PIMCO Economist: US Debt Crisis Overhyped!

Peder Beck-Friis, an economist at Pacific Investment Management Company (PIMCO), wrote on Thursday that investors currently do not need to worry about a debt crisis in the United States because the actual situation is milder than it appears. In a commentary, Friis wrote that investors need to prepare for higher instability before policymakers take debt issues seriously. The economist wrote, "The U.S. financial markets may become more sensitive to fiscal and political shocks. Limited fiscal space may restrict fiscal policy during future economic downturns, coupled with fatigue towards quantitative easing policies, which will also increase macroeconomic volatility." However, he pointed out that, for the time being, this situation does not pose any direct threat. Over the past year, the expanding budget deficit in the United States has raised warnings from market analysts, including PIMCO's co-founder and bond king Bill Gross. Like many other prominent market observers, he believes that the aggressive growth of U.S. debt will eventually reach unsustainable levels. This is especially true when interest rates are high, as they raise the borrowing costs that the United States must pay for its debt. This forces the U.S. government to borrow more money, leading to a debt spiral. The consequences of a national default are largely difficult to assess, but some predict that these potential consequences may include soaring inflation and economic recession. Despite acknowledging the worrisome growth of U.S. debt, Friis also cited some data that should make the near-term outlook more optimistic. He said that over the past decade, the growth of U.S. net national wealth has exceeded public borrowing. The United States also faces fewer fiscal constraints than its global peers, and there continues to be demand support for U.S. bonds. Friis said, "What does this mean for U.S. debt in the coming years? The overall fundamental outlook may be: deficits remain high, debt continues to rise, demand for U.S. bonds remains strong, partly due to the benefits of the U.S. dollar's status as a global reserve currency." Ultimately, the debt issue will need to be addressed. Analysts have repeatedly emphasized that the most obvious response is to increase taxes and cut spending. What frustrates them is that politically, border policies and large-scale spending plans by both parties make the likelihood of this situation occurring slim. Friis is not too concerned about this. He pointed out that historically, the United States will eventually embrace reform, especially when debt growth is accompanied by unsettling high inflation and interest rate levels. He noted, "Historically, when federal interest payments (as a percentage of total expenditure) reach levels similar to today, fiscal tightening follows, such as post-World War II, the late 1980s Reagan era, and the 1990s Clinton era." More importantly, the United States has the ability to respond Fris added that compared to Europe, the tax burden in the United States is lower, which means that the United States has more room to increase taxes. This will not only provide more revenue but also give the United States more fiscal credibility