This is why this top economist says we are not headed for another recession alone

Investors and economists are sounding the recession alarm. But a major economist who has been seeing warning signs for months says this potential recession is different from what we are used to.

That economist is Mohamed El-Erian, formerly the 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’s one of the best Fed and markets watchers in the world, and he doesn’t like what he’s seen for a while now.

There is a tendency to see economic challenges as “temporary and quickly reversible,” El-Erian wrote in a commentary for Foreign Affairsciting the Federal Reserve’s initial thought that high inflation would be transient or the consensus that a recession could be short-lived.

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

He was referring to the economic theory that a recession occurs when a business cycle reaches its natural endpoint and before the next cycle really takes off, but he said this time the “economic wheel” will not be turned again, as he claimed. sees that the world is experiencing major changes that “will survive the current business cycle.” He highlighted three trends that indicate a transformation is underway in the global economy.

Three major trends transforming the global economy

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

These help to explain “many of the unusual economic developments of recent years,” he wrote, and looking ahead, he sees further uncertainty as economic shocks “become more frequent and violent.” Analysts are not waking up to this yet, he added.

The first shift was caused by the effects of the pandemic, starting with the system-wide grind to a halt and government stimulus measures, or what El-Erian called “massive handouts”, causing “demand to rise much faster than supply ”.

But as time went on, El-Erian said, it became clear that the supply issue was “caused by more than just the pandemic.” It is linked to the Russian invasion of Ukraine, which resulted in sanctions and geopolitical tension, along with widespread labor shortages due to the pandemic. These supply chain disruptions gave way to nearshoring, a more permanent shift of companies moving production closer to home, rather than a 2019-era supply chain reconstruction. 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 approach,” said El-Erian. As he has been for months now, El-Erian particularly criticized the Federal Reserve for being too slow to recognize that inflation was taking root in the economy, and then for steep rate hikes to make up for lost time.

As inflation rose, the Fed turned to aggressive rate hikes — with the last four hikes all being 75 basis points, pushing the Federal Funds rate to a range of 3.75% to 4%. But this fundamental change in approach led to the third problem, writes El-Erian. “Markets recognized the Fed’s efforts to make up for lost time and began to worry that interest rates would stay high longer than would be good for the economy. The result was volatility in the financial markets.”

Markets have been trained to expect easy money from central banks, he said, and the “perverse effect” of that is that “a significant portion of global financial activity” is flooding into asset management, private equity and hedge funds, among others. regulated entities. The swings in the markets since the end of the easy money era this year can be understood as that significant portion looking for a new home in terms of investment. At the moment it is fragile.

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

El-Erian is not alone in citing multiple threats to the future of the global economy. Veteran economist Nouriel Roubini and financial historian Adam Tooze are two other prominent voices warning of interrelated threats. Roubini has just written a new book called “MEGATHREATS” about no less than 10 massive economic problems facing the world, while Tooze has popularized the term “polycrisis” to describe a group of related and compound problems.

Roubini told it himself Fortune recently that he and Tooze describe a similar series of phenomena, although he has not touched on El-Erian’s criticism. However, like El-Erian, Roubini explained the many factors that come into play, and because they are so interrelated, it creates a domino-like effect, contributing to a possible recession.

“If you raise interest rates, you could also have a crash of stock markets, bond markets, credit markets and asset prices in general, causing further financial and economic damage,” Roubini said. Fortune. Still, he explained that raising tariffs helps fight inflation, even though there is a risk of a hard landing, all of which are caused by “adverse shocks” in the supply chain.

Going forward, El-Erian concluded, these changes mean that economic outcomes will be more difficult to predict. And it doesn’t necessarily mean one simple outcome, but rather a reflection of a “cascade effect” – in that one bad event can likely lead to another.

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