Investors and economists were sounding the alarm about a recession. But one senior economist who has watched the warning signs mount for months says this potential recession is unlike what we’re used to.
This economist is Mohamed El-Erian, who was previously the CEO of PIMCO, which is very influential in the bond market. He also chaired former President Barack Obama’s Global Development Council and wrote several best-selling economics books. Simply put, he’s one of the best watchers of the Fed and markets alive, and he hasn’t liked what he’s seen for some time now.
There is a tendency to see economic challenges as “temporary and quickly reversible,” El-Erian says wrote in a comment for foreign affairsciting the Fed’s initial belief that high inflation would be temporary or the consensus that the recession could be short.
“The world is not just teetering on the brink of another recession,” he continued. “It is in the midst of a profound economic and financial transformation.”
He referred to the economic theory that a recession occurs when the business cycle reaches its natural end point and before the next cycle actually begins to fly, but he said that this time will not be again in the “economic wheel”, as he believes that the world is witnessing major changes that “will last longer of the current duty cycle.” He highlighted three trends that indicate a shift in the global economy.
Three major trends are transforming the global economy
El-Erian says the first transformational trend is the shift from insufficient demand to insufficient supply. The second is the end of unlimited liquidity from central banks. The third is the increasing fragility of financial markets.
These help explain “the many extraordinary economic developments in the past few years,” he wrote, and looking ahead, he sees more uncertainty as economic shocks “become more frequent and more violent.” He added that analysts have not yet woken up.
The first shift was driven by the effects of the pandemic, starting with the shutdown of the entire system and stimulus from the government, or what El-Erian called “massive handouts,” causing “demand to go way ahead of supply.”
But over time, El-Erian said, it became clear that the supply issue “arised from more than just the pandemic.” It is linked to the Russian invasion of Ukraine that led to sanctions and geopolitical tensions, along with the widespread labor shortage caused by the pandemic. These supply chain disruptions have given way to “rounding up,” a more permanent shift for companies moving their production closer to home, rather than the 2019-era supply chain rebuilding. This mainly reflects a change in the “nature of globalization.”
“Making matters worse, these changes in the global economic landscape come at the same time that central banks are fundamentally changing their approach,” El-Erian said. as it was months nowEl-Erian criticized the Federal Reserve in particular for being too slow to recognize that inflation was entrenching itself in the economy, and then for its sharp rise in interest rates to make up for lost time.
With inflation on the rise, the Fed has turned to rate hikes – the last four increases were all by 75 basis points, which brought the federal funds rate to a range of 3.75% to 4%. This fundamental change in approach, El-Erian writes, led to the third problem. Markets realized that the Fed was scrambling to make up for lost time and began to worry that it would keep interest rates higher for longer which could be good for the economy. The result was the volatility of the financial market.”
Markets have been trained to expect easy money from central banks, he said, and the “damaging effect” of that has been the flow of “a large portion of global financial activity” into asset management, private equity and hedge funds, among other lesser ones. regulated entities. The volatility in the markets since the era of easy money ended this year can be understood as that big block looking for a new home, in terms of investment. It’s fragile at this point.
“The fragility of the financial system also complicates the work of central banks,” he said. “Instead of facing their usual dilemma – how to lower inflation without hurting economic growth and employment – the Fed now faces a dilemma: how to reduce inflation, protect growth and jobs, and ensure financial stability.”
El-Erian is not alone in citing multiple threats to the future of the global economy. Veteran economist Nouriel Roubini and financial historian Adam Tose are two other prominent voices warning of interconnected threats. Roubini has just written a new book called “Megathrites“At Least 10 Giant Economic Problems Facing the World While Tooze Popularized the Term”multi-crisisto describe a group of Related and multiplying problems.
Roubini himself Tell luck Recently, he and Touz had been describing a similar set of phenomena, though he did not address El-Erian’s criticisms. However, like El-Erian, Roubini explained the multiple factors at play and, because they are so interconnected, they create a domino-like effect, contributing to a potential recession.
“If you raise interest rates, you may also experience a crash in stock markets, bond markets, credit markets, and asset prices in general, causing more financial and economic damage,” said Roubini. luck. However, he explained that raising interest rates helps fight inflation, although it risks the possibility of a sharp downturn, all of which are caused by “negative shocks” to the supply chain.
Going forward, El-Erian concluded, these changes mean that economic outcomes will be difficult to predict. This would not necessarily mean one simple outcome but rather a reflection of a ‘cascading effect’ – whereby one bad event is likely to lead to another.
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