PIMCO founder Bill Gross -- one of the world's largest mutual funds managers, who focuses mostly on bonds -- has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been “relying on the kindness of strangers” to help cover our debts, he tells Aaron Task in the accompanying clip.
By “strangers” he is referring to our foreign counterparts, like China for example. Basically, for years Americans have spent their hard-earned dollars on less-expensive Chinese made goods. With great gratitude, China turned around and used all those dollars to buy up U.S. Treasuries and other dollar-denominated assets.
But now after years of reckless spending, America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort. “When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,” says Gross, citing the work of Ken Rogoff and Carmen Reinhart in This Time Is Different.
Option #1 – Keep spending and do nothing
Option #2 – Balance our budgets by cutting entitlements
If the country cannot come to grips and cut back on entitlement programs, U.S. debt will continue to grow and governments around the world will loose faith in the U.S. dollar. Foreign goods would become more expensive, says Gross, while our standard of living would drop.
Under the second option, if entitlement programs are cut, many Americans would naturally have to learn to live on less and take a hit to their standard of living.
“There is really no way out of this trap and this conundrum at this point,” says Gross.