“The unifying theme should be the simple question: why is policy stubbornly ineffective,” El-Erian, the chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “It doesn’t make sense for different countries to be doing things without coordinating. You don’t have enough coordination.”
Policy makers have been more successful when they have worked together in the midst of the global crisis, and risk allowing stagnation to persist should they fail to cooperate, El-Erian said. Newport Beach, California-based Pimco, which oversees more than $1.1 trillion of assets, says the world has entered a period of slower growth, more government intervention and less influence by the U.S. in what it calls the new normal.
“Policy ineffectiveness matters a great deal,” El-Erian wrote in an op-ed article published today by Bloomberg News. “The longer it persists, the greater the challenge of restoring industrial economies to the path of sustained high growth and job creation.”
Fragmented efforts are at risk from the outset as they are undertaken without regard for or examination of the efforts of their neighbors and trading partners, El-Erian said.
Several countries are at the same time trying to restrain government spending, push exports and lower the value of their currencies, El-Erian said in the radio interview. “Everybody’s self-interest is to do something that’s not in the common interest.”
“In the U.S. alone, just look at the high unemployment rate that persists in the face of unprecedented fiscal stimulus and the extended use of unconventional monetary policy,” El- Erian wrote. “In Europe, dramatic policy actions have failed to calm concerns about solvency risk in peripheral countries such as Greece, Ireland, Portugal and Spain.”
The biggest obstacle to achieving policy goals may be the amount of debt still on government and household balance sheets, El-Erian said in the interview. “Once you have overhangs, policy becomes less effective.”
Without coordination, policy makers have lacked imagination in their approach to the problems posed by the indifference shown to their initiatives by the lack of economic improvement, El-Erian said.
“We tend to do more of the same,” El-Erian said. “It’s called active inertia.”
When they have coordinated, policy makers have been effective, El-Erian said, citing the period from October 2008 to April 2009 as a “golden age” of cooperation that helped avert a meltdown of the global economy.
Efforts at addressing problems stemming from the global economic crisis without coordination may run a greater risk of failure, El-Erian said.
The Japanese yen tumbled from a 15-year high versus the U.S. dollar after Japan intervened to sell its currency and buy the greenback today for the first time since 2004 to curb gains that threaten an export-led recovery.
Japan’s currency slid the most in 22 months after Finance Minister Yoshihiko Noda said the nation unilaterally sold yen. The move comes a day after Japanese Prime Minister Naoto Kan won re-election as the head of the ruling party, beating a candidate who had insisted intervention was necessary.
“It is highly unlikely” to succeed, El-Erian said. “They’re getting the impact of the surprise. Now people are asking what’s next, particularly is it coordinated or is it one- off.”
(source: Bloomberg, September, 15, 2010)