The U.S. annual deficit of nearly $1.5 trillion is 10 percent of its gross domestic product — a number never approached since the Great Depression, says PIMCO head Bill Gross.
“The immediate question is who is going to buy all of this debt?” Gross writes in a note to investors.
“It is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not.”
“Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds.”
U.S. policymakers, Gross observes, assure voters and financial markets that a return to fiscal conservatism is just around the recovery’s corner, but it’s tough to see “exactly how that more balanced rabbit can be pulled out of Washington’s hat.”
Gross points out that five more years of 10 percent of GDP deficits will quickly raise America’s debt to GDP level to over 100 percent, a level that both rating services and markets recognize as “a point of no return.”
The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don’t count on either one happening, Gross says. Those trillion-dollar deficits are probably here to stay.
China is the world’s largest holder of U.S. Treasuries, with $768 billion of U.S. securities in reserve as of the end of March.
In recent months, however, Beijing has increasingly voiced concerns about the value of its foreign-currency holdings and suggested that the world adopt a new international reserve currency.
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