Pimco’s chief executive and co-chief investment officer Mohamed El-Erian reacts to this weekend’s news out of Busan, South Korea.
Count me among those that believe that the G-20 is one of the better approaches to global governance in a world that desperately needs improved international policy coordination. While the G-20 has not gotten to where it could and should be, its periodic meetings provide us with important insights into global policy issues.
As such, I joined those dissecting today the communiqué that followed the group’s deliberations in Busan, South Korea. Five key issues stood out in my mind, which I will try to list for you- from the most comforting to the more disturbing.
First, the G-20 communiqué re-iterates the view that the Group’s previous strong policy response “played a pivotal role in restoring growth;” and that countries “stand ready to safeguard recovery and strengthen prospects for growth and jobs…and pursue well coordinated economic policies.” We should draw a certain degree of comfort from this.
Second, it confirms that we now live in a multi-speed world characterized by more than large differences in growth rates and a global economy that “continues to recover faster than anticipated.” There are also enormous differences in the soundness and sustainability of public finances in individual countries.
Third, it repeats well-known financial reform priorities, including the need to “improve both the quantity and quality of bank capital,” “to reduce moral hazard,” “to develop effective resolution tools,” “to protect taxpayers,” “to improve transparency,” etc…
Yet, critically, it makes no meaningful progress in providing a unifying magnet for increasingly disparate and uncoordinated national policy approaches. Indeed, the communiqué opens the door even wider for country differentiation. This criticism also applies to the communiqué’s weak paragraphs on financial inclusion and environmental aspects.
Fourth, and related to the two previous points, it recognizes that “significant challenges remain.” Some of these are behind an important change in the overall G-20 policy approach. As I read the communiqué, the Group has gone from strongly supporting growth stimulus to recognizing two critical issues: the approach has not succeeded in delivering sufficient economic escape velocity (confirming recent sluggish indicators of self-sustaining recoveries in the industrial world, including yesterday’s disappointing US jobs report); and that collateral damage is being strongly felt in the form of increasingly unsustainable deficits and debts (consistent with growing core/peripheral tensions in Europe and the failure of the massive ECB/EU/IMF response to deliver any durable improvement to date).
Finally, it welcomes agreement on “the World Bank’s voice reform to increase the voting power of developing and transition countries by 3.13%.” While this is a signal of ongoing efforts to address longstanding representation and legitimacy deficits in international institutions, it also confirms that the steps being taken are miniscule and slow. This is a further indication that, despite what they say, industrial countries continue to embrace and protect a global governance system that reflects the outmoded world of yesterday, rather than the world of today and tomorrow. This will further undermine hope for effective and durable global policy coordination.
So, what should we make of all this; and how will it play out in markets?
I come away with the strong feeling that today’s G-20 communiqué is a further confirmation that structural and balance sheet realities are imposing themselves on the global economy.
Compared to what the world has known for the last 40 years, this situation results in a highly unusual configuration of growth, debt and deficits; it raises legitimate questions about the prospects for self sustaining private sector recoveries in industrial countries (and the related ability to grow out of excessive indebtedness); and it loudly illustrates the limitations of cyclical policy responses and international coordination, and associated problems with unintended consequences and collateral damage.
I fear that all this may continue to catch off guard at least three dimensions that are still significant in today’s marketplace:
- Mindsets that have difficulties recognizing regime shifts, preferring instead the illusionary comfort of the more familiar cyclical frameworks;
- Approaches that focus excessively on rates of change and inadequately on levels; and
- Investment portfolios that are over-exposed to equity and credit risk, and that maintain insufficiently hard interest rate duration.
In concluding, I would repeat what I said early yesterday morning when asked by a reporter “what does the US jobs report mean for markets:” Investors should keep their seat belts on and tight.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO.