Chrystia Freeland

Yesterday Chrystia sat down with PIMCO CEO Mohamed El-Erian, Washington Post columnist George Will, and former Council of Economic Advisors Chairman Austan Goolsbee on the set of ABC’s This Week with Christiane Amanpour. Here’s the video of their discussion about the latest developments in the European debt crisis, China’s economic slowdown, and other dangers facing the global economy today:

Also, be sure to check out El-Erian’s op-ed on Europe’s crisis that Reuters published today.

As Chrystia threatened at the end of her interview with Mohamed El-Erian today, we’ve compiled all the questions our readers submitted via the Newsmaker blog and Twitter and e-mailed them to him. El-Erian will be flying to Europe tonight after he finishes up his business in New York, and while we do hope he gets a little sleep, we also hope he stays up long enough to answer all of your questions.  We’ll post his answers right here once we receive them.

Global Markets

Are the current “mixed signals” by the various markets similar to the ones you said were being transmitted before the financial crisis, and do you think that the current stock market trading activity signals caution, confidence or complacency? (from i8emallup)

Are the markets too complacent about potential risks to growth (disturbance in global production chains, fiscal tightening) and inflation (Japans expected demand for resourses, continued strength in China, core EMU)? (From Michael D-R)

What percentage chance exists of default by G20 & G7 governments? (from Mark Melin)

Middle East

How can the Middle East conquer corruption and power-abuse that has been inherited for generations? is there hope in the new “governments”? (From Lalla Nashta)

Would you give us your views on how Egypt shall grow economically and socially ?? (From mohamedino)

Japan

What do you think about the next steps for BOJ in the near term? (from Murad Halaiqa)

U.S. Economy

The US is approaching the end of QE2. What do you think would have been a better option? (question from GKhalifa)

Do you really feel the full faith and credit of the US Government is at risk? from (amj)

Why should the Fed permit large US banks to return the $1T in cash on their balance sheets to stockholders when several are technically insolvent now? (from triwealth)

Posted by Peter Rudegeair.

To Mohamed El-Erian, the world’s major reserve currencies — the dollar, the euro, and the yen — are a bit like your dirty laundry; every shirt is dirty, but compared to the alternatives, they historically have been the “cleanest dirty shirts.”  El -Erian thinks that arrangement will not last forever.  He tells Chrystia that a long-term trade that PIMCO likes is a long position in the currencies of the successful emerging markets — the clean shirts — funded by the currencies of the U.S., the EU, and Japan.

El-Erian forecasts a medium-term weakening of the yen as Japan will repatriate more funds than the market currently expects in order to finance reconstruction.  Of the three options Japan has for funding reconstruction — borrowing, repatriating funds, or monetizing debt — repatriation has the fewest risks.  With a debt-to-GDP ratio well north of 200% and a diminished credit rating of AA-, borrowing money or monetizing debt could each cause a rise in Japan’s interest rates.

In the near-term, though, before Japan can think about reconstruction it will have to muddle through the immediate aftereffects of the tsunami: a one-off destruction of wealth and a 25% reduction in Japanese energy generation.  El-Erian pointed out that auto companies and tech firms around the world continue to announce production slowdowns due to the tsunami’s of supply chains — just two days ago Ford announced a temporary shutdown of a factory in Belgium in order to preserve car parts.  His biggest worry is the “stagflationary wind” that’s blowing from Japan towards the rest of the global economy.

Posted by Peter Rudegeair.

Reuters finance blogger Felix Salmon has previously written that “if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache” of PIMCO CEO Mohamed El-Erian.  Well, this morning Chrystia sat down with this famous bond vigilante for an hour-long Thomson Reuters Newsmaker interview and asked him why PIMCO decided to dump all of its holdings of U.S. government bonds earlier this month.  Here’s what he had to say:

Everything you buy and hold must have value; it’s that simple…  And our estimation at the time was that there was better value elsewhere…  Now if the valuations of Treasuries change — and it has been changing; they have been getting cheaper — we will revisit that.  But when we looked at what else was available, you have Treasury-like instruments that offer you a lot more value than Treasuries.  You have government instruments in other countries that offer you more value.  We made a portfolio decision that said at these prices we find better value elsewhere in the fixed-income market for this mutual fund, and as it turned out, that was the right decision to make.

El-Erian listed three concerns PIMCO had about the market for U.S. bonds.  First, the Fed, which has been buying 70% of new Treasury issuance in its second round of quantitative easing, will cease it purchases in June, and it is unclear who will step in to buy Treasuries at current prices.  As El Erian said, “when you can’t identify a buyer, you don’t want to hold that instrument.”  Second, El-Erian doubts that Washington can find a political solution to the U.S.’s medium-term fiscal problem in the near future.  Finally, U.S. inflation is a worry for PIMCO.  Though increases in the prices of food and energy have yet to feed back into core inflation, El-Erian’s experience investing in emerging markets has taught him that the convergence point between headline and core inflation will be higher this time around than it has been in recent decades.

In response to questions via Twitter about the Fed’s latest round of quantitative easing, El-Erian said “I would not have done QE2.”  He speculated that the only reason the Fed undertook a second round of asset purchases was because it believed Congress would not pass an additional fiscal stimulus, and that had the Fed known there would be an extension of the Bush tax cuts and a payroll tax cut, it would not have started QE2.  El-Erian also doubted the Fed would embark upon a third round of quantitative easing after the current program ends in June, citing an improving economic outlook at a bleaker political situation:

Posted by Peter Rudegeair.

It has been a bad couple of weeks for what Vitali Silitski, a political scientist, calls the Authoritarian International.

Mr. Silitski is from Belarus — a good background for studying authoritarian rulers — and he is a student of the troubling way in which the world’s autocrats responded to the “color” revolutions in some former Soviet republics a few years ago by increasing repression at home and forming a loose international support group.

China is the star of this Authoritarian International, with its robust growth guided by a government that quashed the 1989 Tiananmen Square protests but now wins plaudits even from many Western business leaders who concede that it is often better at getting things done than querulous democracies.

But just as the Authoritarian International drew strength from the Chinese model and the so-called “Beijing Consensus” it inspired, the uprisings in Egypt and Tunisia have been unsettling for the world’s unelected rulers.

“When you see somebody like Chávez in Venezuela reaching out to somebody like Ahmadinejad it is clear these authoritarian regimes are forming an alliance that helps them to maintain their control,” Aryeh Neier, the president of the Open Society foundations, said, referring to President Hugo Chávez of Venezuela and President Mahmoud Ahmadinejad of Iran. “If I were Hu Jintao,” he said of the Chinese president, “I would be nervous at this moment.”

If you happen to be a dictator, the scariest thing about the Egyptian uprising is its suddenness.

Mohamed A. El-Erian, chief executive of the bond giant Pimco, is the son of an Egyptian diplomat, holds an Egyptian passport, and spent much of his childhood in Egypt. He is an expert in emerging markets, where regime change is the norm, and he spent Christmas with his family in Egypt. But he, like everyone else, was taken by surprise.

“These processes aren’t linear,” Mr. El-Erian said. “Nothing happens, and nothing happens and nothing happens, and then everything happens. The protest movement got ahead of policy makers in both Egypt and the West.”

That was certainly true last week at the annual meeting of the World Economic Forum in Davos, Switzerland, which largely ignored the world-changing events in the Middle East in its long-set official program. Yet Egypt was the talk of the corridors and cafes, and, apart from the Arab participants, some of the most riveted were the Russians.

That is because, as the Russian opposition leader Boris Y. Nemtsov said by telephone from Moscow this week, “many in Russia are drawing direct parallels between Mubarak and Putin.”

A key similarity between the Egyptian leader and Prime Minister Valdimir Vladimir V. Putin, in the view of Mr. Nemtsov, a former deputy prime minister and provincial governor, is that “both are corrupt regimes and both regimes have been about the enrichment of a small group of people around the leader.”

Mr. El-Erian agrees that the gap between the super-privileged and everyone else was an Achilles’ heel of the Mubarak regime.

That weakness was invisible — or deemed irrelevant — to many because of the growth of the economy overall.

But the lesson of history is that the most fragile authoritarian regimes aren’t necessarily the poorest ones. They are often those where the economy is doing reasonably well, but where gains are unequally shared. Hence, for example, the complaints in Tunisia about the enrichment of Leila Trabelsi, wife of the deposed president, and her family.

“In Egypt, there was an income distribution problem, even though the economy was growing impressively,” Mr. El-Erian said. “But there wasn’t enough trickle down.”

China’s mandarins are seen by some as the world’s smartest authoritarians. One example might be the information war that China has waged around the events in Egypt, restricting online access to independent news while in the official media emphasizing the “chaos” attendant upon the uprising.

Another is that Chinese leaders are conscious of their vulnerability to public perceptions that Communist Party rule is about enriching the cadres, rather than generating prosperity as a whole. That is why the most surprising story out of China recently was the conviction of Li Qiming, son of a senior police official, who ran over and killed a young woman.

At some level, the Russians have listened. Speaking in Davos before the uprising in Egypt had gathered true force, President Dmitri A. Medvedev said: “What happened in Tunisia, I think, is quite a substantial lesson to learn for any authorities. The authorities must not simply sit in their convenient chairs but develop themselves together with the society. When the authorities don’t catch up with the development of the society, don’t meet the aspiration of the people, the outcome is very sad.”

Mr. Nemtsov doesn’t think that Russia’s rulers will necessarily heed that advice. Russia has oil, he noted, “but the Russian regime is so corrupt it requires the price of oil to constantly increase. Oil won’t save Putin.”

For the West, one conclusion must be that even though authoritarian plutocrats can be easier to work with than dissidents — a few weeks ago, Hillary Rodham Clinton, the U.S. secretary of state, has spoken publicly about her warm personal friendship with Mr. Mubarak and his wife, Suzanne, who has upheld women’s rights — staying close to the activists is not just morally justifiable, it is pragmatic, too.

Carl Bildt, the Swedish foreign minister, wrote in an e-mail that one indirect consequence of the uprising in Egypt will be that “Western governments will be more alert to the need to reach out to civil society in these societies and be more proactive on some sort of democracy agenda.”

He sent that message from Warsaw, where he was working to support the beleaguered opposition in Belarus.

Indeed, the hardest part of overthrowing authoritarian regimes is often the day after. “If you look at the most successful transitions — Poland, Mexico, Taiwan — they’ve been long hauls,” said Lucan Way, a political scientist at the University of Toronto. “You want there to be established oppositions, and that doesn’t happen in a two-week period.”

Mr. Silitski argues that the Authoritarian International was emboldened by the disappointing performances of the governments that were installed by the color revolutions — the Rose Revolution in Georgia, the Orange Revolution in Ukraine, and the Tulip Revolution in Kyrgyzstan.

What one might dub the Democracy International could be needed now to prevent a similarly disappointing second act in the Arab world.

Mohamed El-Erian, PIMCO’s CEO, is #45 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is a “recognition that we are living in a period of major global realignment.”  This rapidly changing environment favors emerging markets, which are accustomed to periods of upheaval, as well as businesses, which have the metrics and flexibility required to make quick course corrections. The developed world has been hobbled by years of inertia, he says, and is at a disadvantage in responding to these global shifts.

In El-Erian’s eyes, being an outsider is fundamentally connected to being a top global thinker.  He credits his unconventional background — growing up in Egypt, studying four different schools of economics at Cambridge, and analyzing emerging markets for 15 year at the IMF — with his ability to spot the realignment in world economic growth towards the developing world.

El-Erian attributes PIMCO’s success to its heterodox culture — the investment giant’s motto is to be “constructively paranoid,” and once a year management invites a “shadow” investment committee to its Newport Beach offices to second-guess the portfolio managers’ investment decisions.

In FP‘s words, El-Erian belongs on the list “for reminding us just how bad things could get:”

The world’s best financial minds have closely watched the prognostications of this Oxbridge-trained economist ever since January 2007, when Mohamed El-Erian, then the head of Harvard University’s endowment, bet $1.6 billion of the school’s money that global markets were headed for a downturn — and turned out to be right.

Author of the 2008 book When Markets Collide, a former IMF economist, and head of investment colossus Pimco, El-Erian helped popularize the term “the new normal” to describe the post-crisis economic era: one in which growth remains stubbornly low everywhere but the developing world. This year, as hopes for a rapid recovery have faded, he has penned a series of full-throated articles warning that world leaders aren’t taking the potential consequences of a prolonged downturn seriously enough.

Read more about El-Erian at Foreign Policy.

Posted by Peter Rudegeair.

In conjunction with her essay in Foreign Policy‘s Top Global Thinkers issue, Chrystia interviewed six of the financial luminaries that made the list:

MIT’s Daron Acemoglu, Yale’s Robert Shiller, PIMCO’s Mohamed El-Erian, Columbia’s Joseph Stiglitz, the University of Chicago’s Raghuram Rajan, and NYU’s Nouriel Roubini.

Reuters and Foreign Policy will be showing these interviews over the next coming days.  This one is a compilation of the above six global thinkers.

Posted by Peter Rudegeair.

Chrystia wrote an essay for Foreign Policy’s Top 100 Global Thinkers Issue on the economists and financiers whose ideas survived the financial crisis:

In a letter to shareholders written just after the dot-com bust, Warren Buffett observed, “You only find out who is swimming naked when the tide goes out.” The 2008 financial crisis had a similar effect on our economic and financial gurus: It revealed whose thinking was based on whiggish, End-of-History assumptions about the essential triumph of Western democratic capitalism and whose mental framework admitted the possibility of radical disruption. The thinkers whose intellectual — and maybe even psychological — starting point was that Western market democracy is neither perfect nor eternal turned out to be much better at foreshadowing the financial crisis, and it is those thinkers whose ideas are the most relevant today, in the uncertain, post-crisis world.

These specialists in uncertainty are a broad church: They range from academic economists who saw the crisis coming, like New York University’s Nouriel Roubini and the University of Chicago’s Raghuram Rajan, to philosophers of finance like George Soros and Mohamed El-Erian, who have made huge market bets, as well as intellectual ones, on how bubbles are formed and how they burst. One striking similarity between many of them is that they have seen regime change up close.

The most dramatic example is Soros, whose formative life experience was the Nazi invasion of Budapest when he was 13 years old. That trauma taught him two things: that the world could change overnight, and that those, like his beloved father Tivadar, who responded to that upheaval instantly were the ones who survived. Roubini, who is sometimes caricatured as either Dr. Doom or the Hugh Hefner of the dismal-science set, is likewise best described as a specialist in revolution. He spent his childhood being moved around volatile parts of the world from Istanbul to Tehran to Tel Aviv — and began his career as an economist studying the 1990s emerging-markets crises in Latin America, Asia, and Russia. El-Erian, Rajan, and Daron Acemoglu, a widely cited young Turkish economist, also have both personal and professional experience of rapidly, and sometimes traumatically, changing social and economic orders.

These men were all born or at least partly raised outside the United States. That is surely no accident. In the 20th century, and even in the 19th and 18th, America was the world’s laboratory, the place where many of the best, and most revolutionary, ways of organizing government and the economy were being worked out. The United States is still the world’s most powerful country and most intellectually vibrant — after all, these global thinkers now make their home in America — but partly because the United States is so big and has been so prosperous for so long, American-centric thinkers have been relatively slow to spot the challenges to the Washington Consensus and offer coherent alternatives.

Being a “global nomad,” as Roubini calls himself, has another intellectual advantage. Thanks to communism’s collapse, the lowering of trade barriers, and the technology revolution, the world economy is more interdependent than ever. This group takes America’s connection to the global economy as the starting point for its analysis — hence El-Erian’s emphasis on global financial imbalances (also a signature theme of Martin Wolf‘s Financial Times columns) and the relationship Rajan traces between rising income inequality and its U.S. political manifestation in subprime mortgages.

This crew is all about big ideas and the big picture — their frame of reference is global, and their intellectual strength is their ability to understand that entire economic systems can, and do, collapse. Paradoxically, the opposite impulse is simultaneously in fashion: You might call it the economics of small steps, an approach that eschews the big theory altogether in favor of smaller, achievable, and, crucially, measurable proposals.

Posted by Peter Rudegeair.