Tags: El-Erian | pimco | US | Recession | policy | mistake

El-Erian: Only 'Major Policy Mistake' or Big Shock Will Spark Recession

Thursday, 09 Jun 2011 09:19 AM

The United States is battling uneven recovery and won't resort to further monetary or fiscal stimulus tools to get the economy out of the doldrums, but it will also avoid dipping back into recession, says Mohamed El-Erian, co-head of Pimco, the world's largest bond fund.

"We find it hard to get another recession. There is simply too much liquidity in the system," El-Erian tells CNBC.

"You would need a major policy mistake or you would need a major unanticipated shock for you to get a recession."

The Federal Reserve is wrapping up a $600 billion liquidity injection into the economy via a bond-buyback program designed to fuel growth.

MohamedEl-Erian200ap-.jpg
Mohamed El-Erian
(Associated Press)
The government, meanwhile, has spent hundreds of billions of dollars improving infrastructure and in other programs designed to create jobs.

Those actions may not be sending gross domestic product growth and unemployment figures into sunny territory, but they will keep the country plodding along.

Government policies have pumped banks full of cash, while multinationals are reporting positive earnings from overseas sales plus the stock market has been up due to accommodative monetary policy.

Yet the housing market is double-dipping back into contraction, and all the stimulus measures carried out by the Federal Reserve and the government are taking their toll on public-sector balance sheets and unemployment remains high.

Add to that, emerging markets like Brazil and China are tapping the brakes on their growing economies, which are getting too hot in part due to the flood of U.S. liquidity entering their markets in search of attractive investments.

"What's really interesting is how different the different segments of the economy really are," El Erian says.

"The good news is the balance sheets for most multinationals are pristine and profits are high. But we are not going to be able to sustain this sort of profit growth in this global economy."

That means now that the Fed's policies cannot inflate stock prices as much as they did under quantitative easing, investors much pick assets with greater discernment and rely less on a rising tide.

"So you have to make a judgment. Are fundamentals going to improve to validate the valuations or are valuations going to come down to valuate the fundamentals?"

El-Erian's views that the U.S. will avoid recession differ from others, including John Taylor, founder of the world’s largest currency-hedge fund, who says there is nothing stopping the U.S. from heading back into contraction.

"I must say that next year is going to be truly miserable," says Taylor, who manages about $8.5 billion and uses statistical models to help predict future movements in assets, CNBC also reports.

President Barack Obama, however, feels a double dip won't happen although he adds the economy is still a serious concern.

"I am not concerned about a double-dip recession," says Obama, according to the AFP newswire.

"I'm concerned that the recovery we're on is not producing jobs as quickly as I wanted to happen," he says, adding there was "enormous work to do" to strengthen a U.S. economic recovery.

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The United States is battling uneven recovery and won't resort to further monetary or fiscal stimulus tools to get the economy out of the doldrums, but it will also avoid dipping back into recession, says Mohamed El-Erian, co-head of Pimco, the world's largest bond fund. ...
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2011-19-09
Thursday, 09 Jun 2011 09:19 AM
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