The Largest Bond Fund in the World Is Boycotting the Debt to Uncle Sam

The largest bond fund in the world is called Pimco Total Return. It represents more than $230 billion in savings to investors in all socio-economic levels. The mutual fund is based in Newport, California, and run by Bill Gross, a calm and pragmatic character.

This shrilled-voiced manager, whose past performances have commanded respect, has been begging political leaders in Washington for months to reduce the huge budget deficit in the United States. He has been advocating for a combination of increased taxes for the rich and a cut in national spending.

He is alarmed at the risk to the dollar represented by the pursuit of completely lax monetary and fiscal policies, on behalf of the courageous struggle against unemployment. He sees, in this political move, a relinquishing of power by elected officials and a source of inflation. In one word, he represents the views of many investors. But since he manages more than $230 billion in investments, we listen to him more than to others.

According to Reuters, Pimco Total Return got rid of all its obligations to the U.S. Department of the Treasury, along with all its risks associated with the U.S. Treasury (Fannie Mae, Freddie Mac, etc.). It is a sign of incredible defiance toward the paper issued by the Treasury.

What to make of this decision?

1) Gross anticipates a surge in bond yields, as a result of accelerated growth, which could cause an acceleration of inflation.

2) Gross probably makes the judgment that American rates can only go up, now that the European Central Bank, in turn, signals an increase in interest rates.

3) Gross has little faith in the sincerity of Barack Obama, who talks about reducing the public debt, but proposes only $10 billion in reductions for the 2011 budget. Going above this amount would mean putting at risk employment, education, and the future of innovation, says the White House. This statement is outrageous, considering that the budget represents $3.8 trillion! How could a marginal reduction in the budget have such catastrophic consequences?

Even by taking away $800 billion for Social Security, $900 billion for Medicare and $200 billion for the national interest on debt, there is still $1.9 trillion left for discretionary spending. Trimming $10 billion of this is neither courageous, visionary, nor admirable. Instead, it is proof of the electoral calculations of Barack Obama to let the Republican voice get massacred before touching the public budget, even though the deficit is close to 10 percent of the GDP.

4) Gross doesn’t take seriously Republicans who speak out about cutting public spending, choosing to attack only politically controversial areas and refusing to look at the enormous spending programs, which are at the heart of the problem: Social Security, Medicare and national defense. Moreover, they proposed a $61 billion savings in the 2011 budget. If you believe the New York Times, these savings would cause America to fall into ruin.

5) Gross clearly believes that other public and private issuers have better credit — countries that have less suicidal fiscal policies and businesses that can surmount a jolt of inflation.