Mohamed El-Erian http://blogs.reuters.com/mohamed-el-erian Mohamed Mondays Mon, 06 Feb 2012 17:50:13 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Learning from tomorrow’s leaders http://blogs.reuters.com/mohamed-el-erian/2012/02/06/learning-from-tomorrows-leaders/ http://blogs.reuters.com/mohamed-el-erian/2012/02/06/learning-from-tomorrows-leaders/#comments Mon, 06 Feb 2012 17:42:28 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=172 Have you tried speaking to a group of bright high school students wondering about what the current state of the world means for them and what they should do about it? I am grateful to have done so last week: I ended up gaining insights into how some of tomorrow’s leaders are thinking about the world they will inherit.

My presentation was divided into three parts. The conversations that ensued, both at the talk and thereafter, were broader in scope and, yes, much more interesting.

We first tried to construct a framework that finds common links among headlines that many teenagers find troubling, and understandably so. Unfortunately it is a rather long list, including indicators of too few jobs, too much debt, growing social tensions, squabbling and ineffective politicians and, more generally, a sense that America is losing vibrancy at a time when some other parts of the world are getting stronger and less predictable.

To identify these links we spoke about why and how confidence is eroding in America’s ability to deliver on its long-standing promises of prosperity, opportunity and social fairness. We then traced this to damaging institutional failures in the private and public sectors, insufficient investment in America’s future, multiyear debt dynamics and the realities of fundamental global realignments.

Our second challenge was to ask whether this state of affairs is reversible. The answer is clearly yes, but it will take a major, comprehensive, sustained effort to change some things and to do others much better. This will only occur if, first, there is a better sense of shared responsibility and, second, our elected representatives overcome their inclination to bicker and instead converge on a common vision and purpose.

The third and most difficult challenge was to translate all this into action items for these talented students to debate and pursue. Yes, they were exceptionally fortunate in that their schooling exposed them to strong academics, deep educational traditions and a good sense of community; but they owed it to themselves, their families and society to go well beyond that.

Certain items were easy to convey, like the importance of continued education. Just think, according to the jobs report released last Friday, the unemployment rate for those with less than a high school education was 13.1 percent in December compared with the national average of 8.3 percent and just 4.2 percent for those with an undergraduate degree or higher.

The importance and merit of intellectual curiosity and agility were also readily conveyable. They are easily reinforced by stories of the inventors of many of today’s products that teenagers deem indispensable.

Other potential “to-do’s” are equally important, such as keeping an open mind and, critically, doing so in a global and humble manner. We should all be more willing to learn more from other parts of the world, including those that traditionally have been deemed “developing.” As an illustration, consider how European leaders could have spared their citizens quite a bit of pain had they not arrogantly dismissed the parallels between Europe’s current crisis and those experienced by emerging economies in the 1980s, 1990s and early 2000s.

The interactions on these issues were wonderful. They gave me a feeling, albeit partial and imperfect, of how bright, high-achieving students can (and should) make a material difference in the world as they climb their educational, professional and maturity curves.

There were also important lessons for us older generations.

We should not underestimate the extent to which this group risks losing trust in the ability of the “system” to deliver. The disappointment of these students would have less to do with the system itself and more to do with how our generations have ended up running it.

If my experience is any indication, it is wrong to think that America’s youth is driven by entitlements. Rather, young people are seeking a system that enables opportunities that, combined with their talents and ambitions, can restore America’s competitiveness, confidence and sense of fairness.

We should also seek to understand even better the emergence of youth-based social movements around the world, such as Occupy in the U.S. and UK, the Indignados in Spain, protesters in Israel and, of course, those that unleashed the uprisings in the Arab world. What some adults erroneously view as “just noise,” many others see as legitimate and much-needed catalysts for raising awareness, fueling national debate and influencing better outcomes.

We should stress even more the importance of improving the distribution of income and wealth. More people now have a better feel for how the large and growing inequality gaps undermine the collective well-being.

This is not just about social justice. Self-interest is also in play here, even for the richest in the world. To use a housing analogy, it is hard to be an improving home in a deteriorating neighborhood.

Finally, we should not underestimate young people’s resistance to passively accepting projections that suggest that, for the first time in a very long time, their generation is on course to end up worse off than their parents. They do not want this distinction. Moreover, many feel that they can — indeed must — prove the projections wrong.

There is a lot for us all to learn from how high schoolers think about today’s world and that of tomorrow. Indeed, today’s rather dysfunctional political discourse would gain from the insights and instincts of those who are still too young to vote.

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Davos at a distance http://blogs.reuters.com/mohamed-el-erian/2012/01/17/davos-at-a-distance/ http://blogs.reuters.com/mohamed-el-erian/2012/01/17/davos-at-a-distance/#comments Tue, 17 Jan 2012 17:10:43 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=158 I’ve never been to Davos, despite attempts by many over the years to persuade me to go. Don’t get me wrong. I understand that it is a special event for many people, and for many reasons. It is anchored by wide-ranging and engaging agendas, and participants get to mingle with a global cornucopia of important people. It is also the place to see and be seen for heads of state, politicians, academics, thought-leaders, media pundits, CEOs, and movie stars.

The annual meeting of the World Economic Forum in that intimate setting remains one of the year’s hottest tickets, but its organizers want their event to be much more than what it currently is—a big, prestigious talk-shop. They want it to influence policy at the national, regional, and global levels.

Yet, over the years, and in the context of an increasingly unsettled and uncertain world, Davos has not had much impact.

I get a range of responses when I ask attendees why so few, if any, of the interesting discussions that have taken place in those beautiful Swiss Alps have led to change that improves the lives of most people.

Some say the strength of the typical Davos agenda is also a weakness. The topics are overly ambitious. In trying to cover too much for too many, breadth trumps depth.

Others cite the inherent difficulty of distilling the opinions of such a varied group of people into specific action points. This is never an easy endeavor, and it becomes a virtually impossible one when it involves so much wealth and so many egos.

Then there are those who believe that too much time is spent arguing about what has happened—especially when things have gone horribly wrong—and too little time is devoted to what lies around the next corner, and the one after that.

But most of the Davos devotees I talk to say the problem is more fundamental. They say that many of the attendees who truly matter are not interested in the organizers’ higher ambitions, and some are even suspicious of them. In either case, these key players do not want to give up control of their narratives, and they certainly do not wish to delegate any meaningful part of their personal agenda to Davos.

It will be difficult to overcome these obstacles unless Davos organizers make major changes. Specifically, they need to do two things that no one who puts on such events has seemed willing or able to do.

First, they must revise how Davos’s agendas and discussions are structured.

To be more productive, more useful, they need to be much less inclusive at some key moments. Very difficult (and highly delicate) decisions have to be made about who to involve in certain meetings and who to exclude. This would require additional (and closely monitored) status levels for participants, which could only be implemented by changing the World Economic Forum’s current role of convener/facilitator into a much stronger one of super-conductor/enforcer.

Second, key participants must truly collaborate—something that has not happened. This lack of collaboration has been particularly costly at a time when the world teeters on the brink of an economic abyss.

Shared interests must come with a greater sense of shared responsibilities. Narrowly focused national agendas must develop greater peripheral vision, and mutual assurances must be supported by credible peer reviews. The probability of these things being done is small, if not de minimis.

I am not happy about this. Given the global changes in play today, there is an enormous need for better coordination and understanding among those who influence developments in critical areas. This world has lost many of its economic and socio-political anchors, and leaders are finding it impossible to keep up with developments on the ground. Suspicion too often displaces mutual trust, which is why this prestigious gathering will continue to fall short of its vast potential.

Even if nothing really consequential gets done there, Davos will remain a hot ticket, but I will not be going.

 

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The new international economic disorder http://blogs.reuters.com/mohamed-el-erian/2011/12/21/the-new-international-economic-disorder/ http://blogs.reuters.com/mohamed-el-erian/2011/12/21/the-new-international-economic-disorder/#comments Wed, 21 Dec 2011 19:35:04 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=150 By Mohamed El-Erian

The views expressed are his own.


A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling.

For decades, many people lamented the extent to which the West dominated the global economic system. From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests. While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.

On the few occasions that such resistance was seemingly overcome, the outcome was gradual and timid change. Consequently, many emerging-market economies lost confidence in the “pooled insurance” that the global system supposedly put at their disposal, especially at times of great need.

This change in sentiment was catalyzed by the financial crises in Asia, Eastern Europe, and Latin America in the late 1990’s and early 2000’s, and by what many in these regions regarded as the West’s inadequate and poorly designed responses. With their trust in bilateral assistance and multilateral institutions such as the International Monetary Fund shaken, emerging-market economies – led by those in Asia – embarked on a sustained drive toward greater financial self-reliance.

Once they succeeded in overcoming a painful crisis-management phase, many of these countries accumulated previously unthinkable levels of international reserves as precautionary cushions. They extinguished billions in external indebtedness by generating and sustaining large current-account surpluses. And they increased the scale and scope of domestic financial intermediation in order to reduce their vulnerability to external storms.

These developments stood in stark contrast to what was happening in the West. There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.

Suddenly, the world turned upside down: “rich” countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.

Little did these countries know that their divergent paths would end up fueling large global imbalances, and eventually trigger a financial crisis that has shaken the prevailing international economic order to its foundations.

There is no restoring fully that order. Rather than recovering strongly, sluggish Western growth is periodically flirting with recession at a time of high unemployment and multiplying debt concerns, particularly in Europe. In an amazing turn of events, virtually every Western country must now worry about its credit ratings, while quite a few emerging economies continue to climb the ratings ladder. We can now consider the image of Western delegations heading to emerging countries to plead, cap in hand, for financial support, both direct and through the IMF.

At first blush, this unusual convergence between Western and emerging countries seems to reflect what advocates of a new international economic order had in mind. But appearances can be misleading, and, in this case, they are misleading in a significant way.

Advocates envisaged an orderly process in which economic convergence accompanied and facilitated global economic growth. They foresaw a collaborative process guided by enlightened policymaking. But what is occurring is far different and more unpredictable.

Rather than exhibiting enlightened leadership, Western policymakers have consistently lagged realities on the ground, with a bewildering mixture of denial, misdiagnosis, and bickering undermining their responses. Rather than proceeding in an orderly manner, today’s global changes are being driven by the disorderly forces of de-leveraging emanating from a Europe in deep financial crisis and an America seemingly unable to restore sustained high rates of GDP growth and job creation.

Multilateral institutions, particularly the IMF, have responded by pumping an unfathomable amount of financing into Europe. But, instead of reversing the disorderly deleveraging and encouraging new private investments, this official financing has merely shifted liabilities from the private sector to the public sector. Moreover, many emerging-market countries have noted that the policy conditionality attached to the tens of billions of dollars that have been shipped to Europe pales in comparison with what was imposed on them in the 1990’s and early 2000’s.

Fortunately, despite having lagged rather than led this process of consequential (and increasingly disorderly) global change, it is not too late for policymakers to catch up. But doing so requires more than just better national policymaking in Europe and America; it is also time for urgent and deep reform of the multilateral system and its main institutions. That process requires joint leadership by the emerging world as a true equal and partner of Western powers.

Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide.

Copyright: Project Syndicate, 2011.
www.project-syndicate.org

PHOTO: International Monetary Fund’s Managing Director Christine Lagarde (C) smiles with Nigeria’s Finance Minister Ngozi Okonjo-Iweala (R) as they hold a joint news conference in Lagos December 20, 2011. REUTERS/Stephen Jaffe-IMF/Handout

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Prepare for a different financial landscape http://blogs.reuters.com/mohamed-el-erian/2011/12/05/prepare-for-a-different-financial-landscape/ http://blogs.reuters.com/mohamed-el-erian/2011/12/05/prepare-for-a-different-financial-landscape/#comments Mon, 05 Dec 2011 16:51:40 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=142 By Mohamed El-Erian
The opinions expressed are his own.

With the European crisis continuing to dominate the news, many people now realize that today’s global economy faces an unusually uncertain outlook. Indeed, Europe’s turmoil is but one of the multiple global re-alignments in play today. What may be less well recognized is the extent to which specific sectors are already changing in a consequential and permanent manner.

This is particularly true for global finance where volatility has increased, liquidity is evaporating, and the role of government is pronounced but inconsistent. This is a sector where the functioning of markets is changing, along with the outlook for institutions. The implications are relevant for both economic growth and jobs.

The recent volatility in financial markets – be it the dizzying swings in equities around the world or the fragmentation of European sovereign bonds – far exceeds what is warranted by the ongoing global re-alignments. We are also seeing the impact of a consequential shift in underlying liquidity conditions – or the oil that lubricates the flow of the credit and the related ability of savers and borrowers to find each other and interact efficiently.

Facing a range of internal and external pressures, banks seem to be limiting the amount of capital that they devote to market making. Combine this with the natural inclination of many market participants to retreat to the sidelines when volatility and uncertainty increase, and what you get is a disruptive combination of higher transaction costs, reduced trading volumes, and abrupt moves in valuations.

We are also witnessing a loss of trust in instruments that many market participants – from corporations to individual investors and institutional ones – use to manage their balance sheet risks. The reduced ability to hedge current and future exposures is even forcing some to transition from using markets to manage their “net” exposures to simply reducing gross footings.

Meanwhile western banks, whether they like it or not (and most do not), are now embarked on a journey – away from what some have called “casino banking” to what others label as the “utility model.” Whether in America or in Europe, banks are under enormous pressure from both the private and public sectors to become less complex, less levered, less risky and more boring.

By withholding new credit, private creditors are forcing certain banks to de-lever – a process that is amplified by the sharp decline in bank stocks and the accompanying erosion in capital cushions. At the same time, the banks’ traditional global dominance is under growing competitive pressures from rivals headquartered in healthy emerging economies.

The result of all this is a further, across-the-board shrinkage in the balance sheet of the western banking system. This is led by Europe where some institutions (e.g., in Greece) are also experiencing meaningful deposit outflows.

After the 2008-09 debacle of the global financial crisis, governments also want their banks to be better capitalized and more disciplined. And while implementation has been both far from consistent and less than fully effective, the intention is clear: Much tighter guardrails and better enforcement to preclude any repeat of the wild west experience of over-leverage, bad lending practices, and inappropriate compensation approaches.

The influence of central banks and governments are also being felt in other ways that impact the functioning and efficiency of markets. Some of the implications are visible and largely knowable while others, by their very nature, are unprecedented and therefore less predictable.

For three years now, central banks have been pursuing a range of “unconventional policies,” particularly in America and Europe. The goal has been to reduce the probability of prolonged recessions and severe financial dislocations.

In doing so, central banks have gone well beyond their prudential supervisory and regulatory roles. They have become important direct participants in markets – essentially using their printing presses to buy selective securities, and doing so not on the basis of the usual commercial criteria that anchor the normal functioning of markets.

Market predictability is also being impacted by the erosion in the standing of sovereign risk in the western world. The cause is the twin problem of way too little economic growth and way too much debt. The effect is a less stable global financial system now that there are fewer genuine “AAA” anchoring its core.

All this will translate into a very different financial landscape. The change will be most pronounced for banks.

Look for western banks to be less complex, less global, somewhat less inter-connected and, therefore, less systemic. With some banks teetering on the edge, certain European governments (e.g., Greece) will have no choice but to nationalize part of their financial system.

Also, with the western banking system shrinking in scope and scale, look for new credit pipes to be built around those that are now clogged. With the aim of supporting growth and jobs, particularly in longer-term investments such as infrastructure, some of these pipes will be directed or enabled by governments.

Have no doubt, the financial landscape is rapidly evolving. Some of the changes are deliberately designed and implemented. Others are being imposed by the quickly changing reality on the ground.

The ultimate destination is a smaller and safer financial services sector. When we get there, a better balance will be struck between private gains and the common good. Banks will be in a better position to serve the real economy without exposing it to catastrophic risk and harmful abuses.

The next few months will shed light on the extent to which governments and, to a lesser extent, business leaders are able to properly orchestrate the process. The more they fall short, the less growth and fewer jobs there will be.

Photo: A money exchanger speaks on the telephone in his shop in Sanaa January 5, 2011. REUTERS/Khaled Abdullah

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Could America turn out worse than Japan? http://blogs.reuters.com/mohamed-el-erian/2011/10/31/could-america-turn-out-worse-than-japan-2/ http://blogs.reuters.com/mohamed-el-erian/2011/10/31/could-america-turn-out-worse-than-japan-2/#comments Mon, 31 Oct 2011 14:20:49 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=127 By Mohamed El-Erian
The opinions expressed are his own.

It is time to say goodbye to the confident reassurances from American policymakers that Japan could not “happen here.” It is also time to regret the smug assertions that Japan’s “lost decade” of growth was due to a combination of uniquely Japanese failings – from insufficient policy activism to weak corporate governance and poor political leadership.

American policymakers, together with their European counterparts, are realizing something that Japan has been experiencing for a while: It is very difficult to manage well an economy hobbled by structural impediments and balance sheet excesses. Absent a major change in the effectiveness of the policy approach, this realization will likely lead to broadening societal concerns about the possible “Japanization” of America and, with that, worries that under such circumstances the country would not be able to navigate such a phenomenon as well as Japan has.

The US continues to find it difficult to generate meaningful economic growth and to create enough jobs. Despite multiple fiscal and monetary stimulus programs – indeed, record breaking ones – the economy has failed to recover decisively from the sharp contraction that followed the global financial crisis.

With insufficient growth, un- and under-employment remain distressingly high while the average duration of joblessness hits one unfortunate record after another. To make a bad situation even worse, it is the most vulnerable segments of the labor force – the young and the less educated – who are being hit the hardest. In the process, society experiences a further deterioration in already excessive inequalities in income and wealth.

Low growth means that America is unable to “safely de-lever” from the financial excesses of the last decade. As a result, the economy faces a risk of tipping into another recession.

A recession at this time would be terrifying – from an economic, social, political and institutional perspective. In addition to the country’s unemployment crisis, almost a quarter of homeowners owe more in mortgage debt than the value of their houses. With policy interest rates floored at 0% for quite a while now and the fiscal deficit hovering at almost 9% of GDP there is limited policy flexibility.

What America is discovering is something that Japan has painfully known for awhile: Post-bubble economies are both complex and perplexing.

It is not easy to bring back to sobriety an economy that overdosed on leverage, debt and credit-entitlement. It is doubly difficult when it faces structural impediments to economic growth; when the political system undermines all attempts at reform; and when the global economy is weakening and being subjected to renewed financial fragilities.

I suspect that quite a bit will be written in the months ahead about the possible Japanization of the American economy. That is the easy prediction. More difficult – and controversial – is the prediction that the emphasis of such work could well evolve over time to also assessing the similarities and differences between America and Japan when it comes to coping with many years of low growth without tipping into greater economic degradation and heightened social tensions.

The US lacks two important characteristics that have enabled Japanese society to cope relatively well with a difficult situation. First, it does not have the level of social cohesion that prevails in Japan. As such, it does not have the same extent of societal safety nets that can be beneficial during a time of sluggish growth. Second, America has neither the net creditor status of Japan nor the ability to generate surpluses on its balance of payments. As such, it has less of a cushion, thereby increasing its medium-term vulnerability to capital from abroad.

With these attributes, the US would find it much harder to deal with many years of slow growth, sluggish job creation and further income and wealth inequalities. The economic costs would be higher, the financial frailties greater, and the social consequences much more material.

This is yet another reason why the elected representatives of the American people, and their appointed policy makers, must do more today to internalize in their thinking the growing risk of economic “Japanization.” They must also realize that the country has fewer financial and societal cushions to deal with this risk should it materialize.

The sooner that happens, the greater the chance America can use its still-considerable strengths to overcome its policy paralysis and embark on much needed – and much discussed – measures to remove structural and debt impediments to job creation and to higher and more inclusive, economic growth.

Against this background, it is encouraging to see the Administration recently propose a number of steps that, assuming congressional cooperation, would serve as a foundation for further progress. This is especially true for the jobs proposal, and also for the reforms to housing. But much more needs to be done to urgently improve the key enablers of sustained expansion: namely, the functioning of the housing and labor market, the process of credit intermediation, productivity-enhancing infrastructure, and balancing immediate fiscal stimulus with medium-term reform of both the revenue and spending side.

There was a time when America looked down on Japan for the latter’s inability to deal with its economic problems. No more. Like Japan, America is now realizing how difficult a post bubble economy can be. The fear is that it will also find out that that it lacks some of Japan’s attributes needed to cope with long years of economic stagnation.

The US has no time to waste to build on the important, albeit small progress that has been made in recent weeks. If it does not, there is a risk that the country’s economic fate could end up being even worse than what Japan has experienced. Everything possible should be done to minimize this risk.

Photos, top to bottom: An employee of a foreign exchange trading company passes a graph showing the movement of the Japanese yen’s exchange rate against the U.S. dollar, at a dealing room in Tokyo October 31, 2011. Japan intervened unilaterally in the currency market to weaken the yen after it scaled another record high against the dollar on Monday, Finance Minister Jun Azumi said. REUTERS/Issei Kato; An employee of a foreign exchange company walks past a monitor displaying the Japanese yen’s exchange rate against the U.S. dollar in Tokyo October 31, 2011. REUTERS/Yuriko Nakao

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An unsettling trifecta for market contagion http://blogs.reuters.com/mohamed-el-erian/2011/10/03/a-lethal-trifecta-for-market-contagion/ http://blogs.reuters.com/mohamed-el-erian/2011/10/03/a-lethal-trifecta-for-market-contagion/#comments Mon, 03 Oct 2011 14:26:17 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=111 By Mohamed El-Erian
The opinions expressed are his own.

Friday’s worldwide sell-off was a fitting end to a miserable month and a horrible quarter for equity markets.

The 14.3 percent quarterly loss in the S&P, a widely-followed index for the largest stock market in the world, was its worst performance since the fourth quarter of 2008 — a particularly bad omen given the additional market collapse that followed in the first quarter of 2009 and that brought the world to the brink of a global economic depression. Meanwhile, market and economic narratives are dominated even more now by words such as alarm, anxiety, worry and, to quote from the latest Federal Reserve statement, “significant downside risk.”

Is all this an exaggeration? Are markets stuck in an irrational cycle of self-feeding fear? Is the volatility, including eye-popping intra-day swings, just a head fake?

As much as I would like to say yes — after all, the balance sheets and income statements of multinational companies are still rock solid — the answer is no. The system is sending signals rather than making noise. It is warning about the highly uncertain and rapidly deteriorating outlook for the global economy; also, it is lamenting astonishingly inept policy-making in far too many western economies.

I know exactly how many feel. At an event last week in Washington, I was asked about my feelings about the global economy. My response was “between concerned and scared.”

I worry that, absent a dramatic change in policies in America and Europe, things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.

We are here because of the interactions of three distinct, yet inter-related forces: poor economic growth, excessive contractual liabilities, and disappointing policy responses. The result is that western economies are getting trapped by the lethal combination of an unemployment crisis, a debt crisis, and mounting fragilities in the banking sector.

The longer this persists, the greater the risk that even the healthiest parts of the global economy, and thankfully there are still quite a few, will get dragged into a prolonged period of economic and financial stagnation. No wonder the cover of this week’s Economist magazine portrays the global economy as a black hole carrying a simple yet powerful message “Be Afraid.”

It should come as no surprise that, despite record low interest rates, companies with massive cash would rather stay on the sidelines than engage more fully in the global economy. It is also not surprising that, after showing resilience and tremendous relative strength because they sell to affluent people around the world, even high end retail stocks have been hammered recently.

If the three underlying crises — unemployment, debt and bank fragilities — continue to be left unattended by policymakers, the de-leveraging of the global economy will accelerate in the next few weeks and months. Selling will beget selling. Economic weakness will sap the willingness to spend by those with healthy wallets. And, over time, strong balance sheets will be infected by the growing economic, financial, political and social malaise.

Only policymakers, supported by more enlightened politicians, can change this outlook. Fortunately, there is now heightened awareness in American and European policy circles of the severity of the situation.

The fear of impending generalized dislocations — what the Managing Director of the IMF, Christine Lagarde, correctly labeled a “dangerous phase” — must now transition into three effective responses: immediate circuit breakers in Europe (what I call “very important and very, very urgent”); structural reforms in emerging economies, Europe and the US (“very important and very urgent”); and demand stimulus in emerging economies, Germany, and the US (“bridging mechanisms”).

The bad news is that having been “missing in action” for so long, policymakers will find it challenging to regain immediate control of a rapidly deteriorating global economy. This is particularly true for Europe where the feasible set of policy alternatives is now very far from a “first best.” Every approach that promises considerable benefits comes with substantial costs and risks as well.

Yet this is no reason to procrastinate even more. The longer policymakers wait, the smaller the room for orderly maneuver. In the meantime, dissatisfaction of electorates with the political process will continue to grow. Indeed, as this week’s Economist cover also notes, “until politicians actually do something about the global economy … be afraid.”

Markets are in the unusual and very uncomfortable position of being wholly dependent on policymakers and politicians. The investment relevance of company analysis, no matter how good, pales in comparison to the importance of getting the policy calls correct.

Faced with this, investors should also remain cautious. Yes there are already opportunities but they will be even more attractive down the road given that the world is now subject to both a synchronized slowdown and de-leveraging.

Investors should wait for stronger evidence that policymakers have the willingness, ability and effective instruments to respond properly. This is a time where cash and cash equivalents provide investors with tremendous optionality as the volatile winds of de-leveraging force far too many others into firesales. It is a time to be patient. And it is a time to strengthen firewalls that limit the further spread of economic contamination and financial contagion.

Photos, top to bottom: An artist’s impression of a growing supermassive black hole located in the early Universe is seen in this NASA handout illustration released on June 15, 2011. REUTERS/NASA/Chandra X-Ray Observatory/A.Hobart/Handout;  Anti-capitalist student protestors demonstrate outside the Bank of England in London October 10, 2008. Britain’s top share index slid 8.2 percent by midday on Friday in a global sell-off in equities as investors feared government efforts to unclog liquidity strains would not avert a global recession. REUTERS/Luke MacGregor; A reporter gestures at a board showing NASDAQ losses at midday at the NASDAQ Market site in Times Square, New York, January 22, 2008. REUTERS/Jeff Zelevansky

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Europeans must not let their “Washington Intervention” go to waste http://blogs.reuters.com/mohamed-el-erian/2011/09/26/europeans-must-not-let-their-%e2%80%9cwashington-intervention%e2%80%9d-go-to-waste/ http://blogs.reuters.com/mohamed-el-erian/2011/09/26/europeans-must-not-let-their-%e2%80%9cwashington-intervention%e2%80%9d-go-to-waste/#comments Mon, 26 Sep 2011 13:21:22 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=108 By Mohamed El-Erian
The opinions expressed are his own.

European officials must feel like that they were just on the receiving end of an “intervention” staged by their colleagues from other countries – a process whereby a group of people come together to “shock” a friend/family member into recognizing the depth of a personal crisis and the urgency of embarking on proper corrective actions.

The venue was this past weekend’s Annual Meetings of the IMF and World Bank. This event brings together policymakers from almost 190 countries, along with business leaders and media. It is full of formal meetings, seminars, press conferences, and bilateral discussions.

It is a well-attended gathering that serves many purposes. One of them is to enable policymakers to collectively get a feel for the state of a highly inter-connected and complex global economy. At times in the past, this has proved absolutely critical for designing policy responses that avoided terrible collective outcomes.

This was certainly the case in 2008. On that occasion, a series of consultations and discussions led policymakers from around the world to the startling conclusion that, after the disorderly collapse of Lehman Brothers, the global economy risked tipping into a great depression.

The follow-up was one of the most impressive examples of global policy coordination that culminated in the highly successful G-20 Summit in London in April 2009. The world averted an economic depression that would have spread unemployment, poverty and misery all over the world.

Unfortunately, it did not take long for such coordination to give way to competing and, at times, conflicting national agendas and narratives. This was particularly true in America and Europe where policymakers failed to understand and act on consequential global and national realignments.

Today the global economy is highly vulnerable to major dislocations on account of  three distinct but mutually reinforcing problems: a sovereign debt crisis (whose epicenter is in Europe), banking system fragilities (Europe), and an inability to grow robustly (America and Europe).

As Europe features in all three, it should come as no surprise that European officials were approached by lots of people this weekend in Washington. Many wanted to understand what the European policymakers had in mind; and they wished to ring a very loud alarm that would spur these officials into bold and decisive action.

Wherever they turned, European officials heard a consistent message which typically consisted of four specific points:

•       The bickering and dithering of European politicians and policymakers have allowed the crisis that originated in Greece to spread too far and wide;

•       The crisis is has now gotten close — far too close — to being uncontrollable;

•       Virtually no country in the world would be immune from the adverse consequences; and, therefore,

•       Europe needs to finally step up with decisive policies that are underpinned by a common political vision of what the Eurozone should look like in five years time.

Initially, the reactions of most Europeans ran the gambit: from denying the severity of the crisis to diverting the blame elsewhere. Some hit back, noting that they were neither blind nor deaf. By the end of the meeting, however, most seem to have heard the messages, taken them to heart, and indicated their intention to act on them.

Recognition and proper diagnosis are essential components of a durable solution to a problem. It is therefore good news for the global economy that, especially after this weekend, there is little doubt in the mind of Europeans about the urgency of their situation. They also know that the world is watching and hoping.

It is also good news that some key officials even went so far as to identify a timetable for action – the six-week run-up to the next G-20 meeting in France. True, it is a timetable that is excessively influenced by political considerations rather than economic and financial ones. As such, it may be challenged by markets that are unsettled by fragilities in both sovereign debt and banking systems.

So, will this Washington intervention and timetable hold? The answer depends on five key issues:

First, the Europeans must take immediate — and I stress immediate — actions to stabilize the banking system and counter more effectively the persistent recent rise in yields on government debt issued by Italy and Spain in particular. This cannot wait six weeks.

Second, they must quickly come up with operational mechanisms that build secure firewalls around at least one highly troubled country (Greece) so that it can default without triggering a tsunami for others in the Eurozone.

This will only be possible if, and this is the third point, the European Central Bank (which has been carrying most of the burden so far) receives much more support from national fiscal and regulatory authorities.

Fourth, bold structural decisions must be taken to strengthen the architecture and functioning of what, in the final analysis, is likely to be a smaller, less imperfect and stronger Eurozone.

Finally, politicians must secure the airspace for the technocrats that are waging difficult day-to-day battles through better communication, a common vision and a unified purpose.

This is quite a list, and there is very little time to waste.

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The G-7 disappoints again http://blogs.reuters.com/mohamed-el-erian/2011/09/12/emerging-economies-to-the-rescue/ http://blogs.reuters.com/mohamed-el-erian/2011/09/12/emerging-economies-to-the-rescue/#comments Mon, 12 Sep 2011 14:14:59 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=98 By Mohamed A. El-Erian
The opinions expressed are his own.

Unlike recent G-7 meetings of finance ministers and central bankers that were essentially ignored, there was quite a bit of interest in the one held over this past weekend in Marseille. That interest turned out to be misplaced, however, as the G-7 delivered little of substance yet again.

Once more, the G-7 issued a communiqué whose disappointing lack of content contrasts sharply with the deteriorating health of the global economy, the intense risks ahead, and legitimate policy confusion. As an illustration, try reconciling the G-7’s “catch all” wording on fiscal policy — “we must all set out and implement ambitious and growth-friendly fiscal consolidation plans rooted within credible fiscal frameworks” — with the two strikingly opposing views expressed last week by Germany’s Finance Minister and the U.S. Secretary of the Treasury.

It is not just that the G-7 disagrees on policy prescriptions; the group failed again to converge to the type of common analysis that lies at the root of any coherent policy formulation.

Neither the global economy nor the financial markets can wait for the G-7 to get its act together — especially as the world’s three main economic areas each face a set of mounting challenges.

With structural impediments to both economic growth and the safe de-levering of excessive indebtedness, America’s economy is succumbing to the cumulative impact of policy shortfalls and political dysfunction. If President Obama’s speech from last Thursday fails to act as a dramatic economic and political catalyst, it is just a matter of time before America tips into another recession, unemployment rises even further, and a growing number of households and small companies are forced into bankruptcy.

On the other side of the Atlantic, Europe’s dithering policy response means that the functioning and institutional integrity of the Euro-zone are now threatened by more than just the troubled sovereign credit of peripheral economies. The European financial system is under enormous pressure as markets legitimately worry about both bank capital inadequacy and the continuous deterioration of asset quality.

All this puts the emerging economies in a tough policy position. With strong balance sheets and growing domestic resilience, they have the unusual historic ability to act counter-cyclically to stimulate internal demand and, thereby, insulate their populations from the West’s malaise while allowing for a more orderly global rebalancing.

Yet the incoherence of policies in America and Europe translates into less inclination for emerging economies to do so. Indeed, they may well opt instead for greater self insurance and, in the process, become another pro-cyclical driver for a weakening global economy.

With these issues continuing to fester, attention now shifts from this weekend’s disappointing G-7 to the IMF/World Bank meetings in Washington in two weeks and the subsequent G-20 Summit in France. The hope is that the former can lead to a common analysis of what ails the global economy, and that the latter allows for better policy formulation. In the meantime, look for markets to fret about the worrisome global economic outlook and a depressing lack of global policy coordination.

The G-7 is fortunate that it is not required to justify the expenses of its meetings in terms of what is achieved. If it had to, these meetings would be more decisive and/or less frequent.

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Workers’ malaise foreshadows wider social issues http://blogs.reuters.com/mohamed-el-erian/2011/09/02/workers%e2%80%99-malaise-foreshadows-social-issues/ http://blogs.reuters.com/mohamed-el-erian/2011/09/02/workers%e2%80%99-malaise-foreshadows-social-issues/#comments Fri, 02 Sep 2011 13:26:12 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=80 By Mohamed El-Erian
The opinions expressed are his own.

This weekend’s Labor Day celebrations in America mark a difficult time for workers. Having experienced a multi-year decline in their share of national income, they are now suffering the brunt of the current economic malaise; and there is little to suggest that the situation will improve any time soon. As a result, the country’s economic hardships risk morphing from pressuring specific segments of the population to undermining more general aspects of social justice.

The numbers are striking — and worrisome. Over the last 30 years, labor’s share of the national pie has declined to 44 percent from 52 percent, with profits growing at twice the annual rate for average wages.

This morning’s monthly employment report adds to the concerns. Unemployment remains very high, whether measured by the most-quoted unemployment rate (9.1 percent), the less partial under- and un-employment rate, (16.2 percent) or, most comprehensively, the proportion of total adults who are not working (42 percent compared to 35 percent 10 years ago).

The duration and composition of joblessness is very troubling. The average unemployed American has been without a job for 40 weeks, a record level, and 44 percent of the unemployed have been out of a job for more than 26 weeks. The incidence of joblessness is severe among those lacking a college degree (11 percent compared to 4 percent for college graduates). For 16-19 year olds the unemployment rate is a horrible 25 percent.

Whichever number you look at, America’s labor market problems constitute a full-blown crisis with far reaching economic, social and political consequences. If current trends continue, joblessness will become stubbornly embedded in the system and, distressingly, some of the unemployed will become unemployable.

We all know that such a crisis fuels rising poverty and misery. Shelter is an issue, too, as mortgage and other debt payments are harder to meet. And credit will become even scarcer for those who are already struggling.

Regrettably, there is little to suggest that, left to its own devices, the economy would improve any time soon. It is mired in low growth and insufficient job creation; and the balance of risks is increasingly tilting toward a recession.

Since economic growth will not solve the issue, what about government action? Here, initial conditions are far from ideal.

Budgets — be it state, local or federal — are generally stretched. Indeed, rather than reduce the challenges facing workers, current budgetary policies accentuate them through cuts in education, health care, emergency benefits and other social services. Meanwhile, active redistribution policies are off the table with our extremely divided Congress vehemently disagreeing on what constitutes appropriate policy responses. And the Federal Reserve is already in full policy experimentation mode, with limited durable impact on economic growth.

It is tempting to blame all this on what economists call an “exogenous factor” – a phenomenon that is outside direct societal control. The two most cited factors are globalization and technological advances.

Globalization has brought hundreds of millions of low paid workers into the global labor force, thus putting pressure on higher paid ones in advanced countries such as the US. Technological progress has allowed companies to raise productivity, helping them generate record profits with fewer employees.

Before embracing this explanation wholeheartedly, it is wise to recall Reinhold Niebuhr’s prayer asking God to grant us the serenity to accept the things that cannot be changed, the courage to change those that can and the wisdom to know the difference.

It is not feasible to reverse either of those two phenomena (globalization and technological advances). It is neither desirable to do so either given that, overall, they have beneficial impact on global welfare.

Think of the millions of people around the world who have been pulled out of absolute poverty and misery. Think also of the wider range of affordable goods available to consumers globally (the largest segment of which is in the US). And think of innovations that have saved lives and improved the quality of life.

Rather than try to unwind globalization and technological progress, the challenge for the US is to adapt its labor force and its economy to these realities.

Through better policy making at both the national and international levels, America should — and can — be a bigger beneficiary rather than a helpless victim. No wonder President Obama’s speech next week is so eagerly anticipated, and rightly so.

While we must not underestimate the significant design and implementation difficulties facing the President, many look to him for restoring America’s economic leadership. This involves three challenging and complex steps (especially given today’s economic, financial and political environment): propose a set of policies that decisively lift structural impediments to growth; mobilize sufficient political support to start the multi-year implementation process; and, as the data evolves, provide for timely mid-course corrections as appropriate.

Better off segments of the population may be tempted to dismiss all this as irrelevant to their particular reality. After all, they are doing well — in several cases, extremely well. But such an attitude is short-sighted. It is not just about fairness; the rich have genuine self-interest in reversing the country’s economic malaise and the worsening of income and wealth inequalities.

Whichever way you look at it, the outlook for the wealthier cannot be divorced from society as a whole. Such considerations have already led some American billionaires to react in dramatic fashion.

Warren Buffet and Bill Gates are among those leading the way, through both actions and words. Howard Schultz, the CEO of Starbucks, has urged companies not to wait for government policy but instead to move more aggressively to employ and produce more. Many others are doing their part, albeit in a less public fashion. They know that national prosperity cannot, and should not, be sustained without social justice.

Unlike many parts of the world, America has experienced, until now, few if any meaningful eruptions of social tensions. Yes, there have been some “flash mobs”, but they pale in comparison to what has occurred elsewhere this summer.

This is not about the comparisons out there to uprisings in Arab countries driven by a thirst for social justice. Rather, it is about what the series of unthinkables that has already occurred in several advanced countries where, facilitated by social media that lowers traditional coordination problems, more people are taking to more streets to express frustration and, in some cases, a call for greater social justice.

Britain and Greece have experienced widespread rioting. Car torching in Germany is now way too common for comfort. France, Italy and Spain have had national strikes. Israel has seen the sudden emergence of a large social movement that has taken both local politicians and worldwide observers by surprise.

This weekend, American workers will understandably temper their celebrations. Their malaise is about more than the challenging economic headwinds. It is about fundamental social issues.

America is now on the growing list of advanced countries where social cohesion is coming under increasing pressure. If left to fester through inadequate public and private sector responses, this phenomenon will damage the welfare of current and future generations. Loud alarm bells should be ringing everywhere.

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Deal or no deal, debt drama is not going away http://blogs.reuters.com/mohamed-el-erian/2011/08/01/deal-or-no-deal-debt-drama-is-not-going-away/ http://blogs.reuters.com/mohamed-el-erian/2011/08/01/deal-or-no-deal-debt-drama-is-not-going-away/#comments Mon, 01 Aug 2011 13:58:32 +0000 http://blogs.reuters.com/mohamed-el-erian/?p=72 Are you tired of all the stories on Europe’s financial crisis and American politicians’ endless bickering about debt and deficits? Are you tired of weekends of hectic negotiations as policymakers rush to cobble together some agreement before markets open? If you are, you are not the only one.

Millions of people, including stressed-out policymakers on both sides of the Atlantic, wish to put these issues behind them. Unfortunately, despite many announcements, they are unable to do so decisively, and for good reason.

So we better understand why, if we want to minimize the risk of collateral damage and unintended consequences.

To do so, you need only remember one rather clumsy phrase: “safe de-levering” (also known to some as “safe de-leveraging”), or the lack thereof. Consider please each word, starting with the second one.

De-levering refers to the rehabilitation of balance sheets that have gotten over-indebted to such an extent that they are unsustainable going forward. The contributing causes are usually numerous and many years in the making.

In Europe, three peripheral countries face immediate and significant de-levering pressures. Greece and Portugal are two of them. They had too many years of irresponsible government spending, inadequate taxation, weak public administration, and insufficient economic growth. The third, Ireland, was fiscally responsible but made the big mistake of using what was a relatively healthy public balance sheet to assume the massive losses of its irresponsible banks.

These three countries now face a buyers’ strike. Lenders have been resisting the renewal of their credit lines and, needless to say, have no appetite whatsoever to provide incremental funding. No wonder interest rates have soared and financing has dried up, other than official bailouts from neighboring countries, the European Central Banks and the International Monetary Fund.

The result is not just a liquidity crisis; but also a solvency one. With government gross debt burdens ranging from 100 percent of GDP in Portugal to 156 percent in Greece, these countries are now embarked on an unpleasant, forced de-levering process.

America’s case is different. Yes, it has a high budget deficit (over 10 percent of GDP) and has experienced a dramatic increase in its debt-to-GDP ratio since the global financial crisis. Yes, the fiscal outlook gets cloudier as a result of a structurally weak budget. But unlike peripheral Europe, it is nowhere near an immediate liquidity crisis.

America’s creditors are more than willing to fund the country at historically low interest rates. Rather, it is political squabbles that have dramatically brought forward medium-term fiscal challenges, and have done so through the use and misuse of the debt ceiling, an arcane but, as we have all found out, a rather lethal legislative weapon.

We should all accept that Europe and America — the former for fundamental reasons and the latter for self-inflicted ones — are now in a de-levering cycle whose consequences will be with us for many years.

The actual process of de-levering can play out rather quickly. Indeed, too fast a de-levering can be catastrophic in terms of its impact on growth, employment and poverty. So you can be sure that policymakers will do their utmost to deliver a safe, gradual process.

The best way to do so is through high economic growth. This maintains living standards and generates incremental income to pay off debt, thus providing an orderly path to medium-term debt sustainability. Unfortunately, this option is not available today to either Europe or the US as both are stuck in what PIMCO has been describing for over two years now as the bumpy journey to a new normal.

Other than some short bursts, Europe and America are unable to sustain the sort of economic recovery that would make a meaningful dent in their debt dynamics. They will remain in this regrettable situation until policymakers become more serious about a comprehensive and coordinated set of measures to remove structural impediments to sustained economic activity — including steps to improve the functioning of the housing and labor markets, better worker retooling and retraining, enhanced education systems, even more bank lending, improved productive infrastructure, etc.

If they are unable to grow out of their debt problems, countries have four other options. Two of these are also available to us as individuals: we can default, and let restructuring lower our debt burdens, albeit in a rather disorderly fashion; or we can implement austerity, spending less in order to generate cash to pay off our debt.

Because countries control the printing presses and write regulations — things that the rest of us do not have or cannot do — they have two additional alternatives. They can try to inflate their way out of the debt, or they can reduce it through years of “financial repression,” that is, paying millions of depositors and creditors much less than they deserve in order to divert funding to debt payments.

Judging from what we have seen so far, governments are opting for different mixes.

The three peripheral European governments are imposing harsh austerity on their populations — remember the riots in Greece? — and also benefiting from the willingness of their European neighbors to financially repress their citizens in order to provide additional official funding. At least one (Greece) is having to go further by also partially restructuring its debt.

America is talking about austerity, including this past weekend’s compromise fiscal framework, but using financial repression. So far, this has taken the form of the Federal Reserve maintaining interest rates at extremely low levels for an exceptionally long period of time — so much so that savers and creditors are paid interest rates that are below inflation, and in some cases, well below inflation.

This will not suffice. Look for America to intensify financial repression through regulations that forces banks and other regulated entities to hold low yielding government securities. Also, it will attempt to generate unanticipated inflation. Ultimately, it will be forced into more painful austerity involving both spending and tax measures.

The de-levering pressures will be with us for years, and governments will mix and match from the menu of options. Accordingly, periodic debt dramas and crises will not go away any time soon. Debt is simply too high and there isn’t enough economic growth to painlessly de-lever.  Each response that governments decide to adopt has different implications for us, as savers, investors, debtors, home owners, and business people (the topic of a future piece).

Unfortunately, none of us have the ability to fully insulate ourselves from the collateral damage and unintended consequences. The best we can do is to understand the process, including what governments will do. In this way, we can try to minimize, though never eliminate, the adverse impact of de-levering.

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