Pimco’s El-Erian: How the Fiscal Cliff Is Avoided Is as Important as a Deal Itself

Monday, 10 Dec 2012 08:39 AM

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The manner in which policymakers avoid the fiscal cliff will be just as important as the details of a deal themselves, said Mohamed El-Erian, CEO of fund giant Pimco.

Congressional Republicans and the White House are negotiating terms to avoid the fiscal cliff, a combination of expiring tax breaks and inbound spending cuts due to take effect at the same time with the closing of this year.

Failure to avoid the cliff could send the country into a recession next year, according to government estimates.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Sticking points can be found in whether or not taxes rise for wealthier Americans and where to cut government spending.

Equally important to a deal, El-Erian wrote in a CNBC Guest Blog, is how a deal is struck.

Mutual cooperation and respect must ensue or else friction will arise when both sides meet again to discuss future issues, where trade-offs and compromises will again be needed for action.

Failure to give and take today for the sake of the economy could compound and exacerbate the problems of both today and tomorrow.

“Judging from many observations, what often distinguishes functioning families from dysfunctional ones is not income, wealth or educational attainment. Rather, it is the degree of mutual trust; and it is the willingness for individuals to compromise in order to serve the greater good,” El-Erian wrote.

Confidence building and a common vision for the country’s path to prosperity must be maintained if the country is to see blue skies again.

“Both elements are lacking in Washington these days. As such, even if our politicians manage to avert the fiscal cliff, as we think (and hope) is likely, the outcome will not be a solid stepping stone for what needs to come next,” El-he said.

“If anything, the way the fiscal cliff negotiations are being conducted will complicate politicians’ ability to reach subsequent agreement,” El-Erian added.

The entire global economy is following the United States and its progress to avoid the fiscal cliff, as reaching a toothless compromise that fails to bring lasting fiscal reform could wipe out growth in the world’s largest economy.

“If the U.S. economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero,” Christine Lagarde, managing director of the International Monetary Fund, told CNN.

“It would be much better to actually have a more comprehensive approach and to deal with all the issues.”

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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