Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian says recent turbulence in the financial markets is “not just normal volatility. … [I]t’s “unsettling.”
By BRIAN CALLE / Register columnist
When the chief executive of a global investment firm that manages assets in the neighborhood of $1.4 trillion calls current economic goings-on "unsettling," it is probably wise to take heed. That's precisely what Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian told an audience of more than 200 people at the Big Canyon Country Club in Newport Beach. This is "not just normal volatility," he said referring to recent turbulence in the financial markets, it's "unsettling."
El-Erian's address Nov. 17 was a diagnosis of current economic woes, their causes and general observations about what might create laudable economic growth and quell global markets.
What concerns El-Erian and his colleagues at Newport Beach-based PIMCO are what the company terms "unthinkables," those worst-case scenarios of economic upheaval. Some "unthinkables" became reality in the third quarter of this year, El-Erian observed, such as the United States losing its AAA credit rating and U.S. policymakers flirting with a technical default.
Many of the problems are political, some are social. But the problems have been a long time coming and recent social discontent manifested through global social movements further highlights challenges facing the global economy.
El-Erian identified politicians and policymakers as major barriers for economic growth. He noted that American society has "transferred enormous power to the politicians and policymakers." And unfortunately, "politicians are driving." He said it is like policymakers are driving the car without a map on an "unfamiliar road and all of us are sitting in the back seat." "They haven't told us where we are going" nor have they provided a "vision for the U.S. economy." Instead the politicians are "arguing amongst themselves;" there is "no clarity." His observations exemplify broader public angst towards policymakers and politicians at virtually all levels of government.
BAILOUT FALLOUT
The PIMCO chief discussed some government policies that have led to increased social discontent, most notably when he called United States bank bailouts a form of "socialism." The bailouts were sold to the world promising to "restore growth and employment," he said, but "neither occurred." This is one source of social unrest in the U.S. because, as El-Erian has noted, previously, it is the perception of the public that government "privatized massive gains and socialized massive losses." Growing numbers of people throughout the world are beginning to "believe the capitalist system is not fair."
In addition, knee-jerk government efforts at economic intervention have largely failed at a time when long-term, multi-year planning and vision are necessary. "The West," he said, has been unable to grow its way out of this recession "despite massive stimulus." He listed a number of "impediments" such as the depressed housing market, labor market problems and structural, long-term unemployment, as well as limited access to credit.
Trouble spots
Two areas El-Erian highlighted as being particularly troublesome are "unhealthy balance sheets" of government and homeowners, and youth unemployment. He said that the "unhealthy balance sheets are dictating the future of Europe, possibly the U.S., too," a dangerous economic proposition. Also, unemployment rates for those between the ages of 16 to 19 are staggering. "That scares us the most," he said, because when young people are unemployed for long periods of time they run the risk of becoming unemployable.
For a substantial U.S. economic recovery, El-Erian says the nation needs its economic "Sputnik moment" – a societal coming together for a "common purpose" and shared vision. "We need our political system to come together and understand that we have structural problems, and we need a multiyear plan" to address them. "Social movements pull the parties further apart" at a time when "coming together is necessary."
For Europe, El-Erian, like many scholars, contends that Germany is the key. "Europe needs its moment of truth," he said. "Germany is the most powerful country. They have the checkbook, and they must act before things will get better." He said that Germany should make one of two decisions: either decide all 17 eurozone countries are a fiscal union and in solidarity, pay for the other countries (much like the German reunification solidarity tax used to rebuild Eastern Germany) or not pay, and move towards a "smaller, less-imperfect union." From El-Erian's view, one of those must occur to solve the challenges in Europe.
SPEND, CHINA, SPEND
Finally, he said, the Chinese government could take measures to encourage spending by its middle class, which he said has the capacity to spend but not the will. If China changed policies to encourage spending "it will open up a huge market."
For the individual investor, El-Erian called for "general defense and selective offense," as well as "intellectual agility."
While global volatility amplified by social, political and economic unrest in the United States and abroad has made for "unsettling" times, these challenges are not insurmountable.
Contact the writer: bcalle@ocregister.com
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