If you’re tired of all the political ballyhoo surrounding debt and deficits, says PIMCO’s Mohamed El-Erian, you’re far from alone. However, he says, conflicts over how to deal with high levels of debt and political histrionics over the best ways to do so will be around for a long, long time.
The problems of Europe and the U.S. are somewhat different—the former a solvency problem, the latter political. Yet the results are the same: painful budget restructuring.
In his monthly commentary on Reuters, El-Erian (left) says the best and most painless way to exit a de-levering action, which he defines as “the rehabilitation of balance sheets that have gotten over-indebted to such an extent that they are unsustainable going forward,” is through economic growth.
Growth, however, is not currently an option, unless “policymakers become more serious about a comprehensive and coordinated set of measures to remove structural impediments to sustained economic activity—including steps to improve the functioning of the housing and labor markets, better worker retooling and retraining, enhanced education systems, even more bank lending, improved productive infrastructure, etc.”
None of this is happening, however, on either side of the pond, leaving four less desirable solutions to be tried.
The first of these is default, the second austerity—both strategies also available to individuals. The third and fourth, only available to governments, are inflation and “’financial repression,’ that is, paying millions of depositors and creditors much less than they deserve in order to divert funding to debt payments.”
Greece, Ireland and Portugal have opted for austerity, with Greece also doing some restructuring. They are also, says El-Erian, “benefiting from the willingness of their European neighbors to financially repress their citizens in order to provide additional official funding.”
The U.S., he adds, talks about austerity, but actually uses financial repression via “extremely low interest rates for an exceptionally long time.” But that will not suffice, he says, predicting intensified financial repression and generation of unanticipated inflation. At some point, both spending and tax measures will be involved.
As governments try various combinations of these strategies, says El-Erian, there will be periods of high drama mixed with the tedium of painful austerity, and no one can escape.
“The best we can do,” he concludes, “is to understand the process, including what governments will do. In this way, we can try to minimize, though never eliminate, the adverse impact of de-levering.”