This article originally appeared in the Daily Capitalist.
I am crossing Pimco off my list as a credible institution. If Bill Gross and Mohamed el-Erian are running that show, and if you have any money invested there, I recommend pulling out, fast.
The fact is they have very little understanding of basic economics and continue to call for policies that are ruinous to our fiscal and monetary health. They are run of the mill neo-Classical/neo-Keynesian economists who happen to be very good traders. I'll add something else as well: they are just lucky. As Nassim Nicholas Taleb points out in his writings, statistically institutions like Pimco can and will exist at the upper end of the investment advisory spectrum, and you can't tell if they are lucky or smart. I'm saying Gross and El-Erian have been lucky.
Bill Gross has already starred in the Daily Capitalist as Crony Capitalist of the Month. No need to repeat his errors. It is Mr. El-Erian I wish to discuss.
Perhaps the fact that Mr. El-Erian publishes commentary in the Huffington Post, that combine of liberal dogma, faith-based economics, and sleaze, is somewhat of an indicator of the quality of his analysis. Yes, I know HuffPo is respectable now that AOL blew $315 million to acquire them. But ... they are still sleazy.
What got me vexed were some of Mr. El-Erian's recent articles in HuffPo.
His style that is that of the Senior Statesman Who Pontificates. That is, there are a lot of nice words but little real content or meaning. It sounds like stuff that comes out of committees. Here is a typical example of his five point solution for America:
First, start with a specific destination for the economy defined by transparent metrics for growth, jobs, inflation, financial soundness and, importantly, the key social indicators. I suspect that most can agree on a formulation that is both desirable and feasible.
Second, translate these objectives into clear priorities for lifting the major structural impediments to our economy. Again, I suspect that there would be broad-based accord on key sectors where simultaneous and coordinated actions are needed. (My list would include housing, the labor market, banks, infrastructure and public finances, as well as immediate steps to unleash productive energies.) ...
Blah blah, blah. I could go on but it all sounds the same. It's the kind of stuff you hear from retired CEOs who go on the lecture circuit. If you wish you can read on your own his five point program to save us.
Basically he is saying that we need to focus on national goals, that our politicians need to show leadership, that we need to unite behind a program that everyone can agree to, and then we need to execute the plan. And he says we have little time to waste or ... we will suffer from years of economic stagnation. Wow! Pretty (un)impressive stuff. I am sure it appeals to the HuffPo audience.
It actually took a little digging to finally figure out what he actually advocates. Here it is in one sentence:
To get out of such an impasse, central bank crisis management remains critical; and it will probably involve further balance sheet operations and monetization of debt.
At last: quantitative easing ("further balance sheet operations") and inflation ("monetization of debt") is the solution.
This is Krugmanesque in its naïveté and ignorance of monetary theory. One might ask him why it hasn't worked after pumping $2 trillion of fiat money into the economy. One might ask why ZIRP hasn't worked either. Or why it hasn't worked in Japan – ever.
When you analyze what Mr. El-Erian is advocating it is the further devaluation of the dollar, more price inflation thereby destroying valuable capital and robbing the elderly of their savings, distorting the business cycle which will lead to further economic stagnation and high permanent unemployment, and increasing federal debt as a percentage of the economy thereby creating debt slaves of future generations who, like us, will obtain no benefit from what we spent the money on.
It gets much worse though. Here is the key paragraph:
In this specific area, the world should learn from one aspect of China's economic policy approach. If it does, it would do three things differently. First, it would get buy-in from broad segments of society for medium-term policy objectives (in this case, high growth, greater employment creation and financial soundness). Second, it would link the objectives to specific structural reforms that are implemented simultaneously and - equally importantly - owned, closely-followed and coordinated at the highest political level. Thirdly, it would build institutional flexibility that facilitates timely mid-course corrections if needed.
While I am a harsh critic of Mr. El-Erian, I am doing my best to fairly represent his ideas from his actual statements without taking them out of context. Thus, when I give you the above quote, I believe it is not just a throw-away line.
Here is the following paragraph:
You would be surprised how effective such a re-framing could be in overcoming the political squabbles that undermine the specification and implementation of individual measures. It also allows for much more effective global co-ordination.
This is a shocking statement from Mr. El-Erian. It is indicative of his world view. That is, an effective government is one where the government makes policy, imposes it on its people, and carries out such policy based on government-determined economic goals. It appears to me he is advocating a command economy.
Why do I conclude that?
If we can agree that WWII was a period of a "buy-in" of government economic policy objectives, then I don't see any other period in recent American history where there was a "buy-in from broad segments of society" of any economic policy. In fact constant dissent and in-fighting is the way most democracies function.
The way China achieves a "buy-in from broad segments of society" is to dictate policy to its cadres who make sure that their "medium term policy objectives" (5-year plans) are carried out. "Re-framing" means that if you don't "buy-in" then there are penalties.
I have to conclude one of three alternatives from his statement. One, he is naive. Two, he is ignorant. Three, he means it. He is a sophisticated, well educated, worldly gentleman. Thus I don't think he is naive or ignorant. I am sure he would deny that he is anti-democratic and that his reference to China was not meant to be exemplary, but rather illustrative of what happens when those objectives are attained.
Perhaps it has occurred to him that such "national" objectives can never be attained in a democratic, capitalistic society. At least not in the top-down manner he advocates. Common goals here have been mainly achieved from ground-up voluntary cooperation of millions of people through the marketplace. Politics has not been a great forum for achieving successful policy, as he points out. By trying to limit the power of the federal government, the founders of our country understood very well the pitfalls of central political authority. The fact we have so much discord is a direct result of the growing power of the federal government to intervene in our lives. By taking away individual choice we have to use politics to fight for what was originally ours.
Mr. El-Erian is a throwback from earlier times when the chimera of central planning and "national goals" were seen as laudable goals. We dismissed those ideas because they don't work. Mr. El-Erian was born much too late.