Pimco’s El-Erian Revisits The New Normal
The more we analyzed the situation, the clearer it appeared to us. Advanced countries, and especially the highly levered ones, were facing a very unusual outlook; and the longer it would take for both the public and private sectors to realize it and act on it, the greater the number of unthinkables that would become fact and the longer they would persist.2
As a global firm, we needed a simple way to convey what we thought was a material (nonconsensus) finding. We came out with a simple phrase, "the new normal," which we disseminated widely in May 2009 following our annual Secular Forum.
The new normal was meant to convey the notion that, for a host of reasons, economies would not reset in the traditional cyclical sense. Instead, absent a material change in policymaking and its mindset, the West was facing the unfortunate probability of several years of unusually sluggish growth, persistently high unemployment, and periodic debt and deficit concerns.
The new normal also postulated a contrasting outlook for emerging economies in what we labeled a "multispeed" world.3 Rather than be pulled down by the malaise in the West, as most expected, emerging countries (and particularly the systemically important ones, including Brazil, China, India, Indonesia, Mexico and Russia) would rebound quite quickly—thereby also accelerating the global convergence of income and wealth.
This multispeed world would entail significant global economic and geopolitical shifts. Accordingly, we also analyzed the agility of the multilateral system. Worried by the slow adaptation in global governance, including multilateral institutions with long-standing representation and legitimacy deficits, we worried about global reconciliation issues.
At first, most observers dismissed the notion and characterization of the new normal. Words such as "unlikely," "idiotic" and "naive" accompanied much of the outside commentary. Some even claimed that our analysis was "fatalistic," rather than seeing it for what it was; namely, projections of what was likely to occur absent major changes in both public and private sector behavior.
In dismissing the new normal, some analysts pointed to the self-generating and mean-reverting forces within advanced economies. Others were comforted by the extent to which both fiscal and monetary policies had been activated to compensate for the disorderly deleveraging of private balance sheets. And all were encouraged by global policy coordination that reached an impressive high at the G-20 Summit held in London in March 2009.
However, while all these forces were indeed operating, they only succeeded in stabilizing the situation. They did not overcome the underlying tectonic shifts.
Yes, with trillions of dollars devoted to the task, a form of financial calm was restored to a banking system that had put the world on the verge of a global depression. But the sharp "V"-shaped economic recovery that many had anticipated thereafter failed to materialize. Western economies did not achieve escape velocity. Lost output was slow to be reclaimed.
The most consequential disappointment was on the employment front. Given the enormity of the damage to the labor market, job creation was painfully slow. Long-term unemployment climbed to alarming levels, as did youth joblessness. Already-fragile safety nets were stretched yet further. Income and wealth distribution worsened. And governments and central banks scrambled to revise—repeatedly—economic and financial projections that erred only on one side, that of over-optimism.
The growth and jobs disappointments were particularly disruptive for countries with high deficits and debts, whether accumulated due to fiscal reasons (e.g., Greece) or on account of decisions to bail out irresponsible banks (Ireland). Access to market financing became more costly. In some cases, it stopped altogether, pushing countries to seek emergency funding from other sources.
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