Tags: pimco | el-erian | deflation | economy

Pimco's El-Erian: Deflation Is Now a Serious Threat

Tuesday, 17 Aug 2010 03:49 PM

Deflation represents a genuine threat, though it isn’t the most likely scenario for the U.S. economy, says Pimco CEO Mohamed El-Erian.

He earlier this month said he sees a 25 percent chance of a double-dip recession.

Financial markets are pricing in several different factors, El-Erian tells Bloomberg.

“First, (economic) data have weakened across the board,” he said. “Second, there is a recognition by policymakers that the outlook is weak and unusually uncertain," he said.

“And third, there is fear that even a small increase in the probability of deflation, because it’s such a big outcome, can make a big difference in how much people want to self insure.”

Deflation is commonly defined as a decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money and allowing one to buy more goods with the same amount of money.

The Federal Reserve’s recent announcement that it will buy Treasuries shifts it from a tightening mode, in which it was shrinking its balance sheet, to a neutral mode where it’s maintaining the balance sheet, El-Erian explains.

“Most people hoped they’d do more — start easing by expanding the balance sheet.”

But we shouldn’t become overly dependent on the Fed, he says. “It doesn’t have enough instruments for what we’re looking at,” El-Erian argues.

“Structural problems require structural solutions. We’re not getting any.”

To deal with the uncertainty, Pimco has raised the quality of its bond holdings, El-Erian says.

Yale economist Robert Shiller also thinks the economy needs more than the Fed is offering.

"Beyond the Fed, I'd like to see the government take a renewed stimulus package focused on creating jobs and on activities that involve a lot of people," he told MarketWatch.

© 2015 Moneynews. All rights reserved.

Around the Web
Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
Zip Code:
Privacy: We never share your email.
Hot Topics
Follow Newsmax
Like us
on Facebook
Follow us
on Twitter
Add us
on Google Plus
Around the Web
Top Stories
You May Also Like

Mali's Islamists Withdraw Cease-Fire Pledge

Friday, 04 Jan 2013 13:06 PM

Tens of thousands of Fatah supporters rallied in the Hamas stronghold of Gaza on Friday for the first time since they we . . .

Fmr. CIA Director Hayden: Iran Nuclear Crisis Gets 'Scarier'

Tuesday, 17 Jul 2012 18:11 PM

 . . .

Join Fmr. CIA Director for Special Iran Briefing, Assess the Danger

Friday, 13 Jul 2012 12:27 PM

 . . .

Most Commented

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

America's News Page
©  Newsmax Media, Inc.
All Rights Reserved