El-Erian: Congressional Deal Does Not End Danger

Friday, 18 Oct 2013 08:36 AM

By Michael Kling

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Now that Congress has reached an agreement to reopen the government and avoid default, everything should be smooth sailing, right?

Not so fast, says Mohamed El-Erian, CEO and co-CIO of fund giant Pimco, in a blog for CNBC.

The deal funds the government until Jan. 15 and extends the debt limit until Feb. 7.

Editor’s Note:
Obama’s Budget Takes Aim at Retired Americans

It's a temporary truce that doesn't change the underlying political situation in Washington that caused the brush with catastrophe in the first place.

"Past experiences suggest that the next round of negotiations will not be easy," he says.

In fact, they could be even more difficult, since Congress will be closer to the 2014 elections and local primaries.

Hope that the damage will be temporary and revocable may be overly optimistic, considering Congress only delayed resolving their differences.

The Federal Reserve may have to extend its quantitative easing stimulus because of a lack of economic data due to the shutdown and to insure against more political dysfunction. Businesses and consumers may postpone purchases, hiring workers and making investments — just before the critical holiday shopping season.

Many foreign investors, who hold vast amounts of U.S. Treasury bonds, are unhappy with what they view as irresponsibility, even recklessness, of American legislators. China has even called for a "de-Americanized world."

"The more the world looks to disengage from the dollar-centric construct, the greater threat to America's economic power and influence," he writes. "And while this is not something that happens quickly, the risk of cumulative erosion should not be lightly discarded."

Americans, as well as the international community, must urge Congress to end its "shenanigans," he argues.

"Neither our economy nor the plumbing of the global financial system would easily handle yet another set of self-inflicted crises in the next few months."

Robert Reich, former Labor Secretary under President Clinton, sees a significant chance of another government shutdown in January. House representatives will be up for re-election, and many Republicans in GOP-safe districts may face Tea Party opponents in primaries, Reich writes on his blog.

Republicans will demand steep cuts to Medicare, Social Security and domestic spending in return for keeping the government open, predicts Reich, a professor at Berkeley.

"The war isn’t over. It’s only a cease-fire," he warns.

Editor’s Note: Obama’s Budget Takes Aim at Retired Americans

Related Stories:

FBA's Joel Naroff: 'Insanity' in DC Is 'Huge Restraint to Growth'

Budget Deal Provides Relief but Little Long-Term Benefit to Economy

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