Pimco's El-Erian: Divided US Government No Longer Good for Economy
By Staff News & Analysis - January 02, 2013

A divided government no longer benefits the U.S. economy as it did in the past, said Mohamed El-Erian, CEO of fund giant Pimco. In the past, indecisiveness and political stalemates in Washington prevented policymakers from passing laws that got in the way of the private businesses, which were otherwise free to go to work with Washington out of their hair. "It was once fashionable to argue that a divided government was good for the economy," El-Erian wrote in an OpEd appearing in The Huffington Post. "The view then was that politicians would be too busy with political brinkmanship to get in the way of a dynamic private sector. As a result, unfettered by government interference, the private sector was more likely to invest, hire and prosper … It is hard — very hard — to make this argument today." – MoneyNews

Dominant Social Theme: Government needs to get back to work.

Free-Market Analysis: Presumably, this is an emergent dominant social theme that Mohamed El-Erian is giving voice to. Perhaps it is a subdominant social theme, as well.

The dominant social theme is, of course, that government is good and among humankind's most necessary inventions. The subdominant social theme could be that government has never been more necessary than NOW.

Why? Well, as El-Erian suggests, the world in general, and the US specifically, has a need for a steady hand on the tiller. What he doesn't indicate, of course, is that it is government and central bank monetary policy that has placed Western economies in jeopardy in the first place.

To some degree, of course, El-Erian is "talking his book." He manages US Treasuries and it is not in his interest if the US as an entity and its fixed income instruments are downgraded. He wants the US – and government in general – to be responsive and make necessary changes.

For this reason, he's made this statement – which certainly goes against what has often been repeated in the business community. The idea that a divided government is good for the economy and the private sector has been a favorite truism of political analysis as well.

For the powerful El-Erian to reverse this perspective is a fairly significant event in mainstream financial circles. Here's some more from the article:

"Our self-inflicted fiscal cliff drama may be the most visible illustration of Congressional political dysfunction, but it is unlikely to be the last one or the most challenging," El-Erian wrote.

"It would also undermine the country's longer-term growth potential and, with that, the ability of many citizens to realize the American dream."

Lawmakers themselves say they understand anger on the part of voters when it comes to the fiscal cliff, a potentially recessionary combination of tax hikes and spending cuts due to take effect at year end.

"I don't blame people at home for wondering what in the heck is going on in the nation's capital," said Sen. Mary Landrieu, a Louisiana Democrat who is up for reelection in 2014, according to Politico. "It's hard to explain. … I don't think it looks good for either party."

Now Mary Landrieu may believe people are wondering what in heck is "going on" in DC (like El-Erian) but we would tend to believe such statements are disingenuous. Did Ms. Landrieu not notice what has become known as the Tea Party? This constituency is not "wondering" about the US government. In aggregate it wishes to dismantle much of it.

It is perhaps unfair to suggest that El-Erian, too, is ignoring what has taken place, but his solution – to utilize current sociopolitical tools more energetically than ever – is perhaps not feasible long term. The system, we would argue, is dysfunctional on purpose.

This is, in fact, the preferred method of the top elites, for whom El-Erian works. Business as usual is the order of the day. In fact, the just resolved (for the moment) Fiscal Cliff is a good example of how these things occur.

Nothing changed for the US as a result of the agreement to avert for the moment the Fiscal Cliff. The debt remained the same, the regulatory structure, the endless fiat money printing of the central bank.

El-Arian may want focused government officials to make necessary changes in the US and throughout the West. But one has to ask, what is it that modern government is to do?

Certainly, El-Erian wants a return to a previous status quo in which government debt was seen as properly apportioned and not overwhelming and in which US consumers – buoyed by easy money – pursued a virtually endless buying spree.

But the trouble is that the current economic system is set up to gradually fail. Central banking creates booms and then gigantic busts and economies both centralize and subside as a result. Eventually, the plan seems to be for world government to gradually emerge. Those who have created the current system have built an environment that like a shark only moves in one direction, forward.

For a number of reasons, then, what El-Erian is asking for may not be realizable. Government officials shall continue to overspend. The culture of corruption will grow. Sooner or later (and probably sooner) El-Erian's US bond market will experience a precipitating event that will burst what some have called the biggest fixed-income bubble ever.

This is no doubt what El-Erian really fears, a destabilizing element that crashes bond prices and causes rates to rise hard and fast. But he is looking at these issues narrowly and obviously does not sense how much the larger sociopolitical conversation has changed in the US.

The dissatisfaction that created the Tea Party has not gone away. While many are proclaiming a US recovery, any real economic advance will generate considerable price inflation. That's because the tens of trillions printed by central banks will surely start to circulate, causing rates to rise and choking off "green shoots" once again.

When it becomes clear to people that this greatest recession since the depression of the 1930s is not really over at all but is destined to go into yet another phase, as it did in the 1970s, whatever patience remains is likely to be exhausted.

El-Erian and others may wish to turn to renewed government activism to "solve" the 21st century problems that government has caused. But those who have set up the current system did not apparently intend for it to remain stable. And what we call the Internet Reformation is likely to continue to undermine people's willingness to put up with the status quo.

After Thoughts

We are not at all sure that El-Erian's plea for a renewal of activist big government is line with what realistically can – and will – occur. He and others in his position may wish for such an event but we would guess that the opposite may be in the offing, more divisiveness rather than harmony. The 21st century will be nothing like the 20th, in our view.

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