Mohamed El-Erian is the CEO of PIMCO, the world’s largest bond investment fund. He is widely respected around the world.
In a recent article posted on an economic website that hosts some of the most famous Keynesian economists, he outlined the problems that are facing the world’s economies. He goes through these, one by one. He says a total change is imminent — a paradigm shift. Yet he says that there are no visible solutions to the crises that have appeared.
It is no coincidence that all of this is happening simultaneously. Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.
Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.
He says there must be de-leveraging. This means write-downs of bad debt. But this is not just private debt, he says. It is government debt. But no government is actively doing this today.
His language is straightforward. The PIIGS have no solutions.
Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.
Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt.
What is he really saying? This: get ready for national defaults and bank failures.
In addition, there are these problems: (1) slow economic growth, (2) calls for redistribution of wealth (“social justice”), and (3) a lack of political leadership.
Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical. The longer they fail to adjust, the greater the risks.
Yet he ends it with a happy-face forecast, based on nothing.
Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.
No paralysis? When we are facing a complete transformation of the world’s financial system?
Talk is cheap when you are very rich.