Over at The Street today, Chris Ciaccia sat down with Jeff Gundlach to talk about Japan, government bonds, natural gas and Apple Inc. (NASDAQ:AAPL) among other investments. As usual, Gundlach made several compelling and insightful arguments, some of which centered around the government’s Quantitative Easing program. The headline is that Gundlach thinks the Federal Reserve has no plan to end the program.

Jeff Gundlach

Gundlach Statement At The Ira Sohn Conference:

Gundlach made a similar statement at the Ira Sohn conference in recent weeks, but the interview in The Street has a more fully realized version of the theory. According to Gundlach, when the Federal Reserve said that it might up the level of QE after starting to reduce, that showed that the central banks thinks of QE as “the policy tool.”

According to Gundlach, the Fed is trying to “create absolutely stable economic growth through quantitative easing.” Gundlach doesn’t think that’s going to work in the longer term, and he seems sure that the market is ignoring some of the wider implications of policy at the Fed. QE3 isn’t just a way to give the economy a boost in tough times, it’s a way to finance the government’s budget deficit.

Though the deficit may fall over the short term, it’s bound to balloon in the medium and long term unless there is a major change in government entitlement programs. The population of older Americans, who are more expensive in terms of entitlements, is increasing. QE3 is the way the Federal Reserve wants to finance their retirement.

The message that the Federal Reserve sent, by saying that it can move the level of QE up as well as down, is that they are going to match the program to the level of deficit in the United States budget. According to Gundlach, when the deficit goes up QE is bound to go up. The Federal Reserve won’t give up its power, particularly when its vital to the running of the U.S. government.

Gundlach is worried that QE has attracted attention to the bond market and the stock market, because the effects of the program are much more widely felt there. Investors are looking to the stock market because they think there are no alternatives.

Gundlach says, “I hate investments that when you’re right, you lose your shirt,” speaking about the bet that interest rates are going to increase. If they do, he says, the entire economy is likely to collapse. If you bet against bonds, you’re betting against everything.