Obama may produce $1 trillion deficit, Gross says

Tuesday, July 1, 2008 at 1:22am
Barack Obama Bloomberg News

Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., anticipates Barack Obama will be the next president and that his administration may have no other choice than to produce the first $1 trillion U.S. budget deficit.

“You have inherited a mess,” Gross, co-chief investment officer of Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the Newport Beach, Calif.-based company’s Web site Monday. “What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.”

Higher taxes for hedge-fund managers and oil companies will not cover the $500 billion stimulus the economy needs, including the anticipated Obama tax cuts for the poor and middle-class, universal health care and aid to the depressed residential real estate market, said Gross, a longtime Republican. The likely expenditures and increased borrowing suggest that “intermediate and long-term yields on government bonds have already bottomed and will gradually rise” through the next four years and possibly beyond, Gross said.

Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what’s needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.

Republicans “will blame you for years and label you ‘Trillion-Dollar Obama,’” said Gross, in his analysis that assumes Obama will defeat his presumptive Republican adversary, John McCain. “There is, in fact, not much that you or any other President can do.”

Obama proposals

Mark Porterfield, a Pimco spokesman, said Gross wasn’t available for additional comment.

“Bill Gross is correct that higher taxes for hedge-fund managers and oil companies will not cover Barack Obama’s agenda,” Jason Furman, Obama’s economic policy director said in an e-mail response. “Which is why Obama has proposed an ambitious program of spending restraint.”

Obama’s proposals include ending the war in Iraq, cutting subsidies for private Medicare plans and student lenders, eliminating no-bid contracts, and reforming the process known as earmarks where direct funding is allocated to specific projects in legislation, Furman wrote.

Japanese comparison

Gross draws a comparison with Japan’s efforts to recharge its economy after a 1980s real estate bubble fizzled. Over seven years, expansionary fiscal spending grew the deficit from 2 percent of GDP to 10 percent at its peak, he says. “Our trillion-dollar level in 2011 would equate to something like 6 percent of GDP, a mere pittance by Japanese standards,” Gross said.

Gross expects housing prices to fall a further 10 percent by January, by then a “Japanese-style deflation will be in full stride.” Home prices in 20 metropolitan areas fell the most on record in April, from a year earlier, according to an S&P/Case-Shiller home-price index released on June 24.

‘Firm background’

Global growth led by developing countries and rising commodity prices will provide a “firm background for stimulative U.S. monetary and fiscal policies” and save the U.S. from Japan’s experience of deflation and near 0 percent interest rates, Gross said.

Pimco, a unit of Munich-based insurer Allianz SE, manages about $800 billion. The Pimco Total Return Fund has about $129 billion in assets under management.

—Bloomberg News

Filed under: City Business
By: wspencer3 on 12/31/69 at 6:00

What is this, Fox News? Your headline reads"Obama may produce...

By: dman on 12/31/69 at 6:00

This is typical terrible reporting. Both McCain and Obama are inheriting a mess from Bush. I feel sorry for them. And to think we had a surplus and a strong dollar over 7 years ago makes me sick.

By: Time for Truth on 12/31/69 at 6:00

I'm sure these money managers dread an Obama Presidency as they will no longer be bathing in champagne. Well, maybe they still will be, but not as often. Whoever wins will have to post a huge budget, it's just a question of whether or not our priorities should remain the same. Looking at the disaster resulting from seven years of misdirected priorities, some change is needed.

By: Dragon on 12/31/69 at 6:00

It ain't Fox News. A heck of a way for the lifelong Democrat Michael Bloomberg to treat his own candidate.

By: TharonChandler on 12/31/69 at 6:00

This sounds like Grossman wants 'throw good money after bad' (him and Barrack). I say that what we need to do is all move 'back to the land'; like out there farming and fishing (and breathing the cleaner air). Many African Americans historicly originated in the 'Lake Victoria' region of Sudan, a place where the fishing was good and the diet consisted of mass quantities of dried fish and marsh corn. I wish I could just have a pretty virgin wife to get pregnant after a good day of fishing and farming (no pollution nor deficits needed). In a normal world i could have had this 20 years ago yet i live in a world where a greedy cousin works for the Mafia.

By: NewYorker1 on 12/31/69 at 6:00

"get pregnant after a good day of fishing and farming" that sounds hot. I'm volunteering to help you practice.

By: girliegirl on 12/31/69 at 6:00

What's so entertaining about Obama's take on "change" is that when you tax businesses and corps, they pass on the cost to the consumer. The US gov't is a consumer of those same corps and industries.... ergo, we, the tax-payer will be paying more for the same services and goods we bought or used just a year ago. And that has nothing to do with the cost of oil. Case in point: a house I looked at in Naples, FL cost $1.2 millioin (just looking for the fun of it) and when I compared it to the exact same model built a few years back (before Katrina and deforestation issues) the same house was 1/3 less. It's the same exact house. But Katrina and other issues have increased the cost of goods needed to build a house, so the next buyer/builder gets screwed. Taxes can have the same effect. It just makes your next car/house/computer/whatever more expensive, and all the while your income never increases.

By: Blanketnazi2 on 12/31/69 at 6:00

girlie, idealistically real estate is supposed to inflate. that is one of the cornerstones of our economic system. btw, Obama wants to roll back the tax cuts to the rich that Bush handed out.

By: girliegirl on 12/31/69 at 6:00

But taxing businesses and oil companies is ludicrous. We all learned that in our Econ classes. Corps don't pay taxes, they pass that on. Every business here in NashVegas does the same thing. Business costs are always passed on to the consumer, even when the consumer is the gov't itself. So it's really the taxpayer who pays it. And of course, your IRA or 401k plan, because most funds have oil companies and such in their portfolio. Dad's gov't retirement fund has dwindled to nothing because of the economy, and he's a typical retired teacher.

By: girliegirl on 12/31/69 at 6:00

As for the real estate commment, that's what I did for a living a few years back. You can approach a builder that's sitting on inventory, and there are THOUSANDS in FL right now, and offer him what he's "got in it"..... and he'll probably take the offer. After all, there are literally thousands of vacant homes right now, even in pristine Edenic areas, just rotting away. But the costs jumped 33% after Katrina. I know because I was buying the lumber back then. And now you've got fuel surcharges for bringing in lumber, brick, mortar, appliances, roofing materials, you name it. It's scary. Plus, it won't get any better. The sources of wood products have decreased drastically to make way for energy producing products. Now consider what those industries will do to the costs of those goods if they are to be charged increased taxes. Same.

By: WickedTribe on 12/31/69 at 6:00

We've also learned from experience that trickle-down doesn't work. Just like corps pass on any new taxes to consumers, they do not pass down any new profits, at least further than the executive level.If price-fixing wasn't standard business practice in this country, neither of these things would be possible in the first place. But since this country doesn't enforce any of its anti-trust laws anymore, we the consumer will feel the pain forever.

By: JohnWMcSame on 12/31/69 at 6:00

This is nonsense. I will no longer be reading this rag. Screw the right wing madness and all those who subscribe to it.If you want to know why things are a complete mess, check out this website:www.closetheenronloophole.com

By: Exile on 12/31/69 at 6:00

I am truly amazed at the general level of economic ignorance manifest on this board. My favorite is the old populist talking point "trickle down doesn't work". Could someone explain to me what the alternative is? Trickle up? Excellent work people.

By: WickedTribe on 12/31/69 at 6:00

The alternative is a normal progressive taxation system in which anti-trust laws are strictly enforced and minor wealth redistribution is in place. I guess you could call that trickle up since the consumer class having more expendable money creates more demand.

By: Time for Truth on 12/31/69 at 6:00

'Trickled On' has been the normal result of supply side economics for the average American worker.Businesses charge what the market will stand. It goes into their pockets, it comes out of their pockets, no matter, they charge what the market can stand.