Why Bill Gross' Latest Warning About An American "Default" Is A Shameful Form Of Book Talking (TLT, TBT)

In an interview this week with Reuters, PIMCO's Mohamed El-Erian said his firm might get back into Treasuries if they got cheaper.

This came a day after his PIMCO partner Bill Gross predicted "default" in America.

Now you'd think that if America were going to default, then you really wouldn't be buying Treasuries unless they traded at truly distressed levels, or buy them at all.

So what gives?

Well, Bill Gross has a really liberal default.

Remember what he wrote: "...the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar  – currently taking place right in front of  our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain."

Now when most people hear that an entity is going to default, they think of the first definition: contractual abrogation -- i.e.,, the government literally not making that payments that it owes. And yet he doesn't see that as possible (he says that's "uthinkable"). So he expands the definition of default to include inflationary policies or weakening the dollar, which may hurt some people (and help others!), but is surely not what people think of when they hear that word.

And yet, what you hears is BILL GROSS PREDICTS DEFAULT, which is a particularly shameful way of talking your book since the idea is to scare people out of their Treasury holdings to the point where PIMCO -- which is looking for a cheap entry point, as El-Erian admits -- can start buying them again.

Obviously everyone talks their book all the time in the investment industry, but attempting to terrify people and shake confidence in the government's finances -- at a time when there is actually talk about a REAL default, in the form of not hiking the debt ceiling -- is a scandal.

Now, click here for a guide to America's gigantic debt >

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See Also:

• Mohamed El-Erian Describes How PIMCO Prepares For And Responds To A Crisis

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