The $1 trillion deficit: has Bill Gross gone crazy?

Bill Gross, Pimco’s founder and Chief Inestment Strategist is bold. In the past, he has argued for extreme measures to bailout subprime, questioned the CPI and said a lot more over the past few years. Now he’s calling for a President Obama to crank up the government juice and spend like mad. Gross is calling for a $1 trillion deficit.

I am no Keynesian, so I can’t endorse his call for government spending and bailouts as medicine for what ails the United States. But, I do admire his out-of-the box thinking. Bold!

Here is a snippet of what he has to say:

Dear President Obama, Bill Gross, Pimco, July Investment Outlook

Dear President Obama:

You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans. He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love. Over eight years, he failed to put forth a coherent energy policy. He needlessly invaded Iraq and lowered worldwide esteem for this nation as a symbol of freedom and benevolence…….

Now I know, Mr. President, that you’re already addicted to those nicotine smokes and I’m not trying to promote a caffeine habit here, but this economy will need an additional jolt of $500 billion or so of government spending real quick. It must replace both reduced residential investment and consumption whose decline has placed the U.S. economy near, if not in a recession. Some quick math for you Sir: gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.

It took the Japanese a lot of time too, Sir. Take a look at the chart below which graphically displays Japan’s increasing deficits as a percentage of GDP following their property bubble of the late 1980s. Over a seven-year span, expansionary fiscal spending widened from a relatively benign 2 percent deficit to a level that exceeded 10 percent at its peak in 1998. Our one trillion dollar level in 2011 would equate to something like six percent of GDP, a mere pittance by Japanese standards.