Thursday, May 13, 2010

PIMCO's El-Erian sees U.S. inflation in medium term

El-Erian is the CEO of Pimco, the world's largest bond fund and he is also the firm's Co-Chief Investment Strategist.

Unfortunately for Pimco (which has had a longtime, good track record under Bill Gross's management), El-Erian doesn't seem to understand the current macroeconomic picture.

After betting heavily on German bonds earlier this year (and against Treasuries), El-Erian is seemingly not worried that Germany is guaranteeing a larger slice of the spreading bad euro debt and the euro is also falling. That's not a good scenario for euro bonds, even if they are German.

Now he's saying that there's too much "money printing" going on and it's going to create inflation. This is a very unsophisticated statement from a guy who used to be IMF Chief Economist. (Then again it's the IMF, so maybe not!)

While central banks are supplying liquidity to bail out banks and speculators who made bad investments, countries are being forced to cut back on spending and that is not inflationary. On the contrary, it is deflationary.

Liquidity provisions only stave off defaults and bank runs; they do not add to aggregate demand. It is not inflationary.

Which brings me to gold. I realize that gold is running up in price, however, if gold is truly an inflation hedge and we are facing a broadening of deflationary pressures (my view), then gold is a huge bubble.

I may be wrong, but I don't think so.


Matt Franko said...

If there was all of these USDs sloshing around, doesnt he think that some banks over here with all of the excess reserves "to lend out" could lend some to these Euro institutions that had to go to the Fed to get the $9.2B of funding this week via the emergency USD swaplines? Afterall there is supposed to be like $1T of these excess reserves out there waiting to make inflation....

Another point raised that the monetarists will never answer!

Ryan Harris said...

El Erian's monthly column said, "it is certain that the Greek crisis will undermine aggregate demand and, therefore, trade flows – directly and, more importantly from a global perspective, by imparting an additional fiscal drag to other European countries." And now a couple weeks later he says medium term inflation. What a goof.