Pimco's El-Erian: Govt Policies Hurting Growth, Recovery

Friday, 05 Aug 2011 10:11 AM

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Employers added a surprisingly high 117,000 jobs to their payrolls in July, which will bring a welcome sigh of relief over anxious markets although much work remains to get the economy growing, says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

Technical factors helped fuel a 512-point drop in the Dow Jones Industrial Average on Thursday, but the underlying problem of weak economic growth remains despite the welcome news on the jobs front.

"The key challenge is how to safely de-lever Western economies that became too dependent on credit and on debt. How do you safely de-lever? You need growth," El-Erian tells CNBC.

MohamedEl-Erian200ap-.jpg
Mohamed El-Erian
(Associated Press photo)
"Unfortunately there are too many structural impediments to growth. So we need somehow to find other ways to safely de-lever. The bad news is there are very few cushions available and the policy responses are limited both by ineffective tools and dysfunctional politics."

Fundamentals still plaguing growth include a weak housing market and an a lack of clarity from the government regarding its finances.

"We still have a housing market that is not functioning. We have bank lending that is amazingly uneven, we have all these public finance issues. Remember, we didn't solve the medium-term fiscal issue — we made it worse after the debt ceiling," El-Erian says.

"And we have a labor market that is still not functioning well, so the relevant numbers look good but the absolute numbers are still pretty horrible. We have 16.1 percent of our citizens that are either under- or unemployed. And labor mobility is not what it was."

"Until we see structural solutions out of Washington, growth will not allow us to safely de-lever fast enough."

The White House and Congress recently agreed on spending cuts attached to raising the government's $14.3 trillion debt ceiling, although the verdict is still out on whether those fiscal measures are correctly geared towards righting the debt-burdened U.S. economy and making it grow again.

Should the government enact policies that promote more sustained economic growth, America will be a great place in which to invest.

"If we lift macro uncertainty, there's a potential for a significant market rally because there's cash on the sidelines, companies have the strongest balance sheets that I have seen for a very long time and they have cash on that balance sheet," El-Erian says

Some are praising the jobless figures.

The 117,000 net new jobs figure for July exceeded many analysts’ expectations and was the highest since April.

Furthermore, the Bureau of Labor Statistics revised upward June's figure to 46,000 jobs created from an original 18,000 figure.

"The better-than-expected report may quell some of the doom and gloom that appeared this week," says Sophia Koropeckyj, a labor economist at Moody’s Analytics, in a note to clients, the Los Angeles Times reports.

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