Mohamed El-Erian - CEO, PIMCO HARDtalk

More needs to rout the night. Now Is it time for the doom-mongers to

admit they were wrong about the world economy? The eurozone is

intact, the US hasn't plunged off that fiscal cliff and even the most

stagnant economy of them all - Japan's - is showing signs of life.

Could it be that central bankers and politicians are finally ready

to take bold decisions in their quest for growth? HARDtalk speaks

to one of the world's most influential investors, Mohamed El-

Erian, boss of the massive PIMCO fund management business. Caution

or confidence, which is winning Mohamed El-Erian, welcome to

HARDtalk. Thank you. The last time we spoke, a couple of years ago,

you were pretty gloomy about the outlook for the world economy. One

word you used words terrifying. Has the fear gone for you? To some

extent, but not completely. I was terrified of the prospects of

sluggish growth, persistently high unemployment, and social unrest.

What we have seen in the last couple of years is exactly that.

Sluggish growth, very high unemployment and unrest in seven

countries like Greece. However, we have seen the actions taken back

has delayed the second stage. I am glad about that. As a parent, I

would rather see the world going into concerned then into a bad

state. I have had the impression that you

have felt that political leaders around the world, maybe most

particularly in the advanced economies, when it up to the task.

Thank you think it is time to modify the negative view you have

of political leadership? I wish I could say yes. But not yet. The

reason why the global system is in a better place has very little to

do with the politicians and more to do with central bankers. They have

stepped up to P-plate. They had used exceptional measures. It is a

little bit like drug company putting out a medication that has

not been clinically tested. They have bought time for the

politicians to get that act together. But the politicians have

not done their bit yet. They have not stepped up to the

responsibility. There is one country right now where the

relationship between politicians and central bankers might be being

changed in an important and fundamental way. That country is

Japan. The new Prime Minister has a clear democratic mandate to take

some dramatic economic policy decisions. Decisions he will impose

on the central bank. It is about listening monetary policies and

changing the key objectives the central bank had been working

towards. That is fundamentally important. It tells us about how

the global system is operating. Japan is being forced into this

debt. It has had its currency appreciated. If one central bank is

pumping a lot of liquidity, as it is in the US, but other people have

very difficult choices. I dare say it accept the consequences and see

their currency appreciate, hollowing out their economy, like

in Japan, or they could during the Fed in what they are doing. It is

scored irresponsible responsibility. It is the right thing to do because

someone else is being irresponsible as well. People look ready, not

just as a hugely influential commentator, but as a real premier.

You and you'll find, you look around the world for the wisest

places to put your investors' money. Especially in bonds. Including

government bonds. You look at the Japanese prime minister's attempts

at stimulating the economy, rise of inflation in Japan and the devalued

currency, you look at what is happening and think that Japan is

still a place you want to put money? You sound like a good

investment manager. You said exactly what will happen. They will

target high inflation, and they will weaken the bin cut -- weaken

the currency. We have to react to that. Owl role, as guardians of

people's invention -- pension and savings, we have to deliver.

Depended on which part of the Japanese market you are looking out,

there are both risks and opportunities. The opportunities

come from the fact that they're going for growth. That is good for

certain markets. The risk is that they are going to weaken their

currency, therefore you have to be careful about holding Japanese yen.

We are talking about a country with a large running budget deficit. And

even worse, a massive debt mountain which adds more than 220 % of GDP.

I am surprised you are sounding so sanguine about the prospects. There

is the potential of a massive collapse in Japan if this policy

does not work. You asked me what was likely to happen. If you asked

me what should happen, we would have a different discussions. The

reality right now is whether it is Japan, or the eurozone, or the US.

Everyone is taking short-term measures. They are not doing the

hard work, which is structural reforms, dealing with many economic,

political, social issues. They are looking to central banks for

delivering a shot -- short-term outcomes. That is the world we are

living in. The politicians have not stepped up to their

responsibilities. They have to make tough decisions. Despite the time

delay between me and you in California, I have to interrupt you.

It is easy for you to sit there. You are not held to account by

voters. You know that voters around the world, especially in the US,

Europe and Japan, they have people will are not willing to accept high

levels of unemployment and continuing sluggish growth. They

have to deal with that. One way they have decided is to continue

with highly stimulative policies, including quantitative easing. And

instructing their central banks to not just be preoccupied with

inflation targets, but also to think about removing the jobless as

well. But has to be right for a politician. It is. They should be

targeting higher growth and low unemployment. I have been saying it

non-stop. Bad it is wrong of politicians to think that central

banks can deliver what I call the immaculate recovery. Even central

bankers are warning, whether it is Mervyn King in the UK, or Ben

Bernanke. Do not depend on us. You need to do you roll so we can build

a bridge. We cannot deliver the destination. The politicians are

focusing on a bridge and what the people like is a destination. And

that would not come until board decisions are made by the

politicians. I want to give a quote to you. This man has not been a

huge fan of you because he things you have been deeply conservative.

Of Japan, he says, something remarkable is happening over there.

The country that has pioneered economic stagnation may show the

rest of us a way out. He thinks this could be a watershed moment.

He is right. For him to deliver the watershed moment, which is possible,

it is not probable. This is what needs to happen. The Bank of Japan

needs to be convinced it can deliver what the Prime Minister

wants them to do. Second, you need fiscal stimulus. Japan has a really

bad track record current fiscal and skinniness. Third, you need society

to accept the short-term cast which has higher inflation and higher gas

prices. 4th, you need political harmony. We are looking at Japan,

we are hoping they can deliver. But we are not under estimating what

they need to do. You talked about Mervyn King, the current governor

of the Bank of England. And you talked about Ben Bernanke. There is

the idea that the old orthodoxies, inflation being the only key

priority for motor policies and central bankers, has to be modified.

There has to be a broader look at central banks taking responsibility

for growth, not just for inflation. The new guy who will replace Mervyn

King seems to buy into that. Do you? I do. From day one, I have

recognised that inflation is a means to an end. The end is

improving living standards and better opportunity for all. He she

has shown that when you have high inflation, you do not just give up

growth, but he also give up on income distribution because the

poor cannot protect themselves from high inflation. Low and stable

inflation is a means to an end. What people are finally realising

is that you need to target the end more aggressively. I would not put

all the burden on central banks. This is a shared responsibility

among many economic agencies nationally and globally. Bellini

much better policy called an Asian. -- we need much better policy

called in. I imagine you are not thinking about the way in which the

White House, and the US Congress are working together, or do not

work together. The fiscal cliff was avoided by it is the sense of

crisis still alive? Still alive is the underlying problem. The US has

not as much of an economic issue as it does a political issue. We are

seeing extreme political dysfunction in Congress. I am

looking at this as an image of a divorcing couple arguing over a

pillowcase. There are be the issues. -- bigger issues. But they cannot

even resolved the argument over the pillowcase. If you're living in

this country, you have very little heart in Congress. Less than 10% of

the population think Congress is doing a good job. This political

discussion is holding back growth and employment. Congress is looking

to keep the can down the road when it comes to the debt ceiling. They

have to lift it beyond the 16.4 trillion dollars it currently

stands at. It was coming to ahead in late February but it looks like

it will be put back three months more. Ben Bernanke says if this is

not sorted, it could be a recovery ended event. Is it right to see it

in those terms? It is. The longer this uncertainty persists, the more

businesses will hold back in investing in people, equipment, and

then the growth momentum will sigh. It is not just that this is

dampening growth. It is taking attention away from other issues.

We need help on the functioning of the labour market. President Obama

set up an employment initiative six months ago. It got nowhere. We need

help in the credit market. Small businesses cannot get credit. We

need help in the functioning of the housing market. There are many

items on the two to list in Congress. It is being crowded out

by these continuous fight over the fiscal issues, that simply are

repeated month after months. Before we finish a quick tour of the world

economy, I have to take you to future of the euro. He said there

were real fears that the euro, in its current configuration, would

not survive. The eurozone has poured through. Are you prepared to

I certainly underestimated the extent to which Europeans would

throw money at the problem and delayed dealing with the

fundamental issue, such as countries like Greece, that they

are unable to grow within the eurozone, and that difficult

decisions have to be made. Where I still stand, something has to give

them. Either the eurozone would transition to a smaller, less in

perfect eurozone, or Germany and other strong economies are going to

sign up to end this checks to countries like Greece. One of the

two decisions will be made. Let's be clear about this, when just the

other day, in the HARDtalk student I had the vice-president of the

European Commission, he told me quite confidently that the period

of existential threat for the euro was categorically over, in your

view, was he being premature? question is what the eurozone will

look like. Here is a choice that has to be made by European

countries. One is to opt for something that works better because

there is better political, economic, banking integration. That is one

possibility. The other one is to say that we are going to maintain a

political project that does not make total economic sense, but that

is OK because the credit Dyer's -- the creditors will subsidise the

debt to tears indefinitely. And sure that make that decision,

growth will not materialise. point to key decisions that I yet

to be made. That leads me very easily to a discussion about the

historic decision taken by Prime Minister David Cameron to go for

the gamble of than in out referendum in the UK. It is about

Britain and membership of the European Union. His argument is

that he will go to Europe, he would negotiate a new settlement for

Britain inside the European Union, a loose a settlement, as far as

Britain is concerned, and then he will put it to the people as an in

out referendum. As an outside observer of Europe at -- and as an

investor, what you think of the strategy that can man has now

adopted? -- that Cameron. It does not surprise me that he has gone

down the path. I felt how strongly that people felt about the British

sausage, I remember the Yes Minister series on that, so it does

not surprise me. Pretend use the European Union as a means to an end,

it is a common market that allows for more trade and employment. --

Britain views. The Europeans, especially the Germans and the

French, see it as an end in itself, it is about political integration,

reducing the risk of something terrible. There is a fundamental

difference in how people see this. This fundamental different

perspective has not been resolved yet. The second thing it tells us

is that the more the eurozone, the 17 countries, seat closer and

closer integration, the more problematic it is for countries

such as Britain that are members of the European Union but not members

of the eurozone. You are a hugely influential investor and economist.

In your opinion, can the UK afford to leave the eurozone -- the

European Union, which is going to be one of the two options in this

referendum? It will certainly suffer the consequences of a said,

which will probably mean lower growth, lower investment initially,

it will be a one of shock, and that is the economic cost of a political

decision. Then it will be set, but immediately, it would translate

into lower investment and lower growth. You would be aware that a

senior figure in the State Department, Philip Gordon, recently

came to London and said that the US regarded it as a key national

interest for the UK to be inside the European Union. As a private

investor in the UK -- the US, will be UK be less attractive to you,

will it be the strong economy if it were to be outside the European

Union? A lot depends on what conditions prevail on the outside.

If he forced me to say in general, I will tell you yes, because it

will have less preferential access to a bigger market, and that

translates into law where economic potential. So yes, it will be worse

off. But the only thing that I would caution is that let's wait

and see on what condition this would occur. But on the surface of

it, Britain economically will be less well off. And you would be

loath to put more money into the UK if that is your analysis.

problem that Prime Minister Cameron has to deal with is that when you

make a forward announcement, and he has made a forward announcement,

this referendum is not any time soon, people like a start putting

in an uncertainty premium. If we are going to make investment

decisions which will play out over five-ten years, what does the

regime look like in the next five- ten years. It will go up when you

are not sure what the relationship between Britain and Europe will be.

We may face five years of uncertainty. If he were to win the

next British election, he will insist on a referendum by the end

of 2017. It seems to be suggesting to me that that potential length of

time of uncertainty could be very damaging. It could. The one silver

lining is that in that period, we will also get information on the

eurozone. We have the eurozone, the inner core, and Britain on the

outer core of the European Union, and Britain's well-being also

depends on what happens in the inner core. We will have a lot to

talk about. It is not just about what Britain does, whether it stays

in the outer core goes out, it is also about what happens in the

inner core. Right now there is speculation because our economic

performance is poor, we may be close to losing our AAA credit

rating. You follow this very closely because it is very Germaine

to your business investing. Do you think that Britain is going to lose

its AAA credit rating? It depends who is writing it. If you are

talking about the rating agencies, Moody's, SNP, they have Roddis

ignored a highlight of wood that Britain may lose its AAA C -- they

have already signalled a high likelihood. We do not follow those.

We use our own internal ratings. It suggests that British risk right

now is less than it was in the past. There is likely to be a downgrade

from the rating agencies. In fact, very few countries are likely to

return AAA rating right now, given the course that everybody has

embarked on, but investors, we make a different assessments. We have

talked about Japan, we have talked about the US, the European economy

as well. In this terrible phrase, are you more risk on all this off

in your mind set at the beginning of 2013? We are taking risk off the

table. We were based on, our clients benefited, and now we are

taking it off. Let me explain why because this is very important.

Economic fundamentals are here, the valuations are much higher, why,

because central banks have created a huge liquidity which, if you

listen to what Ben Bernanke said in December, he said the objective of

monetary policy is to push investors to take more risk. He has

pushed investors to take more risk, valuations have gone up, but the

fundamentals do not validate these valuations. Valuations will come

down. At this point, we are saying what, be careful because asset

prices are artificially supported and there is a limit to how long