(July 31, 2012) — Nations around the world have lost the ability to solve their economic woes, a number of commentators from Pacific Investment Management Company (PIMCO) have claimed.
The result? Real economic growth should be muted. While some stabilization is possible later in the year, it is hard to foresee a sustained recovery, PIMCO’s Tony Crescenzi, Ben Emons, Andrew Bosomworth, and Isaac Meng asserted in a co-written paper.
According to the authors, the tendency of developed counties to add more debt has led them to increasingly rely upon central bank action. “It is fantasy, however, to think that central banks can keep the game going for long,” the paper said. “No central bank ever created anything tangible – you won’t find any stories about a Fed chairman discovering electricity or creating the light bulb.”
The authors expect central banks to deploy a greater number of policy tools to thwart the pace of deleveraging. The paper continued: “What central banks are best at creating is fiat currencies, and these are only as valuable as what they are backed by, whether it be gold, silver or the productive capability of a nation. Create or print too many of these and they will have no value to anyone, save for nerdy numismatists.”
Furthermore, the paper concluded that while policymakers in China face different limitations today than those in the US and Europe, they have been forced to respond to the strain in the global economy. “Chinese banks remain tight in credit and slow to cut their lending rates. Domestic Chinese borrowers have excess capacity to deleverage, and the yuan’s nominal effective exchange rate is rising amid a rigid foreign exchange rate regime,” the authors noted.
The dismal outlook by PIMCO on developed nations along with China follows more optimistic assertions by Mohamed El-Erian, the CEO and co-chief investment officer of PIMCO, who said earlier this year that a variety of factors suggest that the United States’ economy is slowly healing. However, the problem is that these factors, both individually and in combination, are unlikely to be game-changers, largely due to the fact that “too many sectors of the US economy have not completed their balance-sheet rehabilitation process,” he wrote in an article. Commenting on signs of improvement for the US economy, El-Erian wrote: “For starters, large US multinational companies are as healthy as I have ever seen them.” He added that rich households also hold significant resources that could be deployed in support of both consumption and investment.
Furthermore, the head of the roughly $1.4 trillion bond fund manager noted that housing and the labor market are on the upswing. “These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns,” El-Erian wrote. “But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one. Meanwhile, job growth, while anemic, has nonetheless been consistently positive since September 2010.”