Bond Guru Jeff Gundlach: The USA Will Default
Jul. 1, 2010
At last week’s Morningstar Investor Conference in Chicago Jeff Gundlach, bond guru and founder of DoubleLine Capital said the USA is confronted with a terrible deflationary battle that will ultimately end in default (see the full presentation here). I was shocked to read this from Gundlach who is truly a master of the debt markets. He appears to connect all of the dots with near perfection only to come to what I believe is a maniacal conclusion (that we will default).
At the presentation Gundlach focused primarily on the government debt level without focusing heavily on the difference between private sector and public sector debt levels (which is absolutely crucial in my opinion). He said:
“The problem for the near term is that the load of all of this debt is deflationary. We need to work through these deflationary outcomes. Debt growth creates a headwind where we need more and more and more debt.”
Of course, deficits are as American as apple pie. As you can see below, the USA has essentially always run deficits. Throughout many of our most prosperous periods we have run large deficits and been deep in the red. Government has spent more than its brought in for almost the entirety of the existence of the USA yet we have never had trouble paying for our children’s futures or “financing” anything. This confounds the inflationistas and those arguing that we will default. How can a nation never be in surplus and still be, arguably, the greatest economic engine ever known to man?