Pimco's El-Erian: Improving Economic Data Don't Reflect Grim Reality

Wednesday, 21 Nov 2012 10:48 AM

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Improving economic indicators merit applause, but the economy isn't picking up its pace along the road to recovery, said Mohamed El-Erian, CEO of fund giant Pimco.

Monthly jobs reports and housing data have come in stronger than expected.

However, Americans remain anxious over the fast-approaching fiscal cliff, a combination of tax hikes and deep spending cuts due to kick in at the same time at the end of this year.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

The nonpartisan Congressional Budget Office has warned that failure on the part of lawmakers to deal with the cliff could send the economy contracting by 0.5 percent next year.

Fears that political brinkmanship may threaten progress on the cliff and elsewhere when it comes to longer-term fiscal reform can hamper the economy in a way that economic indicators fail to reflect.

U.S. consumer sentiment stalled at the end of November, as uncertainty grew over federal tax and spending programs next year, a survey released on Wednesday showed.

"Americans are rattled by the reckless and previously unthinkable political behavior they have seen in Washington," El-Erian wrote in a Foreign Policy OpEd.

"Be it politicians' repeated willingness to play Russian roulette with the economy (the fiscal cliff being this year's sad sequel to the debt-ceiling debacle) or last year's loss of one of the country's AAA credit ratings, Americans are regularly confronted with destabilizing realities that are hard to comprehend," he wrote, referring to the 2011 debt-ceiling debacle in which Congress lifted the country's borrowing limit at the last second, narrowly avoiding default.

Standard & Poor's stripped the country of its coveted triple-A rating just afterward.

"The further citizens get pushed away of their comfort zones, the less they trust the institutions of government. Lack of trust, in turn, encourages people to pursue approaches that undermine rather that nurture the collective good," El-Erian added.

"Moreover, for the first time in over 100 years, our children's generation risks being worse off than that of their parents. This could mean not only relative deprivation, but also the fracturing of a society built on the notion of continuous improvements in living standards — embedded not only in the popular narrative of the 'American Dream,' but also in mundane constructs like retirement and health-insurance plans."

Future policy must prioritize improving the U.S. educational system on top of narrowing deficits and paying down debts.

In addition, Americans need to be more competitive and aware of new financial realities.

Meanwhile, another intangible threatening the health of the U.S. economy must be addressed and treated as well — blame.

"The rich and privileged need to stop hiding behind the facade of the American Dream. A little bit of hard work is clearly not enough for every citizen to escape poverty," El-Erian wrote.

"At the same time, however, less well-off segments of society should be careful about placing all the blame on 'the system' for being rigged against them. Both views are harmful exaggerations, and both ignore the reality of how interconnected American society is."

In the meantime, President Barack Obama and lawmakers face the daunting challenge of managing short-term and longer-term fiscal imbalances threatening the economy.

"As he starts his second term, President Barack Obama has an important opportunity to convert into positive energy the nation's high level of anxiety about its economic and financial outlook," El-Erian wrote.

"Let us hope that the political parties can help him by overcoming their pettiness and, thus, enable the nation's broad-based aspiration for a much better future. If not, our collective anxiety will continue to rise and the payoffs from inspired individualism will fall far short of what is possible, desirable and, indeed, necessary."

Should the White House and Congress put politics aside and hammer out ways to improve the country's fiscal health, greener pastures may lie down the road, says Federal Reserve Chairman Ben Bernanke.

"There’s important potential for the economy to strengthen significantly if there’s a greater level of security and confidence about where we’re going,” Bernanke told the Economic Club of New York, according to Bloomberg.

“A plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy.”

Editor's Note:
Obama Donor Banned This Video But You Can Watch it Here

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