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American consumers are on the verge of running out of money later this year, Bill Gross has warned.
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Consumer spending is a key driver of economic growth. If it drops, a recession could result.
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Gross said aggressive government spending during the pandemic was still supporting the economy.
U.S. consumers are supporting the economy by spending their pandemic savings, but they risk running out of money later this year, Bill Gross has warned.
‘It’s fiscal policy, not just monetary policy – stupid’, billionaire investor tweeted Monday. His argument was that government spending and tax rates, along with interest rates and the money supply, affect economic growth and inflation.
“4 trillion in Covid spending continues to flow into the economy, with consumers still spending their last ~500 billion,” he continued. “The trick is knowing when to time the end. The 4th quarter is the best guess.”
Why does Gross expect consumer spending to dry up?
Inflation hit a 40-year high last year, likely fueled by government assistance during the pandemic, previous tax cuts, near-zero interest rates and the government pumping cash into the savings through bond purchases. Prices also rose because the virus and Russia’s invasion of Ukraine disrupted global supply chains.
The Federal Reserve has responded by raising interest rates north of 5% since last spring and planning further hikes. Annualized inflation fell from a peak of 9.1% last June to 4% in May, but remains well above the Fed’s 2% target.
Based on his tweet, Gross’ view is that the Fed is too focused on raising rates to beat inflation, as prices rise in part because the flood of government cash during the pandemic continues. to make their way through the economy. However, he expects this tailwind to dissipate within a few months.
The so-called “Bond King” – who co-founded fixed-income titan PIMCO and managed its flagship bond fund – is far from the only market commentator predicting a cash crisis.
For example, Michael Burry of “The Big Short” fame noted in April last year that consumers had benefited from stimulus checks, forgivable loans, cash refinance offers and tax support. indirect during the pandemic.
Under the pressure of historic inflation and rapidly rising interest rates, they began saving less, borrowing more and using the money they had hidden, setting the stage for lower spending by consumption and a blow to corporate profits, Burry said. “Looming: a consumer slump and more income issues,” he tweeted at the time.
Similarly, Bob Michele, the chief investor in JPMorgan’s asset management division, warned in April that consumers were dipping into savings and racking up credit card debt to pay for groceries and other things. essential products. “They don’t waste it on stuff, they spend it on living,” he said.
Michele’s boss, JPMorgan CEO Jamie Dimon, also said in October that US households risked depleting their savings this summer and consumer spending would suffer. “It’s pretty predictable,” he said. “This will put a strain on future numbers.”
Consumer spending is the engine of the US economy, which means that if Gross is right and he weakens this winter, there could be serious fallout.
“Be careful. Recession is coming soon,” the seasoned investor tweeted in March. He based the call on his belief that the Fed has raised rates beyond what the economy can bear, setting the stage for a credit crunch and repayment headaches for the deeply indebted US government.
Read the original article on Business Insider