The global economy is approaching a “T-stop” in the road, PIMCO’s MohamedEl-Eriansaid at a conference in New York City Thursday morning.
After years of relying on central banks to stabilise financial markets, “The current road is going to end,” El-Erian said in an interview with CBS’ Jill Schlesinger at a LinkedIn FinanceConnect event. “You can go left, you can go right, but you can’t stay on the current road.”
El-Erian, who recently decided to step down from PIMCO in mid March, said that he “really likes Janet Yellen,” but that the Federal Reserve has reached the extent of its impact.
Quantitative easing, the Fed’s chief tool to jumpstart the economy, has bought time but with a “big qualifier.” And with its decision to taper asset purchases, the Fed is starting to realise that, El-Erian said.
“The reason why you’re seeing this pivot of the Fed, the costs and risks are starting to outweigh the benefit,” he said. “I
t has certainly bought the system time, but it hasn’t done so in a costless manner.”
“It can buy the system time to heal, but it alone cannot carry the burden… We should realise the Fed cannot deliver great outcomes for the economy without help. Either they’re going to get help from other agencies in DC that are currently paralysed or our future is going to be less bright.”
What kind of help?
For one, Washington needs to stop offering “pot holes” to growth — and the Senate’s recent passage of a debt ceiling extension is a start, El-Erian said.
El-Erian said that one of the most concerning issues for society is the “trio of inequality” — income inequality, wealth inequality, and inequality of opportunity.
And years after the crisis, the finance sector can’t go back to pre-crisis strategies and mentalities. “There’s a reason they call it the financial services industry,” he said. “Because it serves something else, it can’t live on its own.”
On the emerging markets crisis, El-Erian said the Fed helped spur a “massive outflow of money from the advance world to the emerging markets” as investors sought yield after the financial crisis.
“People cannot adjust very quickly with new paradigms…The systems weren’t mature enough, the currency was made more expensive.” Now, “These countries have to deal with the problem of too many outflows too quickly.”
On China, El-Erian said it would be better off for both China and the world if the country can switch to a consumption-based economy. “The Chinese consumer has the wallet but not the will, that’s why China is trying to change it’s economic model,” he said.
El-Erian also discussed his own decision to leave PIMCO. “It’s wonderful to be able to leave the company in the hands of really talented individuals,” he said. “On my side, after 15 years in international public policy and then straight 16 years in finance, I decided time had come to step back and decompress and look at the larger landscape of life… Having said that, I am really interested in the intersection of Main Street, Wall Street, and policies.”
He said he plans to spend time with his 10-year old daughter — an aspiring Broadway star — and that he “really wants to enjoy that journey.”
So will El-Erian change his LinkedIn profile to reflect his next career move, Schlesinger asked. “If I knew, I would have updated it already.”