July 2, 2009

The bumpy road to new normal

It's hard not to be impressed by Mohamed El-Erian. Stepping into Bill Gross's considerably large shoes (ahem) at Pimco during the most difficult financial period in modern times is one thing. Capably maneuvering the company so it's the only one of the top 25 fund shops to experience net inflows is another (OK, so it's a bond shop, but still ...). His periodic commentary in Financial Times is a must read, and this week he doesn't disappoint. He poses a simple question few are asking: What happens if unemployment (currently at 9.5 percent) stays above 10 percent for an extended period? As El-Erian notes, disruptions in our economy until now have been mainly influenced by large-scale anomalies in the financial system. But double-digit unemployment is a large and very angry black swan, and the reactionary policy implications (protectionism, another round of stimulus) aren't promising.

"Think of this [unemployment] as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability."

Amen to that. But whose reality is he referring to? I should point to the fairly obvious fact that the President's definition of the new normal (and his resulting policy moves) is far different from those of El-Erian (and many of the rest of us).

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