Part I makes a case for why the El-Erian feels this book is necessary and gives some background.
Part II tries to give a (recent) historical context toPart I makes a case for why the El-Erian feels this book is necessary and gives some background.
Part II tries to give a (recent) historical context to the discussion that follows. I skimmed most of this as, having read the papers regularly these past 8 years, a lot of it was review.
Part III is where the meat arrives. El-Erian details the ten main issues he sees as facing society today.
In Chapter 8, he makes the case that non-central bank policy makers (i.e., elected leaders) shirked their responsibilities, making central banks – wait for it – the only game in town. Central banks managed to prevent the gears of the global economy from becoming jammed, but because of the way their policy instruments operate, this has mainly benefited asset owners, i.e., the very wealthy (as an aside, this chapter also made me appreciate the Bank for International Settlements a lot more). The longer traditional fiscal policy makers (i.e., elected leaders) resist coming up with sustainable solutions for the problems facing their economies, the worse the price that will be paid in terms of financial stability.
In Chapter 9, El-Erian lays down the first of his Ten Big Challenges: Repeatedly inadequate and unbalanced economic expansion, reflecting cyclical/secular/structural headwinds, highlights the extent to which many advanced economies still lack proper growth models.. I would translate this into lay-person speak as, "The US, European countries and Japan don't have sustainable growth models." They all got hooked on an unsustainable growth model that relied on credit growth and leverage, that blew up, and now things are so messed up that it's hard to get political consensus to tackle the issues. Greece and Portugal relied on debt-financed government spending to fuel economic activity. Cyprus, Iceland, Ireland, the UK and the US focused on leverage in financial institutions to fund housing bubbles. China and Korea exploited the wave of globalization and trade to capture more market share and a bunch of other countries rode China's coattails. One way countries are (not) dealing with all of this is to try to manipulate their exchange rates to steal growth from other countries rather than implementing harder structural reforms. This is a zero-sum game though and given the limited success developed countries has had in implementing change, reform fatigue has set in. Places like Greece have fallen back on "extend and pretend" policies, "kicking the can down the road". The fact is, El-Erian argues, we're in a "new normal" situation, brought on by the difficulties of escaping from a liquidity trap and dealing with "balance sheet" recessions (a term that I believe he cribs from Richard C. Koo who authored a book of the same name Balance Sheet Recession: Japan's Struggle with Uncharted Economics and Its Global Implications), as well as changes in productivity trends, lack of infrastructure investment and demographic change. It's pretty rough ya'll. And El-Erian doesn't have much to be optimistic about, saying that all these developments probably mean that the slump is going to go on for even longer. There's also a brief but interesting section about prices. Many central banks have price stability as their stated goal and we've got a problem in the world now where our economists and central bankers don't have a good handle on the way prices are changing. The chapter concludes with a lot of really interesting stuff about emerging market economies having to deal with "tourist" flows of money as investors from developed markets economies park hot money in emerging markets financial systems that are not deep enough to handle it as well as encomium for the head of the central bank of India Raghuram Rajan who foresaw these issues. Sadly, there doesn't seem to be much of a prescription and the financial cushions that thoughtful finance ministers in emerging markets economies have been greatly depleted, leaving many of these countries in a tough spot....more