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Bill Gross: why Ponzi-like treasuries can't be ignored

US government bonds are a giant Ponzi scheme says Bill Gross. But the world's largest bonds investor is still holding them in his fund.

Bill Gross: why Ponzi-like treasuries can't be ignored

His calls on US government bonds haven’t been the best, but Citywire A-rated Bill Gross has lifted his head above the parapet, revealing why he won’t be underweighting treasuries, which he likens to a Ponzi scheme anytime soon.

‘Don’t underweight Uncle Sam in a debt crisis,’ writes the world’s largest bond investor in his latest investment outlook.

‘I will not dispute it, market movements have confirmed it and ….Money seeking a safe haven will find it in America’s deep and liquid (almost Aaa rated) bond and equity markets.’

Referring to comments made by Michael Bloomberg earlier this year, Gross says the New York City mayor was on to something when he said: “If somebody offers you a guaranteed 7% on your money for the rest of your life, you take it and just make sure the guy’s name isn’t Madoff.”’

The manager of Pimco's $260 billion Total Return Bond fund added: ‘What he didn’t say is that our US president – past, present and future – heads a financing scheme that has similar characteristics.’

‘Think of the US balance sheet with its $66 trillion dollars of liabilities as one giant PIK – payment in kind – bond.’

‘Instead of paying actual current interest they promise to pay future bills with more and more bonds – payment in kind. That’s what social security ($8 trillion) is; that’s what Medicare is ($23 trillion); and that’s essentially what Medicaid is ($35 trillion) although the latter is appropriated annually and therefore disguised as an actual debt.’

‘US treasuries are one giant PIK bond that can only partially be paid off under assumptions of Old Normal 3% real growth rates, or check writing by the Federal Reserve that inflates away the debt and a bondholder’s real principal at the same time.’

He says solutions for real growth in an authentic debt crisis – which the world is now experiencing – can only be ultimately cured in two ways: 1) default on it, or 2) print more money in order to inflate it away.

‘Both 1 and 2 are poison for bond and stock holders.’

That’s why he says timing in investment markets is critical. ‘At the moment the US is considered to be the cleanest. That’s why Pimco owns them. But things change.’

2 comments so far. Why not have your say?


Jul 02, 2012 at 16:49

"Cleanest DIRTY SHIRT" actually. Here is the full story for those who would like to read it:

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Jul 03, 2012 at 15:14

Yeah but, yeah but, yeah but - surely all government expenditure (including our State pensions) can be seen as a Ponzi scheme - what is paid out is funded by what is coming in. There's nothing wrong with the system so long as you can trust the government in question.

Personally I don't, but that's just me . . . .

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