Tags: El-Erian | US | Congress | wounds

El-Erian: Congress' Antics Are Not Mere Flesh Wounds for Economy

By Michelle Smith   |   Tuesday, 15 Oct 2013 12:19 PM

This phase of Congressional dysfunction looks set to end with another "kick the can down the road" outcome, but the severity of the economic wounds shouldn't be readily discounted, warns Mohamed El-Erian, CEO of fund giant Pimco.

Thus far, the impact of the shutdown has been mostly limited to certain groups, such as federal workers, investors and tourist-dependent businesses near national sites. The rest of the nation and the world may believe the issues are "quite distant," "temporary" and "largely reversible," he writes in an article for Fortune.

Those may be imprudent assumptions. The U.S. economy may not bounce back as many expect, he argues.

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The government will reopen and a debt ceiling agreement will remove the immediate threat of a global recession prompted by a debt default, he notes. But, with a minority influencing the negotiating position of the Republicans, "the best that can be realistically hoped for is some clumsy agreement on stop-gap measures."

Those are not conditions to shore up confidence among consumers or businesses, which are critical elements in the nation's fragile recovery. People's temptation to increase self-insurance may further dampen economic activity, El-Erian cautions.

And, our global standing would also emerge less than fully intact, he adds.

Yes, America will remain the global superpower, will continue to be issuer of the world's reserve currency and will remain a top destination for financial intermediation.

But "Congress would be foolish" to ignore the temptation for other countries "to explore ways to reduce their reliance on the U.S. as the anchor for the bulk of international economic interactions (including trade, finance and multilateral policy coordination)," he adds.

The United States' standing is based on the perception of stability and safety, according to Time. People believe the U.S. dollar and debt are the safest bets around.

Granted, "we're a long way from the dollar's position being usurped," Time states. But at some point central banks are likely to get fed up and could move "to a different balance of reserve currencies."

Even before the current debacle, people around the globe were citing the security risks of relying on a single currency and encouraging a shift toward a basket of currencies, Time notes.

Warnings that the world's trust and confidence is nothing to toy with seem to have fallen upon deaf ears in Washington, but El-Erian compares short-term solutions and unresolved issues with open wounds.

If Congress can learn no other way, El-Erian encourages taking a lesson from Monty Python.

In the movie, the knight "unexplainably puts himself in harm's way," El-Erian explains.

"Sequentially robbed of his limbs by King Arthur, the knight refuses to come to terms with his predicament. He confidently declares 'tis is but a scratch,' treating each blow as just a 'flesh wound.' And having absurdly announced that he is 'invincible,' the knight is left behind immobile and irrelevant."

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