Mohamed El-Erian, CEO of bond giant Pimco talks about the best and worst case scenarios of what could happen in the U.S and which countries are likely to bounce back the fastest.
>> Eric Schurenberg: Even before the crisis hit, Mohamed El-Erian CEO and co-CIO of Pimco, was warning that the U. S. was on an unsustainable course. His book, When Markets Collide, suggested the center of gravity in the world economy was shifting away from the U. S. to the developing countries; of China and India. Joining me now is Mr. El-Erian to talk about this, and other factors going on in the world economy today. Thank you for joining us Mr. El-Erian.
>>
Mohamed El-Erian: Thank you Eric for having me on.
>> Eric Schurenberg: Global trade has been choked off. Global financing has been cut off, and especially hard hit are the big exporting nations in the developing world. Are you still as positive as you used to be on the emerging economies?
>>
Mohamed El-Erian: I am long term Eric. The first point you made, which was important, is that the world suffered a massive cardiac arrest on September 15. It's what economists call sudden stop. Everything stopped when Lehman failed, and the result of that is that trade financing stopped overnight. Because of that, everybody was knocked down in the global economy. So nobody stayed on their feet, everybody was down. So the question is not today whether you're down, the question is how quickly can you get up? And if you ask that question how quickly can you get up, it leads you to what conditions you need to be able to get up in a sustainable manner. You need to be in that savor, you need in that creditor, and many emerging economies meet that criteria. So looking forward, one would expect the American economies, not all of them but the stronger ones - the Chinas of the world, the Brazils of the world, to recover first and to recover in a most sustainable fashion.
>> Eric Schurenberg: What worries you the most?
>>
Mohamed El-Erian: I think what worries me the most is that the system is not gonna be able to reset at anything that looks like high employment and low inflation. I worry that we may end up, and I say 'may' because it's a low probability, but you have to worry about that. We may end up in a multiyear process of low growth and high inflation.
>> Eric Schurenberg: You say that's a low probability. What's a higher probability?
>>
Mohamed El-Erian: The higher probability is that we start recovering on the growth side, global growth goes back to full percent by 2011, the U. S. slowly rehabilitates itself, and inflation is contained.
>> Eric Schurenberg: Looking back 5 years from now, what will we say nobody anticipated? What were the biggest surprises and how will the world have changed?
>>
Mohamed El-Erian: It's a tough question, and it really ultimately relates to the United States. The baseline scenario that most of us have is that the United States remains important, remains an engine of growth, but is no longer the engine of growth in the global economy. That, as you said in your introduction, you get a shift in gravity to the developing world, and we go from 1 big global plane that was powered by the U. S. as the global engine of growth, to multiple smaller engines that include the U. S. and developing countries. That is the baseline scenario. The surprises would be if the U. S. turns out in 1 of the 2 corner solutions, as economists call it. 1 corner solution is what happened to Japan in 1989, that basically Japan checked out of global growth for 10 years and nobody noticed. So 1 very big surprise would be that the U. S. is not able to get it's act together, but despite that the global economy continues to grow. The other big surprise is that the other side of the distribution of surprises, if you like, is that if the United States doesn't face an L or a W, but in fact faces a V. And we find out that towards the second half of this year, the U. S. is back at 3 percent. That would be a game changer for markets and for the global economy. I think the chances of both probabilities are low, but they will constitute major surprises to the baseline that is now priced into markets.
>> Okay that's interesting. And those letters you were talking about, referring to the shape of the recovery?
>>
Mohamed El-Erian: Correct.
>>
Eric Schurenberg: Thanks for joining us Mohamed, that was very interesting.
>>
Mohamed El-Erian: Thank you Eric.
>> Eric Schurenberg: I'm Eric Schurenberg for Money Watch.com. Thanks for watching.
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