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Mohamed El-Erian's Bagehot Lecture From Buttonwood


A handful of major forces may be extremely useful in shedding light on most, albeit not all, of what is happening in the global economy today.

[Editor's note: Mohamed El-Erian delivered the "Bagehot Lecture" at the Buttonwood gathering in New York hosted by The Economist today. The following are excerpts from his talk.]

The world is undoubtedly fluid. You need only consider the seemingly endless list of prior unthinkables that have become facts; and it is a list that keeps growing. [Editor's note: The list includes France and US losing AAA rating, eurozone economy defaults, and Switzerland pegs its currency.] Indeed, some could well argue that this fluidity, and the complexity that underpins it, renders the very notion of a simplified analysis both undesirable and not feasible. Yet left unanswered, this complexity can also lead to damaging intellectual and operational paralysis.

We believe that a handful of major forces may be extremely useful in shedding light on most, albeit not all, of what is happening in the global economy today [which is being] led by bold central bankers, particularly in Europe and the US. They are venturing ever deeper into unfamiliar territory, in the context of a murky landscape and with partial and declining visibility. And they are not alone.

Central bankers are pulling along politicians and other policymakers who seem to spend way too much time bickering and dithering, and less time being visionary leaders.

Then there are the reluctant citizens. Many are bewildered and confused, and their reactions range from apprehension to resistance and outright rejection.

Yet it is also important to remember that the risks are not one-sided. There are also upside possibilities, albeit less imposing than the set of downside risks. Whether it is driven by idle capital and sidelined cash or a series of significant innovations, better policy cooperation could unleash forces that shape a completely different outlook – the sudden emergence of sunshine, if you like.

This is the multi-year reality that companies, governments, and households face today – that of an "unusually uncertain" baseline, asymmetrical two-sided risks, and the accompanying possibility of tipping points, multiple equilibria and path dependency.

For the European Central Bank, the latest – and most dramatic – phase of unusual policy activism started on July 26 of this year, when President Mario Draghi announced at a London conference that "within our mandate, the ECB is ready to do whatever it takes to preserve the euro." And to leave no doubt in anyone's mind about his seriousness, he added "and believe me, it will be enough."

His remarks culminated in the September 6 decision by the ECB's governing council. The Bank now stands ready to buy "unlimited" amounts of government bonds issued by struggling and systemically important peripheral countries (e.g., Italy and Spain).

Acting on its own, the ECB can only buy time. It cannot deliver the much-desired growth and financial sustainability outcomes, nor can it ensure the convergence of national democracies to a harmonized forward-looking regional narrative.
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