Posted By thestatedtruth.com on February 8, 2011

The following is part of an interview of Pimco’s El-Erain by Germany’s SPIEGEL . Here are a few of his key points……

In 2006 we undertook a very comprehensive U.S. housing study and we said this housing market is very unstable and investors should reduce their exposure and manage risk better. Nothing happened in 2006, and nothing happened the first half of 2007.  And there are many other examples, including our 1999-2000 acute concern about Argentina.

We have said from day one that part of the problem in this country (U.S.) is there isn’t a sufficient recognition that there are new dynamics in play. It’s what we have called the bumpy journey to a new normal. Growth will be viewed as unusually sluggish. Unemployment will remain unusually high, and for an unusually long period. And we will see an accelerated realignment of the global economy.

SPIEGEL: The U.S. does not have a real plan for ridding itself of its debt problem.

El-Erian: There are several ways that a country can deal with its debt issues. I suspect the U.S. will end up with a mix of some fiscal adjustment and inflating its way out.

SPIEGEL: Washington never publicly talks about that option.

El-Erian: Europe and Germany, especially, have been very scared of hyperinflation. The U.S. is influenced by a different historical experience, that of the fear of another Great Depression. So this country has a huge aversion to recession, huge. And if you ask a policymaker if you’re going to make a mistake, which mistake would you rather make, they would say I’d rather make an inflation mistake than make a growth mistake.

SPIEGEL: But, everyone will have to suffer the consequences. The Fed is flooding the markets with another $600 billion that will impact not only the U.S. but the rest of the world as well.

El-Erian: It’s inflating the whole world, that’s absolutely right. We are concerned that QE2 …

SPIEGEL: … the name given to the US central bank’s quantative easing program …

El-Erian: … will be disappointing in terms of its own objectives because it’s a very imperfect instrument to deal with the headwinds to U.S. growth. The U.S. economy cannot productively absorb all this liquidity. So when all the liquidity is injected into the system, it also goes elsewhere. Its like pouring water on a hard surface, it splashes everywhere. That explains the large skepticism about QE2 outside the U.S.

SPIEGEL: Is there a better way?

El-Erian: We have said from day one that part of the problem in this country is there isn’t a sufficient recognition that there are new dynamics in play. It’s what we have called the bumpy journey to a new normal. Growth will be viewed as unusually sluggish. Unemployment will remain unusually high, and for an unusually long period. And we will see an accelerated realignment of the global economy.

SPIEGEL: What will that new global economy look like?

El-Erian: It is a multispeed world. While several advanced economies are dealing with debt overhangs, systemically important emerging economies will hit a development breakout phase. So our view has been if you’re faced with this world, policymakers around the globe should not be using just fiscal and monetary policies. They should also be using the whole array of structural reforms. The U.S. should be doing something about its labor market like Germany did. Many countries should be doing more to improve the functioning of the financial system, and not just pouring in liquidity.

SPIEGEL: How long do you see the dollar remaining the world’s reserve currency?

El-Erian: At some point, we’re going to evolve into a genuine world of multiple reserve currencies, but it cannot happen overnight because there are certain requirements.

SPIEGEL: For example?

El-Erian: Take China as an example. From the outside, we all look at China and see the second largest economy in the world. As the second largest economy in the world, we say it should have global responsibilities. The currency should be convertible and flexible. But go to China, and they will ask you what you are talking about. Look at per capita income, they will say. We’re number 99 in the world, not number two. At number 99, our responsibility is domestic because we have lots of people that are poor. So we don’t want our currency to appreciate and to be volatile. When we get closer to number two, we’ll take on global responsibilities.

For the whole interview, click here: http://www.spiegel.de/international/business/0,1518,744297,00.html

Categories: Commentary, Commodities, Gold and Silver, National News, Wall Street
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