today. “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.”

 “All investors should fear the consequences of mindless U.S. deficit spending.” wrote Gross, a founder and co-chief investment officer at Pimco. Like a female mantis who eats the head of her mate while reproducing, policy makers are “munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills,” he wrote.

Bond investors will suffer once general prices start to rise, Gross wrote. He declined to be interviewed today. 

“The American answer to a bulging waistline is always ‘mañana’” Gross wrote. “Eventually, as reflationary policies take hold, long-term bondholders lose their heads (and a portion of their principal as well), as yields rise to reflect higher future inflation.”

Bill Gross compares deficit spending to flushing money down the toilet

http://sfgate.bloomberg.com/SFChronicle/Story?docId=1376-L69P2S6NKMZJ01-1M2S7D340JHALJ6F809MPJREDH

Pacific Investment Management Co.’s Bill Gross said deficit spending by governments that seek to maintain artificial levels of consumption “can be compared to flushing money down an economic toilet.”

Without acceleration in population growth, developed countries finance more consumption to maintain economic growth, the world’s biggest bond-fund manager wrote in his August commentary today on Newport Beach, California-based Pimco’s website. Leveraged spending, he said, is not a substitute for demand created by people.

“I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population,” Gross wrote. “Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence.”

Deficit spending will be unsuccessful in what Pimco calls the “new normal” because deleveraging, re-regulation and de- globalization produces structural headwinds that lead to slower growth and lower-than-average investment returns, Gross said.

Pimco, a unit of Munich-based insurer Allianz SE, managed $1.07 trillion of assets as of March 31.

Rick Santelli vs. Steve Liesman on tax cuts vs. deficit spending

US Global Investors on gold

http://www.usfunds.com/investor-resources/frank-talk/?i=2902

Gold is charging up to new highs, so it’s no surprise that the level of interest in this financial asset is charging up as well. Last week I did interviews with CNN, CNBC, USA Today and Reuters, and in most cases a specific question came up – “Should people be buying or selling gold right now?”

That’s a tough one. The monetary turmoil in Western Europe and some early signs of inflation create the right conditions for gold to continue its run, and while we see higher prices in the long term, it’s difficult to predict what might happen in the here and now.

If he’s correct – the masses in the developed world are just now waking up to how their personal wealth can be affected by the future inflation spawned by the trillions of dollars and euros created to finance economic rescue plans – the potential implications for gold are profound.

Here’s one way to look at currency destruction -- 10 years ago this week, $1,000 bought nearly four ounces of gold, and today $1,000 won’t even get you a single ounce. Gold is money, so when you look at the gold-dollar exchange rate, the dollar’s value has fallen by a startling 78 percent just in the past decade.

Murenbeeld goes on to make another interesting point – investment demand, rather than jewelry demand, has been the key driver for gold for most of modern history. We are returning to that scenario as gold’s safe haven appeal grows during this period of unstable government and monetary policies.

Our experience shows that whenever you have deficit spending, rapid money supply growth and negative real interest rates (inflation rate higher than nominal interest rate), gold will perform exceptionally well in that currency. Right now, we’re seeing massive deficits, negative real interest rates in the U.S., and a worldwide debt problem that is projected to get bigger.

We have long recommended, based on regressional analyses, that prudent investors consider an allocation to gold – not to get rich, but as a way diversify assets and protect wealth. Our suggestion is a maximum 10 percent allocation – half to bullion and the other half to gold equities or a good gold fund that invests in unhedged gold stocks.

Alan Greenspan quotes

Former Federal Reserve Bank Chairman Alan Greenspan quotes:

Before he was Fed Chairman:

"In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. ... This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard." - Alan Greenspan, 1966, pre-Fed Chairman.

Post-Fed Chairman:

“Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies… What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."
–Alan Greenspan, 9 September 2009

This is in stark contrast to what he was saying during his multiple appointments as Fed Chairman. And his easy money, zero-interest rate policies mirror what current Fed Chairman Ben Bernanke is endorsing today. But the Fed is allegedly unbiased and independent, right?

Wars and central banks

What most people do not understand is the relationship between the Federal Reserve and war. The Federal Reserve is responsible for every economic difficulty that afflicts our nation. Without a Federal Reserve creating fiat paper currency out of thin air, an empire could not wage continuous war. There is no clearer proof than evaluating major U.S. military conflicts prior to 1913 versus after the creation of the Federal Reserve. Between 1791 and 1913 (122 years) the U.S. engaged in only four major conflicts:

* War of 1812
* Mexican-American War
* Civil War
* Spanish-American War

Only the War Between the States can be considered significant and it was fought solely on U.S. soil. The Federal Reserve was created in 1913 by bankers in collusion with politicians in Washington DC. This private central bank, run by a cartel of major banks, has encouraged politicians to wage war. Continuous conflict enriches bankers, as all the money used to wage war is borrowed from them. This may explain why between 1913 and 2010 (97 years) the U.S. has engaged in eleven significant foreign conflicts:

* World War I
* World War II
* Korean War
* Vietnam War
* Grenada Invasion
* Panama Invasion
* Gulf War
* Somalia
* Kosovo War
* Afghan War
* Iraq War

Above and beyond these actual conflicts, we engaged in a 46 year Cold War with the Soviet Union that involved funding opponents to communism, coups, and assassination of foreign leaders. This Cold War was used as an excuse to station troops in over a 100 foreign countries, creation of the military industrial complex and creation of a secret spy agency, the CIA. Conveniently, when the Cold War ended with the collapse of the Soviet Union, a new amorphous war was created by politicians and their bankers. The nebulous War on Terror has been exploited to create the Department of Homeland Security and passage of the Orwellian Patriot Act, which allows the government to violate Americans’ right to privacy in the name of National Security. The War on Terror is used as the reason for invading foreign countries and using predator drones to blow up whoever our leaders feel is a threat. The cost for the War on Terror thus far has been $2.3 TRILLION. There are trillions more to be wasted because you can never win a war on terror. Who benefits from a never ending war on terror? Every dime of the $2.3 trillion has been borrowed. The beneficiaries of debt are bankers, as they reap billions in profits and pay themselves millions in bonuses. The money that is loaned to the government is then paid to the companies that constitute the military industrial complex. These companies then buy the support of Congress for their new and improved killing machines. This encompasses the circle of death in Washington DC.

- James Quinn

von Mises vs. Keynes

John Maynard Keynes has more followers (inside the US government and its banking cartel), and has an economic theory named after him. Ludwig von Mises is largely forgotten by the mainstream financial press, even though his track record of predictions has been much better. A disciple of the Austrian School of Economics, von Mises was a libertarian who predicted in the 1920's that government intervention created distortions in credit and financial markets, causing asset bubbles that would eventually burst. Does that sound familiar?

In any case, his prediction came true in 1929, yet he was marginalized yet again with the emergence of Keynes in 1936, who espoused printing currency and running deficits in order to escape the throes of a Great Depression. Again, does that sound familiar?

Many from the intelligentsia mistakenly believe we are in the midst of a war of ideaologies, i.e., GOP vs. Democrats, conservatives vs. liberals, etc. In regards to financial policies, it's partially true, but not completely, because Administrations and legislators from both sides of the aisle have run up enormous budget deficits, while resorting to printing currency to fund the deficits. They have borrowed trillions from foreign sovereign funds, and contributed to the insolvency of entitlement programs such as Social Security and Medicare. We are simply a country that spends money we don't have.

In short, our government's fiscal and monetary policies have been reckless and irresponsible. President Obama and Congress are following the wrong playbook.

http://online.wsj.com/article/SB10001424052748704471504574443600711779692.html (you may need a subscription to read this article)

My Facebook post on deficit spending

Kathleen, not to single you out, as I do agree with you on the benefits of hope, but when the hopes are built on a false foundation, the house will crumble. Ask Shawna, as I'm sure she is aware of my thoughts--and investment theses. It's built on mistrust of government fiscal and monetary policies. It's got nothing to do with Dems vs. GOP, or conservative vs. liberal, etc. Obama and Pelosi just happen to take it to unprecedented extremes, as our nation's currency--and hence, our sovereignty are now at risk of being irrelevant.

Long story short, you could quite possibly be holding confetti, built on false promises from the Fed and US Treasury, with the complicity of our banking industry, who Congress conveniently bailed out, while they appropriate all this deficit spending. The US is running a massive Ponzi scheme, taking in taxes on social security and other unfunded entitlement programs--knowing full well payers will never see a dime back.

I'm in the business of risk management, not in the business of forming ideaological judgments, and unfortunately, the average American is an unwilling participant in the huge casino of the world's financial system. It includes citizens who pay taxes, have home mortgages, credit cards, retirement savings, or merely hold the USDollar. In other words, every single American.

The financial implications go well beyond whether Congress enacts healthcare reform, cap and trade, or any other bill. The crux of it comes down to you can't keep spending money you don't have. Because in our case, the foreign creditors who have been lending us this money, will eventually say "Enough!", and then the music will stop.

The US government has been bailing out failing industries, and foreign sovereign funds have been buying Treasury bills to fund our debts, but when they realize the US government itself is already bankrupt, they won't be bailing us out.

Sorry to take the punchbowl away, but the G-20 countries have already pissed in it.

The Gold standard

This is one argument for a return to the gold standard. Note the author and date.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Alan Greenspan
[written in 1966]