(March 24, 2014) — “Devastating” has been the impact on Main Street by the “New Normal” in financial markets, the theme’s creator has said this week.
Mohamed El-Erian, former CEO and co-CIO at PIMCO, gave his views on the situation in an interview with Business Insider, updating his now infamous phrase coined in 2009.
“It has been devastating, harming both current and future generations,” he told the news service. “Just witness the extent of long-term joblessness and youth unemployment, as well as the excessive increase in the inequality trio (of income, wealth, and opportunities). It has also contributed to political polarization and weakened global policy coordination on economic and geo-political issues.”
The New Normal was a description of the economic environment that occurred in the immediate aftermath of the financial crash in 2008. El-Erian, and colleagues, opined that a suspected V-shaped recovery would not happen, but instead “economic activity would remain persistently sluggish and unemployment unusually high”.
El-Erian recently split from PIMCO in a shock move that saw the company’s hierarchy substantially shaken up. He has since become chief economic advisor at PIMCO’s parent company Allianz.
But if life for ordinary people has been disrupted, it has been business as usual for financiers, El-Erian said.
“Thanks to the hyper activism of central banks, markets have been largely shielded from the impact of weaker fundamentals. Indeed, central banks have inserted quite a wedge between fundamentals and market prices; and they have done so for an understandable reason: given their limited policy tools, they are obliged to use the asset price channel as a way to influence wealth, spending, animal spirits, risk taking, and investing.”
And the outlook? El-Erian thinks we are in for more of the same, at least in the short-term, but the market faces a fork in the road.
“Either the west reaches a critical point of internal healing that enables growth at or above potential for a while; or now-deeply embedded structural problems contribute to more prolonged low growth with significantly higher probability of financial volatility,” he said. “As yet, there is simply not enough data and analytical underpinning to predict with confidence which of the two-tails would ultimately dominate.”
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