El-Erian Has It Right: The Failure Of Monetarism And Asset Purchasing

Mohamed El-Erian, former PIMCO guru and current Allianz economic adviser, warns that corporate cash, now being hoarded, must be unlocked for growth to take place. Otherwise he fears political collapse and economic demise.

He rejects the concept that people's QE (helicopter money) should be attempted, because of the unknown political ramifications. I don't know that I agree with him. Everyone else has benefited from QE except the people! But he may be right.

Nevertheless, I know he is right that monetary policy has limitations. He is right that the monetarists and market monetarists have failed to get money to filter down to the real economy, even though assets like fine art and high-end houses and stocks appreciated. Asset inflation also has a dark mispricing of assets attached, most often. That makes asset inflation a policy geared to picking winners and losers among us. That is very unAmerican.

He basically says that asset inflation, and methods to bring that about tried by the central banks, is simply not working to cause overall prosperity. It is true that this central bank trickle down economics is not very effective.

Yes, it is better than doing nothing, as no one prospering is even worse than just rich people prospering. But this practice of asset inflation has widened the wealth divide and is simply not enough for the economy to strengthen. There must be a better way and for El-Erian, it is the unlocking of corporate profits.

I would assume that unlocking of corporate profits means paying better wages and benefits. Paying good wages was just good business, not altruism, according to Henry Ford. When are American companies going to seriously take that advice?

And if you read Logan Mohtashami, who has very helpful research, you can see that cash buyers are still making up a huge part of the housing market, even in 2016. 26 percent of buyers n January, 2016, bought with cash. This is a buying up of America for the investor class that appears to me to be very unhealthy. This is part of that unhealthy asset inflation that El-Erian is talking about.

Mohtashami is always the optimist, saying that cash buyers will drop to 20 percent of buyers in the rest of the year. But he still adds a cautious note,  saying that buyers cannot gain enough equity to move up to better homes, and we know that was a central means towards prosperity in the last century.

So El-Erian is not speaking in a vacuum. It is simply essential that corporations pay better wages, that they make the real economy prosper. With the Fed betting on low bond yields and banks doing the same, we will likely never return to the prosperity of the past, but we certainly can do better than what is going on now.

And that means the economy needs to be set up so all classes have the opportunity to get ahead. That is missing now. That is stealing from future prosperity. Business would do well to heed this warning, that future prosperity for them demands better wages now. It is just good business. 

Finally, El-Erian fears that improbable events, like a Trump presidency or massive fluctuation in the price of oil, from 3 to 7 percent, become more probable as this asset inflation and wealth divide increases. That should alarm everybody. 



Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.