The huge expansion in U.S. government borrowing that began under the Reagan Administration in the early 1980s is reaching a point of unsustainability, according to Jeffrey Gundlach, CEO and CIO of DoubleLine Capital. Speaking today at the second annual Innovative Alternative Strategies Conference in Chicago, Gundlach told about 600 attendees that a huge change in government policy encompassing higher taxes and reduced entitlements is coming.
Successive administrations since 1980 working in tandem with the Federal Reserve Board issued excessive amounts of government debt to minimize the negative effects of several recessions, Gundlach said. As a percentage of GDP, government debt rose from 161% when Reagan took office, to 279% when George W. Bush became president, to 353% when Barack Obama entered the Oval Office.
Gundlach said he was "sympathetic" to those who advocated the U.S. should simply "print and pay" its way out of the current predicament and hope inflation would devalue existing debt so that it becomes easier to pay down. But he added there were too many deflationary forces to render such an outcome likely.
The jobless recovery has created "a huge generational class" of unemployed people who are likely to make their voices heard at the ballot box. While the current mood in Washington centers on austerity and spending reductions, Gundlach says that could potentially exacerbate the unemployment problem. At that point, "print and pay" might become more palatable than a Depression."
Gundlach did not seem fazed by a failure by Congress to approve a new debt ceiling limit in the short term, arguing it would not matter that much if the government was late "with one coupon payment."
Another major problem he noted was housing, which he said could fall another 10%.
The Innovative Alternative Strategies Conference is produced by Financial Advisor and Private Wealth magazines.