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Gross said that failing to address the problem would lead to government printing of money and inflation

Gross places the US in a "ring of fire" with fiscally frail countries such as Greece, Spain and Japan

(Financial Times) —  

Bill Gross has compared the US government’s reliance on debt financing to a “crystal meth” addict, in the latest in a series of dire warnings from one of the most influential investors in the bond market.

“The US, in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth”, said Gross, who manages the $273bn Total Return bond fund for Pimco.

In an investment outlook that began with a discussion of the 69-year old investor’s lack of long-term memory, Gross returned again to a theme that he has visited over the last decade: unsustainable US spending.

Gross places the US in a “ring of fire” that includes countries with precarious finances such as Greece, Spain and Japan.

Citing separate but similar reports from the International Monetary Fund , the Bank for International Settlements and the Congressional Budget Office, Mr Gross said that to put US finances on a sustainable footing the US must cut spending or increase taxes by 11 per cent of gross domestic product over the next five to ten years.

To close the gap requires tax or spending changes of $1.6tn a year, he said. By comparison, tax cuts and spending programs set to expire at the end of the year, the so called “fiscal cliff”, total $200bn. The failed “grand bargain” proposed by a presidential and congressional committee last year had pushed for cuts and taxes worth $400bn a year.

The comments come ahead of a US election dominated by questions about the future shape of tax and spending. Gross told the Financial Times that his purpose was to highlight warnings from the IMF, BIS and CBO that progress must be made quickly. “For every year we delay, the fiscal deficit increases by 0.5 per cent or so”, he said.

He said that failing to address the problem would ultimately lead to government printing of money and inflation. “Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the “Ring of Fire”.”

However, it is a familiar theme for the investor, who last year warned of rapidly rising interest rates as he sold all his holdings of US government debt. At the end of August his fund held positions in Treasuries worth around $57bn.

In 2003 he said, “when too much debt infects the heart of capitalism you either default or inflate it away, and the latter is by far the easiest (although not necessarily the wisest) policy”.