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El-Erian: Most of My Money Is in Cash

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Where is economic guru and famed money manager Mohamed El-Erian putting his money these days? In cash.

In a wide-ranging Sunday interview with the Orange County Register, the chief economic advisor to PIMCO’s parent, Allianz SE, also opened up about his beliefs that the wealthy should pay more in taxes and that the current “do-nothing” Congress is unable to create a “Sputnik” moment for the economy.

Rising at 3:30 a.m. to work on his new book, whose working title is “The Only Game in Town: The Rise and Possible Fall of Modern Central Banking and What it Means For You,” the 56-year-old said that his wealth is mostly concentrated in cash, not stocks, bonds or Treasuries. “That’s not great, given that it gets eaten up by inflation,” he admitted. “But I think most asset prices have been pushed by central banks to very elevated levels.”

When asked if the U.S. were “nearing a bubble,” El-Erian noted that the central banks, “look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something. So they artificially lift asset prices by maintaining zero interest rates and by using their balance sheet to buy assets.”

Why? “Because they hope that they will trigger what’s called the wealth effect,” he responded. “That you will open your 401(k), see it has gone up in price, and you’ll spend. And that companies will see their shares are going up and they will be more willing to invest. But there is a massive gap right now between asset prices and fundamentals.”

El-Erian, who also chairs President Barack Obama’s Global Development Council, also noted that income inequality “has risen so much that consumption as a whole is undermined. That’s because rich people have a much lower propensity to consume than poor people.”

It is the rich people, he said, “that have captured all the income growth for the last seven years.”

While “a little bit of inequality is good for the system because it creates incentives,” he said during the interview, “a lot of inequality actually creates negative economic effects. It has become an inequality of opportunity.”

When asked how this “inequity” should be remedied, El-Erian said that the government “should be using fiscal policy – taxing the rich more and supporting the sectors that are critical to equality of opportunity, like education and health.” El-Erian said that he would “remove loopholes that are being taken advantage of by the rich, tax private equity [more]” and that the “inheritance tax should be higher.”

As to income taxes, El-Erian noted that while there’s a view that “if you take the top marginal tax rate up two percentage points, you’ll somehow completely alter the work incentives,” he doesn’t believe that.

As to the changing the current capital gains tax rate of 15%, El-Erian said that he “wouldn’t start from the presumption that you can’t touch these rates,” rather he “would start from the presumption that we need to invest in the future of our youth.”

On persuading wealthy libertarians to pay more taxes, El-Erian responded: “There comes a stage when those who benefit from inequality realize that they better do something about it. You cannot be a good house in a challenged neighborhood.”

— Check out El-Erian: 8 Takeaways From March Jobs Report on ThinkAdvisor.