Gross has long advocated for more coordinated action from central banks to attack what PIMCO has coined the “new normal,” or the theory that investors should expect stagnant GDP growth and lower returns moving forward for the foreseeable future; sentiments El-Erian has echoed.
In a case of “be careful what you wish for,” El-Erian now writes that easy liquidity might be tamping global solvency and growth. In an analysis of Friday’s disappointing GDP numbers, he notes, “The hope is that ample central bank liquidity will serve as a bridge to help the West overcome too much debt and too little growth,” but, he adds, “the risk is that the liquidity will prove a bridge to nowhere,” something that might now be happening.
“Today's markets are not pricing in fully the growth and solvency disappointments, and for good reason," according to El-Erian. “Central banks continue to pump a massive amount of liquidity into the system. And, this week, they again left little doubt about their commitment to this course of action notwithstanding [its] failure to deliver the desired economic outcomes.”
While governments have little choice other than to deploy their central banks to combat global recession, he does point to a possible savior–emerging markets.
“The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region's debt crisis,” he writes. With the U.S. still too weak to act as the global growth locomotive and Europe being more of a caboose, attention naturally shifts to the emerging economies. Are they robust enough to tip the global balance in favor of high growth?”
The IMF, El-Erian notes, was less than fully reassuring on this a few days ago.
“Yes, several emerging economies still benefit from strong balance sheets and productivity gains. Unfortunately, they too are slowing and, in the process, will act as less of a global locomotive,” he says.