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Why The Contradiction? Stocks Fall While Unemployment Claims Are Down


Here's what we know about the global economy - it has been a very scary week. Markets have tumbled in many countries, with investors acting very skittish. Some markets are coming back today. What we don't know is what all this really means. Is it temporary or signs of a major downturn? And let's pose that question to economist Mohamed El-Erian. He's head of President Obama's Global Development Council and author of the new book "The Only Game In Town: Central Banks, Instability And Avoiding The Next Collapse." Welcome back to the program.

MOHAMED EL-ERIAN: Thank you, David.

GREENE: So is this - (laughter) are we heading to the next collapse? I'll just start with that question.

EL-ERIAN: We could well be. What we're seeking is unusual volatility. It doesn't reflect what's going on in this country as much as it reflects what's going on abroad and the fact that investors are now doubting the effectiveness of central banks.

GREENE: So sort of open that up for me a bit more, if you can. Volatility, investors skittish because they don't trust the central banks - is that largely because of what they saw in China, or they just don't trust central banks in general around the world?

EL-ERIAN: So we're coming from an unusual period where central banks have been able to repress volatility. They've used a series of experimental policies, and they've done that for good reason. With most of the other policy-making entities frozen by political dysfunction, the central banks are the only game in town. The problem is that they have repressed volatility, they have borrowed financial returns from the future, but the system hasn't produced enough growth. So now we have a major decoupling between very high asset prices and stagnant economic growth globally.

GREENE: So what you're describing - is that - is there a version of that here in the United States with the fed keeping interest rates so low for so long? And if so, is that because there was a sense that Congress, in your words, was dysfunctional and not doing much to manage the economy or - what happened here?

EL-ERIAN: So absolutely. The fed, in about 2010, after it had dealt with the immediate consequences of the financial crisis and averted a global depression - the fed in 2010 felt morally obliged to carry a very big burden. Why? Not because it wanted to, but because other policymakers were sidelined by political dysfunction. What no one realized is that this situation would continue for so long. And since the fed uses imperfect tools for the challenges at hand, there's collateral damage and unintended consequences. And we're now starting to see what that looks like.

GREENE: When you say imperfect - and I gather you're not just talking about the fed but talking about central banks in other countries as well - what is imperfect about the things they've done?

EL-ERIAN: So ask what ails us. Why is it that the West hasn't bounced back? Why is it that we're not growing at potential? First, we haven't invested enough in genuine drivers of growth - infrastructure, labor market reform, education. Instead, we over-invested in finance, which is not a driver of growth. Second, as inequality has gone up, we have decoupled the will to spend from the wallet. When the rich get the incremental dollar, they spend less of it. So you have a problem of aggregate demand. Thirdly, we haven't had the type of international policy coordination we need. Now, the fed cannot deal with any of these issues. The most it can do is simply buy time for the system until our politicians get their act together.

GREENE: So there is this disconnect, as you've talked about it, especially in the United States. I mean, we've seen some positive numbers. Unemployment is dropping. Wages are on the rise. But your message to Americans is that seeing the market here unstable and also markets elsewhere should be a real worry about where we're headed.

EL-ERIAN: Correct. And I detail it in the book. I call it the T-junction.

GREENE: T-junction.

EL-ERIAN: Yeah. Think of it - you're coming onto a crossroad. The road that you're on is going to end. We are no longer going to be able to rely on central banks. They've done so much, and they can't deliver anymore. So it's going to end. And as we get closer to the end of this road, the world is going to get more volatile and more unpredictable. That's what we're seeing. But where we come out depends on political choices. If the political system remains dysfunctional, then not only are we going to have low growth, but we're going to have recessions. Not only are we going to have financial volatility, but we're going to have disorder. However, if the political system responds, then we can have genuine growth, and we can have genuine financial stability.

GREENE: Thanks so much for joining us. We appreciate it.

EL-ERIAN: Thank you.

GREENE: That is economist Mohamed El-Erian. Transcript provided by NPR, Copyright NPR.

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