US - Old Mutual Asset Managers' head of fixed income Stewart Cowley has slammed the US for failing to rein in its growing budget deficit, warning it risks ingraining inflation in the nation's psyche.
Speaking at a Morningstar Investment Conference this week, Cowley said the US budget deficit resembles an over-leveraged hedge fund, and urged the Federal Reserve to start cutting the deficit now before inflation expectations become embedded.
"US borrowing is nearly at the $9trn mark. This kind of borrowing is grotesque and simply cannot go on," said Cowley.
"US reserves look like an 80 times leveraged hedge fund, and no-one would want to buy that, but the country just keeps on unreservedly spending $1.5trn a year. The consequences will eventually result in inflation being embedded in the economy."
Cowley said the US needs to follow in Europe's footsteps by addressing its loose fiscal policy, and added until the US stops spending and tightens its monetary policy, he would not even consider buying treasuries or the dollar.
The UK needs to be tougher in slashing its budget deficit, the manager added, warning if the government gives in to pressure to soften its spending cuts, it could put the UK at risk of needing a bailout.
"The UK cannot pull back on its spending cuts, and in fact I think the government needs to be tougher, otherwise it will be at risk of mirroring the likes of Spain, Greece and Ireland."
Cowley added he is bullish on commodity currencies given the inflationary environment, and will look to invest in European government bonds when the region becomes less indebted.
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