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Obama May Produce $1 Trillion Deficit, Gross Says (Update1)
By Candice Zachariahs
June 30 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund, said a Barack Obama administration may produce the first $1 trillion deficit and intermediate-and long- term bond yields have already reached cyclical lows.
Higher taxes for hedge-fund managers and oil companies will not cover anticipated Obama tax cuts for the poor and middle- class, universal health care and aid to the depressed residential real estate market, said Gross, a long-time Republican.
``This economy will need a jolt of $500 billion or so of government spending real quick,'' Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the company's Web site today.
The likely expenditures and increased borrowing suggest that ``intermediate and long-term yields on government bonds have already bottomed and will gradually rise'' through the next four years and possibly beyond, Gross said, in his analysis that assumes Obama will defeat his presumptive Republican adversary, John McCain.
Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what's needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.
Republicans ``will blame you for years and label you `Trillion-Dollar Obama,''' Gross said. ``There is, in fact, not much that you or any other President can do.''
Gross draws a comparison with Japan's efforts to recharge its economy after a 1980s real estate bubble fizzled. Over seven years, expansionary fiscal spending grew the deficit from 2 percent of GDP to 10 percent at its peak, he says. ``Our trillion-dollar level in 2011 would equate to something like 6 percent of GDP, a mere pittance by Japanese standards,'' Gross said.
Global growth led by developing countries and rising commodity prices will save the U.S. from Japan's experience of deflation and near 0 percent interest rates, Gross said.
Pimco, a unit of Munich-based insurer Allianz SE, manages about $800 billion. The Pimco Total Return Fund has about $129 billion in assets under management.