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Bill Gross: US Debt Will Get Downgraded

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Bill Gross: US Debt Will Get DowngradedBill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., talks about the U.S. debt ceiling compromise passed by Congress and signed into law by President Obama, the outlook for U.S. tax policy and the state of the economy. Gross, speaking with Carol Massar on Bloomberg Television’s “Street Smart,” also discusses Federal Reserve policy and Pimco’s investment strategy in the current climate. (Source: Bloomberg)

Bill Gross was also on CNBC on Tuesday discussing the same issues below is the video and text of the transcript.

Pimco’s bill gross, cofounder of Pimco joins us. welcome back, mr. gross. nice to be here. haven’t seen you in a while. you’re not impressed by this bill, why? i’m impressed by the slower economic growth behind most of this, decline of stock in eight straight day, biggest decline in yields. the consumer in the united states has disappeared. there are no jobs in terms of growth and no wages in terms of increase and no spending power this is a classic de-leveraging cycle households are under pressure and consumption, 70% economy, the growth rate of that economy will be stiltified for perhaps the next several years. you downgraded your growth rate. is that due in part because of congress? you’re not impressed by the amount of cost cutting they’re doing at all? we’re not impressed at all. that’s an mcbeth full of sound and fury signifying nothing type of event. $1 trillion worth of cuts but back and loaded, nothing takes place in 2012 and all begins in 2013. it’s slower economic growth if it comes, as we suggest, probably increase the deficit than they will decrease it. we’re still looking at 9% from gdp and waiting for standard & poor, based on those numbers. if you tried to cut as much as people would want to bring the deficit down, wouldn’t you do more harm to the growth rate of the economy? when you think about it from a purely economic standpoint, isn’t this the wrong time to be doing cutting in government spending? we agree, bill. sorry, tea party, you don’t promote economic growth in the short time by growing deficits. we’re suggesting over the next 12 to 24 months, it’s de-leverering, weak job growth the essence of the problem and obama and company should have been focused on jobs opposed to this debt package, which took up a tremendous amount of time unnecessarily. the question is, can the u.s. maintain its aaa credit rating? fitch is already out sayi saying — what do you think s&p will do with the credit rating? it’s a close call. they have a $4 trillion deficit reduction or 2.5 current falls far short of that. on the other hand, i suspect s&p is under enormous pressure to maintain the aaa watch they have. we’ve recently seen congressional hearings last week and in your roland, a threat to start their own agency. basically, countries are fighting back and policy pressure for s&p to maintain the aaa. it’s a close call whether or not they have the spine to follow through with their $4 trillion number. bill, this is melissa francis. do you think qe-3 is coming in some form and anything you’re doing in your own fund because of that? i think it is. it is a divided fed and difficult to reinact the same form of qe-2. i don’t think the feds has a program in place to purchase treasuries again but what they do have in place or thinking about what might be ratified at jackson hole ties the language to an inflationary target. if the fed targets inflation at 2.5% or less and promises to keep the fed fund’s rate at 25 basis points, treasury prices can rally from this point forward. how much more stimulus can we take at this point? are we going to get to a point at some time where it’s just a matter of time where the economy needs time to heal without any more stimulus? i think that’s the case. what the fed has done with qe-1 and qe-2 and perhaps qe-3 is support risk assets, prices and the like by lowering real interest rates in particular are now a minus 1% in real terms. there is a limit to where they can go on the strength of the dollar and cannot stand a continuing decline in interest rates because that leads to selling and currency pressure. there’s a limit at some point. we have to simply stand on our own two legs, wobbly as they are. where are you investing to make money right now? we’re investing in clean shirt economies, those with better balance sheets. germany, canada, mexico. they have half to the debt that the united states has. we’re investing in other asset classes and commodities that will benefit from a declining dollar. we’re avoiding the dollar to the extent that we can because other developing market currencies will do much better under these low interest rate scenarios. see you, bill. thank you. thank you. bill gross, head of pimco,

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