5 Questions for Mohamed El-Erian, "When Markets Collide"
Mohamed El-Erian, author of "When Markets Collide: Investment Strategies for the Age of Global Economic Change,"(see review, Don't Get Caught in the Middle "When Markets Collide"), is co-CEO and co-chief investment officer of PIMCO, a large financial management firm. He was previously president and CEO of Harvard Management Company, which runs Harvard University's endowment, and also spent 15 years at the International Monetary Fund. I sent him five questions, and here are his answers.
Big Think: The latest data on US GDP said it contracted by about 0.3 percent in the third quarter, signaling recession. Since 1959, the U.S. GDP has not seen an annual decline of much more than 1 percent. Will this contraction break with that pattern? Has the U.S. economy hit bottom, at least for now?
El-Erian: The US economy has not hit bottom as every element of private sector demand is still under considerable pressure. This is particularly the case for consumption which is facing the triple whammy of what economists refer to as negative income, wealth and credit effects. Specifically, incomes are being undermined by eleven consecutive months of job losses; the sticker shock from lower 401(K) balances will likely curtail spending further, especially on the part of those close to retirement; and credit is harder to obtain at a time when mortgage refinancing can no longer help in generating cash.
Big Think: Do you see a V, U, W or L-shaped recovery for the U.S. economy?
El-Erian: The recovery is most likely to be a stretched out U when it comes to the US.
Big Think: In the book, you are optimistic that the sheer amount of current accounts built up in emerging economies would help cushion the blow of a U.S. downturn. In recent weeks, this decoupling concept seems to have collapsed. What has happened, and how bad might it get in developing countries, particularly China?
El-Erian: The September/October intensification of the financial crisis has eaten into the self-insurance accumulated by emerging economies. For several, including China and other systemically important countries, the remaining self insurance is both substantial and sufficient. For other smaller economies, like Hungary and Pakistan, the situation has become
more difficult and requires a mix of exceptional external financing and domestic policy adjustments.
Big Think: Your book reads like current events, despite being published in May. You expected a series of disruptions in the global economy, but did you expect to see the widespread emergence of a "market of lemons," such as we seem to have seen in the last few weeks? Has the world economy gone past the "flesh wounds" stage you describe in the book?
El-Erian: The main message of the book is that the activities undertaken by the global financial system had outpaced the ability of the infrastructure to sustain them, in both the public and private sectors. Accordingly, market accidents and policy mistakes were inevitable, including institutional failures. And this is what has played out since the book's publication; and, in some regards, to a more intense degree than predicted by the book.
Big Think: Is America going to be able to deal with its gigantic accounts deficit, without becoming like a bigger version of Argentina?
El-Erian: Yes, as long as it moves quickly and effectively. The US has an amazingly flexible economy, enjoys the benefits of being the reserve currency for the world, and has the deepest and most liquid financial markets. These structural advantages are considerable and provide for responsiveness that Argentina never had. But they must also be preserved through the implementation of timely and effective policy measures.