Here is an interesting interview between Mohamed El-Erian, CEO of PIMCO, and Bloomberg Television’s Betty Liu and Michael McKee this morning regarding the situation in Europe and the global economy.
El-Erian said that it’s “striking” that German Chancellor Angela Merkel can’t agree on the “easy part” and that “unfortunately it’s a mess” in Europe.
Link if video does not play: http://www.youtube.com/watch?v=-erklhXVv80
I agree with 60% of what El-Erian says. Yet once again, “non-solutions” coming from Pimco are nothing but Keynesian claptrap.
Here is a complete transcript …
El-Erian on the situation in Europe and the G20 meeting in France:
“It is both disappointment and concern. It is striking that Ms. Merkel came out this morning and said they could not agree on the easy part, and the easy part was enhancing the IMF resources to help Europe. I am both worried and disappointed so far. Hopefully something will happen in the next day or so, but the signals are not good.”
“We need four things. We need an agreement on Europe. We need to stabilize the European situation. Second, the world has to come together and agree on a growth and employment pact. Just like it did in April 2009 when there was a financial crisis, today we have an economic crisis and an employment crisis. We need to see different countries coming together with a common purpose. Third, let’s not forget the hot spots in the world like North Africa. We need something there. Finally, there are longer term issues that are just as important, like climate change. That would have been an original agenda, but the G20 got hijacked by Europe.”
On recently returning from Europe and his assessment from having been there:
“Unfortunately, it is a mess. There are three parties to a solution and all three are unraveling. There are the debtor countries and they are starting to have even bigger political issues. There are the official creditors and they cannot agree on providing support. And then there are the private creditors. It is not sure that they will get all of the banks to agree on the 50% reduction for Greece, which is the minimum Greece needs. So I’m afraid it’s a bit of a mess out there.”
On whether Europe is worse off now having gone through the agreement on Greek debt last week:
“We are [worse off now], because every time you get to an agreement and it unravels, the credibility of the process is undermined. Keep the image in your of the snowball rolling downhill. The problems get bigger and it becomes even more difficult to control the snowball. We cannot afford disappointment after disappointment. Europe needs to turn a corner and start building the basis for a solution.”
On European leaders questioning whether or not they should belong in the euro:
“You are getting leaders saying strange things. It started with Mr. Sarkozy last Thursday saying Greece should not be in the euro zone. Now you have questioning left, right, and center. The leaders need to get on the same page. The narrative is important here. When there are difficulties that there is a conflict between regional priorities and national realities. That is what we’re seeing in Italy. That is what we’re seeing in Greece, countries like Germany and France as well. This is a very delicate period.”
On today’s jobs report:
“The good news is that the report in relative terms is better than expected mainly because of the revisions to August and September. The bad news is that we are still in this unemployment crisis, so no, it does not do enough to remove the risk of stall speed, which is growth but not fast enough growth. We need to see much higher employment creation to get over this issue.”
On what it will take to achieve faster growth in the U.S.:
“We have fundamental structural problems in the labor market, housing market, credit market. We don’t have enough infrastructure. These are a series of structural issues. We also have to reconcile medium-term fiscal reform with short-term stimulus. There are some big issues that are not as yet addressed sufficiently, certainly not addressed in a comprehensive manner.”
On whether there is an increasing risk that the U.S. is losing control of its own economy because of the crisis in Europe:
“The reality is that we live in a globalized economy. Europe is a major economic area. It is an important trading partner. European banks are an important part of the financial situation. No country, whether it is the U.S. or China, is totally immune from what is happening in Europe. The important thing is to be able to navigate it and that depends on your internal dynamics. We are not immune from Europe. Nobody is in the world, but different countries are better or less able to navigate it.”
On how central banks have been handling the situation so far:
“They have been doing heavy lifting. The Fed in particular has been the only policymaker really in play. The problem is they don’t have enough instruments. You must always remember that central banks are monetary institutions. They can only be a bridge to somewhere. In order to be a bridge to somewhere good, you need other policymakers to also contribute. That is what has failed Europe and the U.S. so far.”
On the October market rally and whether we won’t see activity like that for a long time:
“This is an incredibly headline-driven market, a macro-driven market, as opposed to a bottoms up market. What we should expect is enormous volatility. We suggest to investors to play general defense and selective offense. I think it’s important to be generally defensive because the world is very fluid, but there are values out there.”
On whether there’s more value in the U.S. than in Europe right now:
“I see value where balance sheets are strong, where companies are exposed to growth in emerging markets and where they’re relatively immune to erratic policymaking. That’s where value is and it’s all over the world.”
No Magic Wands
There are no magic wands, Keynesian or otherwise.
El-Erian ‘s idea that global leaders and central bankers can snap their fingers, “agree on a growth and employment pact” fueled by more stimulus and “heavy lifting” by central banks to produce growth is simply Keynesian claptrap.
Certainly structural issue need to be fixed. However, the Fed and Central bankers need to stop printing, governments everywhere need to stop deficit spending, the US needs to let housing bottom naturally, and public sector employment needs to shrink globally.
In short, there will be no gain without more pain, and that has Keynesian clowns howling at the thought.
El-Erian offered a realistic viewpoint of what is happening. Unfortunately, he is essentially clueless about what needs to be done to fix things.
Mike “Mish” Shedlock
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