'Bond King' Bill Gross predicts American consumers will run out of cash later this year, paving the way for a recession

• American consumers are on track to run out of cash later this year, Bill Gross has warned.
• Consumer spending is a key driver of economic growth. If it drops, a recession might be the result.

American consumers are propping up the economy by spending their pandemic savings, but they're likely to run out of cash later this year, Bill Gross has warned.

"It's fiscal policy not just monetary policy — stupid," the billionaire investor tweeted on Monday. His point was that government spending and tax rates, along with interest rates and money supply, affect economic growth and inflation.

"4 trillion of Covid spending still dripping into economy with consumers still spending their last 500 billion or so," he continued. "The trick is when to time the end of it. 4th quarter is best guess."

Why does Gross expect consumer spending to dry up?

Inflation surged to a 40-year high last year, likely fueled by public aid during the pandemic, previous tax cuts, near-zero interest rates, and the government injecting cash into the economy via bond purchases. Prices also rose because the virus and Russia's invasion of Ukraine disrupted global supply chains.

The Federal Reserve has reacted by lifting interest rates to north of 5% since last spring, and penciling in further hikes. Annualized inflation has dropped from a peak of 9.1% last June to 4% in May, but remains well above the Fed's target rate of 2%.

Based on his tweet, Gross' view is that the Fed is too focused on hiking rates to conquer inflation, when prices are rising in part because the flood of government cash during the pandemic is still working its way through the economy. He expects that tailwind to dissipate in a matter of months, however.

The so-called "Bond King" — who cofounded fixed-income titan PIMCO and managed its flagship bond fund — is far from the only market commentator to predict a cash crunch.

For example, Michael Burry of "The Big Short" fame noted in April last year that consumers benefited from stimulus checks, forgivable loans, cash-out refinancing offers, and indirect fiscal support during the pandemic.

Under pressure from historic inflation and fast-rising interest rates, they began saving less, borrowing more, and using the money they stashed away — paving the way for a drop in consumer spending and a blow to corporate profits, Burry said. "Looming: a consumer recession and more earnings trouble," he tweeted at the time.

Similarly, Bob Michele, the chief investor of JPMorgan's asset-management division, warned in April that consumers were tapping their savings and racking up credit-card debt to pay for groceries and other essentials. "They're not frittering it away on stuff, they're spending it to live off of," he said.

Michele's boss, JPMorgan CEO Jamie Dimon, also declared in October that American households were likely to exhaust their savings this summer, and consumer spending would suffer. "It's quite predictable," he said. "It will strain future numbers."

Consumer spending is the engine of the US economy, meaning that if Gross is correct and it does weaken this winter, there could be severe fallout.

"Be cautious. Recession to come soon," the veteran investor tweeted in March. He based that call on his belief that the Fed has hiked rates beyond what the economy can handle, paving the way for a credit crunch and repayment headaches for the deeply indebted US government.