Pacific Investment Management Co. (Pimco) CEO Mohamed El-Erian, a sought-after commentator on the United States’ economic condition, has called the past decade a “lost decade” of unemployment and dismal tidings for the nation’s labor market, reports Bloomberg. The economic waters the U.S. has become accustomed to sailing have turned back, never to return, suggests El-Erian. More people than ever need a loan, but the credit market will not currently bear the demand. There will be, in his words, a “new normal” to which America must adjust.
Unemployment and labor continue to suffer
Unemployment remains at a high level, credit markets are on their guard and additional federal stimulus isn’t likely to solve the issues plaguing the nation’s labor market, said El-Erian. Charles Nenner of the Charles Nenner Research Center is even more pessimistic. On Bloomberg Television’s “On the Move,” Nenner predicted that the Dow Jones will fall to 5,000 within two years, underscoring El-Erian’s belief that the U.S. economy isn’t as flexible as policy experts believe. Playing with interest rates and holding hands out for an instant money bailout aren’t necessarily the best springboards to long-term recovery. People and institutions that look for cash now without understanding the long-term impact of borrowing from the future to prop up the present are doomed to fall from the trapeze and strike bottom.
“This country has very weak safety nets,” El-Erian said on “Bloomberg Surveillance.” “It is built on the assumption that our labor markets are very flexible, that if you lose your job in California you move somewhere else, you get another job, and what we’re seeing is structural unemployment.”
Stocking up on high-quality assets
Pimco’s strategy has been to stock up on high quality assets. The company’s Total Return Fund, which has returned 11.8 over the past year (besting return on peer bonds by 67 percent, writes Bloomberg), is the largest of its kind in the United States. But for the country as a whole, a more dramatic focus on structure is needed, says El-Erian. In addition to the mildly ineffective bouts of stimulus, the dead-in-the-water U.S. housing market isn’t producing the assets needed for recovery. The U.S. economy needs to restructure the way business is done. “It needs other agencies to help and in particular, it needs structural policies to be there,” El-Erian informed Bloomberg. “Put another way, you need to stimulate not just demand, but also you need to make supply more flexible.”
El-Erian’s concept of a “new normal” could act as a fresh rubber band that will snap back after economic calamity, or a faux safety net made from IOUs and dreams of wild market speculation.
Understanding the “new normal”