Photo: St. Louis Fed
Yesterday, PIMCO’s Mohamed El-Erian gave the Bagehot lecture at The Economist magazine’s Buttonwood gathering.His talk included a tight summary of how the world’s central banks were addressing the issues plaguing the economy.
He suggested that the Federal Reserve, European Central Bank, and Bank of England weren’t quite done intervening:
Given the trio of imperfect policy measures, weak transmission mechanisms and the lagging reaction of other policymaking entities, we should expect these central banks to remain unusually active and imaginative. Indeed, under current leaderships, we should have little doubt about their willingness to do even more. And companies, households and investors should incorporate this in their assessment of the outlook. But they should not automatically and fully map willingness to policy effectiveness.
For anyone who follows El-Erian, there wasn’t much new in this lecture. He reiterated his expectation for “sluggish growth.” Here are his growth forecasts for the next 12 months:
- U.S.: 1.5% to 2.0% growth
- Europe: 1.0% to 1.5% contraction
- China: 6.5% to 7.0% growth (soft landing)
As any thoughtful forecaster should do, El-Erian addressed both the risks to the downside (left tail) and the upside (right tail).
While risks are asymmetric and slanted to the downside (fat left tail), the risk of an upside scenario isn’t exactly impossible either. Here’s El-Erian:
Given the extent of these risks, it is understandable that economists tend to focus on left tail analysis; and they should, given the Pascal’s Wager nature of the potential payoffs. But this should not preclude us totally from recognising the components of the right tail.
Here, it is about the possible deployment of idle capital and cash balances. A critical mass of policy reform and political coherence – or modern-day “Sputnik moments” – could easily unleash them.
It is also about a series of productivity-enhancing changes. This includes some that significantly lower input costs (e.g., shale gas) and others that provide for much greater connectivity (technological innovation).
There are many illustrations. For example, digitalization is allowing for more responsive input management, including the application by farmers of fertilizers. It is also providing for much more effective inventory management and more efficient access to market.
Indeed, we should never underestimate the potential for developmental leap-frogging associated with individual innovations. Imagine what a combination of them could do.
History is riddled with these Sputnik moments and leap-frogging innovations. Indeed, it’s difficult not to feel hopeful and get excited by these upside risks.
Read the whole lecture at PIMCO.com.