The View from Pimco's El-Erian
Thursday, February 17, 2011 6:12 PM
Instructive interview several days ago by Der Spiegel of Mohamed El-Erian, who is the CEO of Pimco, the world's largest bond investing company. Pimco is headquartered in California and is a branch of Allianz, the giant German insurance company which was founded in Berlin in 1890. With the recent acquisition of the New York Stock Exchange, Germany can be said to be a player in world finance, not just in manufacturing.
Below is the tail-end of the interview, in which El-Erian talks about the U.S. and then briefly, Egypt. He talks about the structural advantages which the U.S. has in the world economy. The major advantage is the fact that the U.S. dollar remains the world's reserve currency. And why is that? Like so much else, the answer is to be found in the Second World War, which was a continuation of the Great War of 1914-18.
FDR railroaded the United States into the Second World War--actually instigated the start of the war in Europe in 1939--and then won it, leaving Germany and Japan smashed in the aftermath. You could say that America has been living off the fruits of that victory ever since. The U.S. dollar's reserve currency status is the juiciest fruit of all. You can see why FDR remains a hero in certain quarters. Like Abraham Lincoln, he is almost sacrosanct. Being a warmonger has certain advantages. It all depends on who writes the history and who believes the narrative.
In the last paragraph below, El-Erian briefly addresses the blowup in Egypt. When asked about his advice to the Egyptians, he responds: "To manage change well. Egypt will not go back to how it was before the street protests erupted. It's key for all policymakers to make a greater effort to get ahead of the curve and address the burdens being felt by populations due to unemployment and high food prices."
El-Erian thinks almost exclusively in terms of economics. But economics is largely determined by proactive government policies--like FDR's decision to escape the Depression by going to war, thereby making the U.S. the world's economic superpower and its currency the world's reserve currency. It was a huge gamble. It turned out to be a good move for the U.S.A. in terms of everything except honesty.
As for Egypt, it's present situation is the result of being saddled with a duplicitous, pliable Washington satrap-cum-dictator for 30 years. This was an abnormal byproduct of what is euphemistically termed "the Arab-Israeli conflict". The Tel-Aviv/Washington axis mandated that Egypt be relegated to a non-factor with respect to the ongoing conquest of Palestine. This was accomplished with bribes, paid for by the American taxpayer, and called "foreign aid". Egypt in the person of Mubarak was bought off, pure and simple.
I don't think Anwar Sadat would have gone down that road, or at least not for very long. Sadat had more self-respect, intelligence and honesty. If he had not been assassinated and lived to see what "the Israelis"--that is to say, the Polish, Russian and east European Jews--were doing to the native inhabitants of Palestine, Sadat would have stepped back and denounced it, and put pressure on Tel Aviv to live up to the spirit of its peace treaty with Egypt.
What happened instead: Mubarak finally, over the past 20 years, entered into a virtual alliance with Tel Aviv and with Likud against the Palestinians. It amounted to an amazing betrayal of his fellow Arabs. Why? To insure that the payoffs and perks kept coming from Washington.
SPIEGEL Interview with Pimco CEO El-Erian
'Germany Finds Itself in a Very Delicate Situation'
SPIEGEL: The US also has a huge debt problem. However, the financial markets don't seem to care much. Why?
El-Erian: Relative to other countries, the US now looks a little bit better. Think of it like a shirt. If you don't have a completely clean shirt, you will wear the cleanest dirty shirt you have.
SPIEGEL: What makes the US look better then others?
El-Erian: The US has structural advantages. It provides global public goods that others wish to use. The dollar is a reserve currency of the world. The US provides the deepest financial markets. So the market gives the US more time simply because there is no alternative. It takes time for the markets to evolve big enough alternatives to what the US provides today.
SPIEGEL: Still, the US does not have a real plan for ridding itself of its debt problem.
El-Erian: There are several ways that a country can deal with its debt issues. I suspect the US will end up with a mix of some fiscal adjustment and inflating its way out.
SPIEGEL: Washington never publicly talks about that option.
El-Erian: Europe and Germany, especially, have been very scared of hyperinflation. The US is influenced by a different historical experience, that of the fear of another Great Depression. So this country has a huge aversion to recession, huge. And if you ask a policymaker if you're going to make a mistake, which mistake would you rather make, they would say I'd rather make an inflation mistake than make a growth mistake.
SPIEGEL: But, everyone will have to suffer the consequences. The Fed is flooding the markets with another $600 billion that will impact not only the US, but the rest of the world as well.
El-Erian: It's inflating the whole world, that's absolutely right. We are concerned that QE2 ...
SPIEGEL: ... the name given to the US central bank's quantative easing program ...
El-Erian: ... will be disappointing in terms of its own objectives because it's a very imperfect instrument to deal with the headwinds to US growth. The US economy cannot productively absorb all this liquidity. So when all the liquidity is injected into the system, it also goes elsewhere. Its like pouring water on a hard surface, it splashes everywhere. That explains the large skepticism about QE2 outside the US.
SPIEGEL: Is there a better way?
El-Erian: We have said from day one that part of the problem in this country is there isn't a sufficient recognition that there are new dynamics in play. It's what we have called the bumpy journey to a new normal. Growth will be viewed as unusually sluggish. Unemployment will remain unusually high, and for an unusually long period. And we will see an accelerated realignment of the global economy.
SPIEGEL: What will that new global economy look like?
El-Erian: It is a multispeed world. While several advanced economies are dealing with debt overhangs, systemically important emerging economies will hit a development breakout phase. So our view has been if you're faced with this world, policymakers around the globe should not be using just fiscal and monetary policies. They should also be using the whole array of structural reforms. The US should be doing something about its labor market like Germany did. Many countries should be doing more to improve the functioning of the financial system, and not just pouring in liquidity.
SPIEGEL: How long do you see the dollar remaining the world's reserve currency?
El-Erian: At some point, we're going to evolve into a genuine world of multiple reserve currencies, but it cannot happen overnight because there are certain requirements.
SPIEGEL: For example?
El-Erian: Take China as an example. From the outside, we all look at China and see the second largest economy in the world. As the second largest economy in the world, we say it should have global responsibilities. The currency should be convertible and flexible. But go to China, and they will ask you what you are talking about. Look at per capita income, they will say. We're number 99 in the world, not number two. At number 99, our responsibility is domestic because we have lots of people that are poor. So we don't want our currency to appreciate and to be volatile. When we get closer to number two, we'll take on global responsibilities.
SPIEGEL: The world is changing rapidly. Pimco has been making an effort to move into equities and other assets as well.
El-Erian: If you believe in a global realignment, like we do, then you have to be able to help clients navigate this change well. Today Pimco is already more than just bonds. In the future we will be our clients' complete global investment solution.
SPIEGEL: Your father was an Egyptian diplomat and you are fluent in Arabic. What is your advice for the Egyptians?
El-Erian: To manage change well. Egypt will not go back to how it was before the street protests erupted. It's key for all policymakers to make a greater effort to get ahead of the curve and address the burdens being felt by populations due to unemployment and high food prices.
© SPIEGEL ONLINE 2011