This month's column is about Bill Gross, who heads Pimco, the world's largest bond fund. We spent a couple of hours talking about his portfolio, and why he's bearish on Treasury bonds. When this news came out, a lot of commentators seemed to think that this meant that he was predicting a high likelihood of imminent default, but that isn't the case. What he's worried about in the near term is the low yields, bred of Fed intervention and the global "flight to quality".
But over the longer term, of course, he's worried about the deficit. But unlike many deficit hawks, he doesn't care how we close it. I asked him specifically whether he though it mattered whether we closed the deficit using tax hikes or spending cuts, and though he said he personally thinks we ought to raise taxes on people like him, he professed himself basically indifferent between higher taxes or lower spending--he doesn't think that the economic effects of one are obviously worse than the other.
Keep that in mind when you hear people arguing about austerity:. People like Bill Gross are the ones we ultimately need to convince, because they're the ones whose defection will precipitate a crisis. And he's not buying either supply-side claims that tax hikes will cause disaster, or the super-Keynesian argument that we can't cut spending because the economy will contract so fast that we'll actually end up with a bigger deficit. All he cares about is the math: do the numbers add up, or not?