How ‘tapering’ of Fed bond buying could affect global growth
Mohamed El-Erian is the CEO of the investment firm PIMCO, the world’s largest bond investor. In an interview, he discusses what might affect the Fed's decision to begin tapering its asset purchases and what impact such a move may have on the global economy.
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Whether it is Japan or the United States, you will hear officials there say that they are pursuing domestic objectives using domestic tools. They will argue that a healthy domestic economy contributes to the global well-being. And, if pushed further, they will state that they are legally required to adopt a domestic focus.Skip to next paragraph
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These characterizations, though strictly correct, are overly narrow given cross-border linkages. Simply put, neither Japan nor the US can – for the well-being of their own citizens – ignore the international feedback loops triggered by their policy actions.
As an example, consider how the recent taper-induced dislocations in emerging economies can impact advanced countries.
The sudden flow of private capital out of emerging economies and its cascading disruptions will likely undermine demand there, be it consumption or investment. This would translate into lower revenues for the many American companies that have relied on growing sales to the emerging world, thus limiting their employment and investment plans.
Then there is the financial transmission channel. The more emerging economies use their international reserves to limit the volatility in their currencies, the less they buy in US Treasuries. In turn, this contributes to the upward movements in US borrowing costs, including on mortgages that Americans rely on to purchase new homes or refinance existing debt.
The challenges are compounded by the absence of an effective global policy conductor.
This role should be performed by the International Monetary Fund. But its effectiveness is undermined by long-standing representation and governance deficits. For its part, the G7 has a composition that is no longer reflective of the economic-power realities of today’s global economy. And the G20, while much more representative, lacks as yet sufficient institutional robustness and continuity.
GARDELS: Will the $100 billion BRIC (Brazil, Russia, India, and China) fund – a kind of BRIC IMF – have any impact? Is it the birth of an alternative IMF?
EL-ERIAN: No, at least not as yet. There are still lots of legal and operational details to sort out before such a fund can be fully effective, let alone play the role of an alternative IMF.
Mohamed El-Erian is the CEO of the investment firm PIMCO, the world’s largest bond investor.
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