Bill Gross, manager of the world's largest bond fund for Pimco, has launched a stinging attack on efforts by Britain and much of the euro zone to cut debt rapidly with severe austerity measures, warning that such action risks stifling recovery.
"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not," Mr Gross told the Financial Times. "You've got to spend money."
His comments come as economists debate the effect of statistical errors in widely cited academic research by Kenneth Rogoff and Carmen Reinhart on the case for fiscal austerity. With governments in the developed world struggling to boost economic growth, the International Monetary Fund has also argued that Germany, the U.S. and the U.K. are tightening their belts too fast.
Mr Gross, who manages Pimco's $289 billion Total Return Fund, is one of the most widely followed and influential voices in the bond market.
It was a mistake to think that bond markets were demanding governments go down the route of severe fiscal belt-tightening, according to the fund manager.
"Bond investors want growth much like equity investors, and to the extent that too much austerity leads to recession or stagnation then credit spreads widen out – even if a country can print its own currency and write its own cheques," Mr Gross said.
"In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP," he said. "The question in terms of the long term and the short term is how quickly to do it."
Mr Gross also warned that expansionary monetary policies were failing to spur higher economic growth, and may prove counter-productive.
He pointed to recent moves in the gold price and inflation-linked securities as signs of changing sentiment.
"Markets are beginning to wonder about the magic of not only the [Federal Reserve], but the Bank of England and the European Central Bank, but maybe even the [Bank of Japan] in terms of whether this will all work out in the end," he said.
Mr Gross instead favoured policies that encouraged investment.
"I think, fiscally, that governments everywhere have erred in terms of their policy for one way or another and they certainly haven't induced investment as a percentage of GDP, which, we all know, is ultimately the way to prosperity."
However, governments could be running out of options: "Once you get into the quicksand it's hard to get out, both monetarily and fiscally. It's really a struggle."
So, while many investors have warned that the Fed's program of emergency bond-buying – known as "quantitative easing" – could lead to a sharp jump in inflation, Mr Gross said favored US government debt was one of the least worst investments available, or "the cleanest dirty shirt".
At the end of March the Total Return fund had a third of its assets in Treasuries, the highest level since July last year.
Mr Gross's backing for U.S. bonds contrasts with his call two years ago to avoid the country's sovereign debt, emptying the fund of it entirely.
That was a mistake that resulted in a rare year of woeful investment performance for a man ranked in the top 3 percent of bond managers over the last 15 years by Morningstar, a research group.