Top economist Mohamed Al-Arian says we’re not just facing a recession, but a ‘profound economic and financial shift’


Investors and economists are warning of a recession. But a leading economist, who has seen the warning signs rising for several months, says this potential recession is different from what we are used to.

He is economist Mohamed El-Arian, former CEO of the hugely influential bond market player PIMCO. He also chaired former President Barack Obama’s Global Development Council and is the author of several economic bestsellers. Simply put, he is one of the best Fed and market watchers out there, and what he has seen in the past has not pleased him.

There is a tendency to see economic challenges as “temporary and quickly reversible,” El-Arian wrote in a commentary for Foreign AffairsCiting the Federal Reserve’s initial view that high inflation would be temporary or the general consensus that the recession may be abating.

“The world is not on the brink of another recession,” he continued. “It is in the midst of profound economic and financial change.”

He was referring to the economic theory that a recession occurs when a business cycle reaches its natural end point and before the next cycle really starts, but he said this was not the time for “a new spin of the economic wheel”. Will be, as he sees the world experience. Big changes that would “derail the current business cycle”. He highlighted three trends that suggest the global economy is changing.

Three major trends changing the global economy

The first transformative trend, says El-Arian, is a shift from insufficient demand to insufficient supply. The second is the end of unlimited central bank liquidity. And the third is the increasing fragility of the financial markets.

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These “help explain many of the unusual economic developments of recent years,” he wrote, and looking ahead see even greater uncertainty as economic shocks “become more frequent and violent.” He said that analysts are not yet awake about this.

The first shift was driven by the effects of the pandemic, starting with a system-wide shutdown and government stimulus, or what El-Arian called “massive handouts,” which led to “demand far outpacing supply.” ”

But as time went on, El-Arian said, it became clear that the supply problem was “caused by more than just the pandemic.” This is linked to the Russian invasion of Ukraine, which resulted in sanctions and geopolitical tension, as well as a widespread labor shortage exacerbated by the pandemic. These supply chain disruptions paved the way for “nearshoring,” a more permanent shift of companies moving production closer to home, rather than rebuilding 2019-era supply chains. This essentially reflects a change in the “nature of globalization”.

“To make matters worse, these changes in the global economic landscape come at the same time that central banks are fundamentally changing their outlook,” El-Arian said. As he has done for months, El-Arian criticized the Federal Reserve, particularly for being too slow to recognize inflation and then making up for lost time with rapid rate hikes.

As inflation picked up, the Fed raised interest rates aggressively – the last four rose by 75 basis points, pushing Federal Funds rates into a range of 3.75% to 4%. But this fundamental change in approach led to a third problem, writes El-Arian. “Markets recognized that the Fed was trying to make up for lost time and began to worry that interest rates would stay high longer than was good for the economy. The result was volatility in the financial markets.

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He said markets have been trained to expect easy money from central banks, and this has had a “disruptive effect” that floods “a significant portion of global financial activity” into wealth management, private equity and hedge funds. , other less regulated entities. The volatility in the markets since the end of the easy money era this year can be understood as a significant portion looking for a new home to invest in. It’s delicate at the moment.

“The fragility of the financial system also complicates the work of central banks,” he said. “Instead of facing the usual dilemma – how to reduce inflation without hurting economic growth and jobs – the Fed now faces a dilemma: how to reduce inflation, protect growth and jobs.” and ensure financial stability.”

El-Arian is not alone in citing various threats to the future of the global economy. Veteran economist Nouriel Roubini and financial historian Adam Toews are two other prominent voices warning of interconnected dangers. Roubini has written a new book called “Megathreats” about no less than 10 massive economic problems facing the world, while Toews has popularized the term “polycrisis” to describe a range of related and complex problems.

Roubini told it himself Good luck More recently, he and Toews have described a similar sequence of events, although they have not touched upon El-Arian’s criticism. But like El-Arion, Roubini explained that many factors come into play, and because they are interrelated, it creates a domino-like effect, contributing to a potential recession.

“If you raise interest rates, you could cause a collapse in stock markets, bond markets, credit markets and asset prices in general, causing further financial and economic damage,” Roubini stressed. Good luckStill, he explained that raising tariffs helps fight inflation, even as the risk of a hard landing looms, all caused by “adverse shocks” in the supply chain.

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Going forward, El-Arian concluded, these changes mean that the economic impact will be more difficult to predict. And that doesn’t necessarily mean a simple consequence, but rather a reflection of a “cascade effect,” where one bad event can lead to another.

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