Jeffrey Gundlach is CEO of DoubleLine Capital. Richard Drew/`
- Jeffrey Gundlach warned that the US economy is likely to “hit a wall” next spring.
- DoubleLine Capital’s CEO sees financial pressures hurting consumer spending and slowing growth.
- The government could try to spend out of the crisis and kickstart inflation, Gundlach said.
The US economy is headed for recession as consumer finances collapse and inflation could pick up again, Jeffrey Gundlach warned.
“I think in the next six or eight months or so the economy is going to hit its limit and there’s going to be a real standstill in consumer activity because of all these interest payments that have to be made,” he told Fox Business Thursday.
The billionaire investor and CEO of DoubleLine Capital noted that many Americans have managed to put money aside during the pandemic.
They took advantage of government aid programs that included sending stimulus checks to households and providing emergency grants and loan forgiveness to businesses. All that extra cash boosted the economy and asset prices, fueling historic inflation last year.
However, consumers have practically exhausted these savings, said Gundlach. They are now faced with a “dangerous cocktail” of inflated living expenses, higher rents, higher interest payments on their credit cards, resuming student loan repayments and due taxes, he continued.
“Right now we are in a very difficult situation,” he said. “We still have very high prices, but we don’t have that much money anymore, and the excess savings are going negative.”
Gundlach – whose nickname is the “Bond King” – predicted the huge financial pressure would weigh on the economy. He warned that the Federal Reserve, which has been raising interest rates from near zero to over 5% since last spring in a bid to lower inflation, is at risk of tightening rates and should not raise borrowing costs any further.
The fixed income specialist also warned that inflation – which has slowed to around 3% from over 9% at its peak last summer – could turn into deflation in the event of a recession. The government would likely respond with excessive fiscal stimulus, which could reignite price growth, he said.
In addition, Gundlach once again sounded the alarm about federal debt. The US government could decide to borrow heavily to get out of a recession and fight deflation, which would be costly at interest rates above 5.5%, he said.
He stressed that government interest payments are already skyrocketing and warned that they could increase significantly in the coming years.
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