August 17, 2014

One view of economy

This is a very good discussion of the status of our economy. The program is now daily on WDET. Follow it.


Below is a summary of what Mohammed El-Erian is saying. (Do not be confused by his name. He is an Egypt born American citizen who is considered to be one of the top economic thinkers in the world.)

Mr. El-Erian says we are in a world of economic contradiction and there is a 50/50 chance of the economy getting better or worse. The world is buying time for the economy to heal and it is not responding fast enough. "You have to have foundation to have conviction". He is saying presently there is not foundation.

Per Mohamed the options we are facing are summarized below. What must be avoided is not to get paralyzed between the two scenarios.

  • The economy in the United States has come back a long way. At some point if it continues it will reach critical mass.
    • There is great innovation taking place
    • We have an energy revolution making us more energy independent
    • Many other countries are not only becoming good producers but also good consumers.
    • If politicians in Washington would step up to their responsibilities of economic governance we could reach critical mass quickly and prosper
  • Issues holding the economy back includes the following
    • Europe's economy is struggling and it is the world's largest economic region.
    • China is trying to accomplish a "middle income transition", going from a country where their citizens as a whole were poor to where it has a strong and growing middle class.
    • There is much risks due to a lack of global leadership.
    • For the past four or five years we have been deep in economic experimentation and no one knows where it will lead. He is referring to "quantitative easing" implemented by the Federal Reserve. At some point the benefits are outweighed by the risk and if the timing is botched it could be a serious problem.
The danger is the world no longer has one core leader that can impose its will on the world. This is complicated by groups such as ISIS that is not a nation that can impose some of its will on the world. The result is we have market coordination and governance failures.

The guest compares the economy to an orchestra filled with very god musicians with no conductor. The result s poor music. The financial sector failed in 2008 because it did not have a good conductor, regulators.  The system needs to reform and if it doesn't countries will try to bypass the system of order and that causes the problems we are seeing today.

We have major changes occurring and we have a political system that cannot agree on things that we know are in our common interest to fix including a labor market that is not functioning well, infrastructure needing upgrading and with interest rates being very low it makes sense to borrow and invest, we know immigration laws need reforming and we have a tax system that encourages companies to do things that are not in the national interest.

The above are problems we know need addressing.  Our political system is not up to the task at this time. The Federal Reserve is the one institution that can take action without the approval of Congress and it has done so for both moral and ethical reasons. It has acted as the main policy maker even though it does not have the correct tools.

The Federal Reserve has been buying time for the system to heal. If  the political system does not step up the nation will be faced with reacting to the Federal Reverses "quantitative easing" without a plan. This will result in another major financial crisis and the next generation being worse off than the current one.We have a problem that can be solved but we need a political system that is better capable of addressing the problem than we have today.

Our current system encourages more income inequality. It is not only income and wealth inequality it includes inequality of opportunity. In the short term it is the wealthy that are benefiting from the Fed's quantitative easing because they are the ones buying financial assets. We need to focus on helping particular segments of society that needs help.

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