PIMCO Co-Chief Investment officer Bill Gross says that if the U.S. doesn’t reform entitlement programs like Medicare and Social Security and/or raise taxes, it will default on its debts — though not in the traditional sense of “defaulting”.

“Without attacking entitlements — Medicare, Medicaid and Social Security — we are smelling $1 trillion deficits as far as the nose can sniff,” Gross writes in his latest commentary on PIMCO’s web site. “Once dominated by defense spending, these three categories now account for 44% of total Federal spending and are steadily rising.” (Gross includes a chart that shows that figure is only 2 percentage points above the 40-year average for entitlement spending, however.)

Gross says that the U.S. federal debt of $9.1 trillion is only the tip of the iceberg. Unfunded Social Security, Medicare, and Medicaid liabilities account for $66 trillion, he contends. Without addressing those liabilities, Gross says the U.S. will essentially default on its debts in one 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.”