His name is Dr. Mohamed A. El- Erian CEO and co-CIO of PIMCO, one of the largest bond trading firms in the world. His arrival onto the global stage was overlooked by many. But his message has branded him with the title of being one of the best thinkers of this century. Heading a team that manages the world’s largest bond fund, he is perhaps one of the most watched and listened to economist on the globe. This French Egyptian born graduate of Cambridge and Oxford Universities poses the unthinkable in what is needed to manage America’s troubled economy. He uses imagination, coupled with the tools of an economist to foretell. Then draws the listener by expanding on his concepts of how America’s economic history is sabotaging her future.
A good economist understands completely the dynamics in managing finite resources to fulfill unlimited needs. Dr. El-Erian goes beyond those basic tools to fundamentally gain an accurate prediction on how financial and fiscal policies will impact our nations’ future. His tools are precise producing a long vision. It takes imagination to comprehend the minutia of regional socioeconomic data, and then develop a new system construct to follow. Dr. El-Erian explains that the difficulty our nation faces on its road to budgetary solvency is a result of the misrepresentation of markets signals. Our system has failed to recognize the new paradigms that shape our financial system, which should include a global economy.
In 1975 seven nations formed the G7. The next year United States, United Kingdom, Japan, Germany, France. Italy and Russia added Canada, creating the G8. On December 16, 1995 the euro joined the global economy. It became the world’s second largest trading currency. Our European partners trade euros as a favored legal tender for goods and services across national borders. This global advent is only one in a series of changes leading to how the world manages its resources. Dr. El-Erian explains that our system ignores the new paradigms; in holding to the old constructs used in post war economic policies.
We are enmeshed in an economic war caught between incumbencies that looked to outdated methods of financial maneuverings. Imagine predicting 10 years ago that two emerging countries India and China would be leading the charge to becoming major investors of United States. Imagine that these two world powers that have become leading consumers are trading as well for goods and services with the euro? The G8 has failed to include two very important policy players at the global socioeconomic table, India and China.
Our banking systems’ global and financial decisions are intertwined. When asked why PIMOC’s portfolios were little affected during the horrendous meltdown of fall 2008. Dr. El-Erian explained that they were tracking the changes occurring in the bond and equity markets years prior to the market losses. The system failed to recognize the signals that seemed contradictory to the analysis that it currently employs. The equity markets –buoyed by foreign and domestic investments were showing profit. For the first time a financial crisis created economic crises. The bond markets carrying the burdens of an over leveraged mortgage market proved to be a strain on an already financially exhausted America. Based on this knowledge PIMCO managed to keep its investments safe through the downturns.
Because the dollar is now so dependent on the performance of the euro, failure of economies in Southern Europe will directly affect our markets. There is one direct path to economic solvency. That would not exhaust the strong economies of Northern Europe and further weakening ours. Dr. El-Erian states that the G8 should welcome China and India to form a new G10.