:00:15. > :00:20.Time for Hard Talk. The world's developed economies are in deep
:00:20. > :00:24.troubling but it could get much worse. If the euro zone in raffles
:00:24. > :00:28.no country be will insulate food the consequences and even if it
:00:28. > :00:36.does not, we may be in the middle of a decade-long contraction. My
:00:36. > :00:41.guess today is one of perk's most influential analysts and investors
:00:41. > :00:51.CEO of Pimco which manages morn $1 trillion of other people's money.
:00:51. > :01:15.
:01:15. > :01:21.What is the best way out of the We are in California. Welcome the
:01:21. > :01:25.hard talk. Thank you. You are one of the most prominent respected
:01:25. > :01:34.fund managers in the United States of America. Right now to you feel
:01:34. > :01:38.under more pressure than you have ever felt before? I feel more
:01:38. > :01:43.worried and scared not just as a fund manager but as a father. Every
:01:43. > :01:49.day when I kiss my daughter goodbye in the morning, she is eight, I
:01:49. > :01:53.wonder what she will inherit given the headwinds that refacing at the
:01:53. > :01:57.level of countries, at the level of regions and the level of the global
:01:57. > :02:01.economy as a whole so I would say I'm worried as a fund manager but
:02:01. > :02:03.more as parents. That is a fascinating answer. You have
:02:03. > :02:07.introduced the idea we need the talk about what is happening in the
:02:07. > :02:17.world at various levels from short to mid to long-term. I want to do
:02:17. > :02:19.
:02:19. > :02:23.that in this interview but let me start with the short-term. Right
:02:23. > :02:28.now it looks like nothing can be assumed to be safe - sovereign debt
:02:28. > :02:34.t youren situation we use t biggest banks in the world? What is safe?
:02:34. > :02:39.Yes, yes. I mean the global economy has lots many anchors. Not all of
:02:39. > :02:43.them but has lostt 78 anchors. We have lost the economic anchor, we
:02:43. > :02:48.have lost the financial anchor and we are losing our social anchor so
:02:48. > :02:52.the sense of uncertainty people are unsettled because they do not know
:02:52. > :02:55.what is now the parameter, something you can assume is safe
:02:56. > :03:00.and Constan and what are the variable, something that fluctuates
:03:00. > :03:06.widely so that is absolutely right, this feeling of what is safe is
:03:06. > :03:10.very, very broad and it speaks to why even people who can spend money
:03:10. > :03:16.today people with healthy balance sheets are saying "No thank you".
:03:16. > :03:20.They are going back the sideline and just waiting. As we bring to it
:03:20. > :03:27.real specifics let's to go the eurozone firstly. Right now do you
:03:27. > :03:30.think that we are close to the sort of fear-driven freeze of financial
:03:30. > :03:35.markets because of what is happening in the eurozone t fear
:03:35. > :03:41.that eurozone itself will unravel that we saw in the autumn of 208?
:03:41. > :03:48.Yes, we are. That has prompted this week's Central Banks to come in, in
:03:48. > :03:52.a very coordinated fashion because they are worried as well. Why do I
:03:52. > :03:55.say that? First we are seeing the functioning of markets starting to
:03:55. > :03:59.ab problem. This is like oil in your car. You do not think about
:03:59. > :04:02.the oil in your car often but you realise if something goes wrong
:04:02. > :04:07.with the oil the rest of the car will not function. What we are
:04:07. > :04:14.seeing is the markets themselves t pipes that connect different parts
:04:14. > :04:18.of the global economy are starting to get clog $. Second issue, we see
:04:18. > :04:24.an in ability of policy makers to catch up with the crisis let alone
:04:24. > :04:30.get ahead of it there it is getting worse and worse. Third, the banks
:04:30. > :04:36.are again fragile. And once you put the banking system in play lots of
:04:36. > :04:38.people will step back and stop interact tirpbgs including banks
:04:38. > :04:43.stopping to interact with each other. So put all these thing
:04:43. > :04:48.together t next few days and weeks are critical if we are to avoid a
:04:48. > :04:54.major economic downturn, if we are to avoid a major increase in
:04:54. > :04:58.unemployment and if we are to avoid a major increase in wealth and
:04:58. > :05:04.inequality. You say the next few days and weeks are crucial. We have
:05:04. > :05:09.seen the the US Federal Reserve acting with the ECB, the UK, Japan,
:05:09. > :05:14.Canada and the Swiss as well saying that they will do what is necessary
:05:14. > :05:20.to introduce new liquidity. That is going to work? It is important so
:05:20. > :05:24.in tree deucing liquidity buys you some time. The hope is that the
:05:24. > :05:27.Central Banks are moving because they feel confident this the other
:05:27. > :05:31.agencies which have been basically asleep at the wheel t other
:05:32. > :05:37.agencies are going to move and these other agencies are
:05:37. > :05:42.particularly in Europe and in the run-up to the December 9 summit
:05:42. > :05:46.where major decision haves to be taken, so the hope - an I stress it
:05:46. > :05:50.is a hope - the hope this is the Central Banks are providing a
:05:50. > :05:54.bridge to somewhere. The fear is that it will be yet another bridge
:05:54. > :05:58.to nowhere and that has been the story tore the last two years, lots
:05:58. > :06:01.of bridges by lots of Central Banks but there have been bridges to
:06:01. > :06:08.nowhere because other actors have not stepped up and done what they
:06:08. > :06:12.need to do. You and your company matter because you manage well over
:06:12. > :06:17.$1 trillion of other people's money. I just wonder whether right now you
:06:17. > :06:20.are saying to your clients that you are - you have lots fate in the
:06:20. > :06:26.euro and that you are moving whatever investments you had
:06:26. > :06:31.denominate in euros out of euros as quick as you can? What we will
:06:31. > :06:35.telling our client that is this is the time to be generally defensive
:06:35. > :06:38.and selectively offensive the reason why we are telling them that
:06:38. > :06:43.is because there is a lot of uncertainty out there. Therefore,
:06:43. > :06:48.it is better to have what we call optionality, it is better to have
:06:48. > :06:52.cash in order to be able to move. Your do not want to be stuck off
:06:52. > :06:59.siefrbgsd caught off-side when the world is complaininging so much --
:06:59. > :07:04.siefpltd in terms of what Europe can do, -- side. We feel Europe
:07:04. > :07:08.faces an engineering and a political challenge. The US faces
:07:08. > :07:12.mainly a political challenge. Europe has an engineering and a
:07:12. > :07:15.political challenge. Engineering a solution that satisfies people
:07:15. > :07:19.where very different initial conditions is hard and we have two
:07:19. > :07:26.Europes not one. We have a strong Germany that has been doing well
:07:26. > :07:30.and that believes that it has a right answer and we have weak
:07:30. > :07:34.peripherals facing enormous economic and social headwinds. That
:07:34. > :07:40.leads to the political prorbgs how do you get agreement again --
:07:40. > :07:43.problem -- on how do you debt agreement on a difficult decision
:07:43. > :07:49.on what the eurozone feeds the look like to be stronger. So we need to
:07:49. > :07:52.keep an eye on Europe. Europe is really important systemicly and
:07:52. > :07:55.hopefully, I say homefully the Europeans will finally get their
:07:55. > :08:01.act together. Yeah, but people like you in the end do not deal in hope.
:08:01. > :08:05.You deal in what you believe to be probabilities and reallive I wonder
:08:05. > :08:12.we have seen Tim quite near the US Treasury Secretary and Barack Obama
:08:12. > :08:14.send a message to Europe for week upon week upon week of "Get your
:08:14. > :08:16.act together" which is a issue directed to Chancellor Angela
:08:16. > :08:20.Merkel t decision being it is only determine any in the end that has
:08:20. > :08:26.the economic power to rescue the zone don't in its current form. Do
:08:26. > :08:31.you believe the Germans are prepared to do what is necessary?
:08:31. > :08:34.First, I think it is more than the Germans. It is ironic everybody
:08:34. > :08:39.says it is the Germans because the Germans are the most successful,
:08:39. > :08:44.they are the balance sheet t wallet. If they say only they had the will.
:08:44. > :08:48.But there is a reason why the Germans are hesitant. I always tell
:08:48. > :08:52.my colleagues ask why is someone rational acting in a way that seems
:08:52. > :08:56.irrational to you. I think the Germans understand that you need at
:08:57. > :09:01.least the five elements of a solution. Five. One is the Germans
:09:01. > :09:06.need to decide what they want if eurozone to look like. Do they want
:09:06. > :09:09.it to be a full fiscal union which is another way of thinking of what
:09:09. > :09:11.West Germany did for East Germany which is this is a political
:09:11. > :09:17.decisions it is not an economic decision, this is a political
:09:17. > :09:22.decision but they need to do it, or does Germany want a smaller and
:09:22. > :09:27.less imperfect eurozone? That is Germany's desifplgts secondly, we
:09:27. > :09:32.need actions -- decision. Secondly, we need actions to reconcile to
:09:32. > :09:37.very different priorities in the privy. One is to contain that. The
:09:37. > :09:41.other toys grow. Remember, soften say has a numerator and denominator.
:09:41. > :09:46.The numerator is how much debt you have to pay, your denominator is
:09:46. > :09:50.your ability the pay. So far the privy has not met that balance.
:09:50. > :09:54.Third, we need to counter the fragile nature of the banking
:09:54. > :09:58.system. The banks have become a problem on a stand-alone basis.
:09:58. > :10:03.They are no longer just at recipient of the sovereign debt
:10:03. > :10:07.crisis. They are now a source of disruption that is going to get
:10:07. > :10:12.worse unless it is countered. Fourth, we need the ECB to be
:10:12. > :10:16.convinced that it can play a major role as a circuit breaker. You know
:10:16. > :10:20.markets tend to be self fulfilling. The more they worry, the worst
:10:20. > :10:28.outcome, the worst outcome the more they worry. So you need a circuit
:10:28. > :10:33.breaker and only the ECB can be that circuit breaker. Right, but...
:10:33. > :10:39.Number five... Then I have a few quick questions. You talk about the
:10:39. > :10:44.ECB and sick my question was simplistic -- and suggest. Issues
:10:44. > :10:46.about had the ECB will be unleashed to be the lender of last resort the
:10:46. > :10:50.Open itself up to rescue some of these countries it comes back to
:10:50. > :10:54.Germany does it not? In a way I want a simple emotional response
:10:54. > :10:58.from you, whether you think Germany acting in concert with the French
:10:58. > :11:03.and the other Europeans can do what is necessary. They can, if they are
:11:03. > :11:11.convinced that others will also do their part. I think it is important
:11:11. > :11:15.to ask the question why two years after the ECBtIMF and. The EU
:11:15. > :11:19.stepped in dramatically to save Greece every single indicator in
:11:19. > :11:23.Greece is worse, every single one, okay? Not jest relative to where
:11:23. > :11:29.they were two years ago but relative to the expectation of the
:11:29. > :11:33.policy makers. There is a reason for that which is the ECB, the IMF
:11:33. > :11:36.can only provide liquidity. Liquidity is a bridge, but if there
:11:36. > :11:41.is no destination on the other side of that bridge, that liquidity
:11:41. > :11:48.becomes wasted. I think the ECB has realised that over the last two
:11:48. > :11:52.years it has been doing things that has only could be Tam nighted its
:11:52. > :11:55.balance -- contaminated. So the ECB says "I'm willing to play, engage,
:11:55. > :11:59.but I need others tone gauge as well. I cannot be the only player
:11:59. > :12:04.in this game. Because if I'm the only player in this game, everybody
:12:04. > :12:06.is worse off" When you talk about the sings Greece getting worse,
:12:06. > :12:12.that also raises another economic philosophical question in my mind I
:12:12. > :12:15.mean, do you think that Europe right now is over-playing austerity,
:12:15. > :12:19.so preoccupied austerity it is forgetting that actually this
:12:19. > :12:23.crisis can only be ended when real growth is being delivered and in
:12:23. > :12:28.the current climate it is very hard to see where growth in Portugal,
:12:28. > :12:32.Greece or even it listing go to come from? Absolutely. Absolutely,
:12:32. > :12:37.I would say the same from other countries. We face four distinct
:12:37. > :12:39.problems. One is too much debt in the west. We fell in love with
:12:39. > :12:44.level average and this credit entitlement that you could buy
:12:44. > :12:50.things on credit. Now we have the pay it back. Or, we have to impose
:12:50. > :12:53.losses. Second, we are not growing enough. We have tremendous
:12:53. > :12:58.structural impediments to growth and we are not doing enough to deal
:12:58. > :13:05.with it. We are yet to see any serious structural reforms either
:13:05. > :13:10.in Europe or the US. Policy makers are stuck in a cyclical mind-set,
:13:10. > :13:15.what they neat they neructural and secular mind-set, this is hard work
:13:15. > :13:18.and they need to start. A quick- fire response on some particular
:13:18. > :13:22.situation. Let me start here in home in London where I speak to you
:13:22. > :13:26.from with the UK government which has given its latest budget
:13:26. > :13:29.forecast which is extraordinarily blaefpblgt it now looks like six
:13:29. > :13:33.years of consistent austerity coming from the British government.
:13:33. > :13:38.Do you think they have the calibration of economic policy
:13:38. > :13:41.wrong? -- bleak. I think on the whole they got it almost right. I
:13:41. > :13:44.would like to see more structural reforms and the Chancellor's speech
:13:44. > :13:50.this week went a little bit towards that but he could do more. But I
:13:50. > :13:54.think they understand thank a small country looking at storms, as it
:13:54. > :13:57.was called - storms coming from Europe and another storm that will
:13:57. > :14:00.come if the US at some point, that they understand that they do not
:14:00. > :14:04.have the luxury of the US, they do not have the luxury of being a
:14:04. > :14:08.large economy with a reserve economy so I think what brings is
:14:08. > :14:11.doing is understandable, it is not pleasant but understandable. A
:14:11. > :14:16.final thought on the European situation S I was taken with with
:14:16. > :14:20.words from the French economist former head of European bank for
:14:20. > :14:24.reconstruction an development who said he believed there was a 50/0
:14:24. > :14:29.chance the euro could break down, unravel by Christmas. How would you
:14:29. > :14:34.charge rise the chances of that happening? Think he is right to be
:14:34. > :14:42.worried. I think if we do not see some meaningful action in the run-
:14:42. > :14:45.up and at the December 9 European summit, the transis his citing is
:14:45. > :14:50.correct but Europe still controls its destiny but it will have to
:14:50. > :14:55.make one of two difficult choices, either opt for the full fiscal
:14:55. > :15:05.union or smaller an less in perfect eurozone it needs to make that die
:15:05. > :15:09.If the crisis deepens, should the US government stepped in at some
:15:09. > :15:16.point and use its enormous economic power to do what is necessary to
:15:16. > :15:23.shore up this massive sovereign debt crisis in Europe? That is a
:15:23. > :15:26.great question. The US is playing a supportive role. It could play an
:15:26. > :15:30.even more supportive role by co- ordinating this orchestra that has
:15:30. > :15:35.no conductor. The European crisis is happening partly because there
:15:35. > :15:38.is no global conductor. Everybody is stepping back rather than
:15:38. > :15:42.engaging. But I think the solution is in the hands of the Europeans.
:15:42. > :15:47.The US can support a solution and help ward maid, but it cannot
:15:47. > :15:51.impose a solution. But on the other hand, Obama knows that if Europe
:15:51. > :15:56.does go belly-up, they will be a massive consequence for the United
:15:56. > :16:04.States. You'll go back into recession if not depression.
:16:04. > :16:09.Michael Bloomberg described the situation in the US, you call them
:16:09. > :16:14.political problems, over the budget, he said, cowardice and partisanship
:16:14. > :16:19.in what cent -- Washington is right now really hurting our country.
:16:19. > :16:24.Would you agree? I absolutely agree. First, I say that you cannot be a
:16:24. > :16:29.good house and a bad neighbourhood. If Europe goes down, if the global
:16:29. > :16:31.economy goes into recession, everybody will feel it. The US is
:16:31. > :16:36.political -- politically dysfunctional. That is why we
:16:36. > :16:40.cannot agree. We cannot come to the centre. Not only are the Democrats
:16:40. > :16:44.and the Republicans far apart, but the populist movements are pulling
:16:45. > :16:49.them further apart. The Tea Party is pulling the Republicans further
:16:49. > :16:55.to the right, the Occupy movement is pulling the Democrats further to
:16:55. > :16:57.the left. What we need in the US is what we call a Sputnik moment. A
:16:57. > :17:02.realisation that unless we come together with a common vision and
:17:02. > :17:06.common purpose, things are going to get a lot worse. Let's put your
:17:06. > :17:09.cards on the table. The specifics that the two parties are arguing
:17:09. > :17:15.over when it comes to the Budget and dealing with the deficit are
:17:15. > :17:18.whether it is right to extend the push tax cuts. As part of any
:17:18. > :17:22.deficit-cutting programme, Republicans insist there has to be
:17:22. > :17:27.an extension of the tax breaks for the richest Americans. Obama says
:17:27. > :17:34.that is not acceptable in this hour of need. Where do you sit on that
:17:34. > :17:37.debate? I think Presidink Presidis right. Everybody has to contribute.
:17:37. > :17:40.This is a shared responsibility with shared sacrifices. The rich
:17:40. > :17:46.have been doing extremely well and the United States over the last
:17:46. > :17:49.number of years. I would not extend the tax breaks. Some more quick-
:17:49. > :17:53.fire things. Take us around the world a little bit more. It strikes
:17:53. > :17:58.me that when you and I talk about the state of the world economy, I
:17:58. > :18:01.in London, you in California, with both talk about a sort of doomsday
:18:01. > :18:07.scenario. Perhaps we are missing a particular point, that is, if we
:18:07. > :18:10.were watching this in China, India, or other cities in the emerging
:18:11. > :18:16.economies, we would say that we are way too pessimistic, because
:18:16. > :18:21.overall growth around the world this year will be between 3-4 %,
:18:21. > :18:26.growth, not a contraction. Cannot continue if we are right about what
:18:26. > :18:29.is happening in the industrialised world? First, we live in a multi-
:18:29. > :18:35.speed growth world, where the emerging markets, because of their
:18:35. > :18:41.own efforts, are doing much better. But if we were sitting in these
:18:41. > :18:46.countries, we would say, yes, yes look at us, we are doing fine, we
:18:46. > :18:51.have lots of growth, we have a middle class that is getting richer,
:18:51. > :18:56.we have production and employment, but also, we live at a global
:18:56. > :19:01.system, and at the core of the global system is the US and Europe.
:19:01. > :19:06.They are having difficulties. So we would also be worried, not because
:19:06. > :19:08.our internals are problematic, but because we are part of a system
:19:08. > :19:14.where the core is contaminated. Therefore, we worry about how does
:19:14. > :19:19.that system operate. In 2008 we had that massive sense of crisis in the
:19:19. > :19:24.We Wethin a year, we saw China restored the growth of almost
:19:24. > :19:30.10%, India, 8-9 %, why are you so insistent that they cannot insulate
:19:30. > :19:39.themselves from what is happening now? De buoy reasons. First, in
:19:39. > :19:43.2008, everything stopped. There was a sudden stop. That brought in a
:19:43. > :19:49.lot of fiscal stimulus. Today, we do not have the scope for fiscal
:19:49. > :19:54.stimulus. We have a sovereign debt crisis that has been the impact,
:19:54. > :19:58.the outcome, of what we did in 2008. The first thing is that we have a
:19:58. > :20:02.lot less physical firepower. The second thing is we have a lot less
:20:02. > :20:06.minatory firepower. Interest rates are almost at 0%. Central banks
:20:06. > :20:11.have been doing unconventional things with no assurance that it
:20:11. > :20:16.will work. We have fewer spare tyres, if you like, on this car,
:20:16. > :20:20.that is on a bumpy journey to an uncertain destination. It caused a
:20:20. > :20:24.real stir recently by saying, unlike most big financiers and Wall
:20:24. > :20:28.Street players in the United States, saying that actually the message
:20:28. > :20:31.coming from Occupy Wall Street, the fundamental rejection of many of
:20:31. > :20:35.the values of aggressive capitalism that we have seen, you said that
:20:35. > :20:40.was a message that everybody in the United States needed to listen to
:20:40. > :20:44.and think carefully about. Why did you say that? Because whenever I
:20:44. > :20:49.look around the world, there are social movements. It is not just in
:20:49. > :20:53.the US. It is in Britain, Spain, Italy, the Arab world. It is all
:20:53. > :20:59.over. The reason why is because we have had an incredible increase in
:20:59. > :21:03.income and wealth inequality. No system can operate well when there
:21:03. > :21:10.is a sense that it is not fair. And right now, the perception of the
:21:10. > :21:14.system is that it is not fair. In particular, the system privatised
:21:14. > :21:20.massive gains in the run-up to the 2008 crisis, and then socialised
:21:20. > :21:23.massive losses. These losses were socialised on the premise that this
:21:23. > :21:28.was needed for growth and employment, and neither have
:21:28. > :21:32.materialised at any scale that is sufficient. So we have a perception
:21:32. > :21:36.that the system is unfair, and we have to deal with that perception
:21:36. > :21:41.rather than ignore it, because the more we ignore it, the more that
:21:41. > :21:45.social discontent will increase. you are saying that you now have
:21:45. > :21:49.concluded that capitalism in its current guise in the United States
:21:49. > :21:55.and Western Europe is unfair and unsustainable? Is that what you are
:21:55. > :22:00.saying? Yes. I think we were on a motorway, if you like, where we
:22:00. > :22:04.live to the speed limits without realising that the vehicles that
:22:04. > :22:09.are on this motorway cannot drive at that speed. And therefore we
:22:09. > :22:13.have to be calibrate the whole motorway if we are to avoid
:22:13. > :22:20.accidents. I think that is a recognition that we went too far,
:22:20. > :22:24.we went to mac far in this great age -- too far in this great age of
:22:24. > :22:28.credit, of debt, and of Credit entitlement. And now we have to
:22:28. > :22:31.deal with the consequences. I can't help wondering what your clients
:22:31. > :22:34.make of this new message from you! The deal with some of the richest
:22:35. > :22:41.individuals and corporate clients in the world, they pay you to look
:22:41. > :22:45.after their money and maximise their returns, you say your total
:22:45. > :22:48.return fund can deliver profits for your clients in good times and bad.
:22:48. > :22:51.Are you suggesting that you are part of a fundamentally flawed
:22:51. > :22:56.system? Will you stop doing what you have been doing for the past
:22:56. > :23:02.few years? Nw years? Nate in the system, so we say, given the system,
:23:02. > :23:06.we operate, and what we aim to do is deliver returns and manage risk.
:23:06. > :23:10.We do this because people trust us with their pensions, their
:23:10. > :23:16.retirement funds, with their investments. Now, in doing so, we
:23:16. > :23:21.take a view on what is likely to happen. And we invest on the basis
:23:21. > :23:25.of what is likely to happen. We also discuss what should happen. We
:23:25. > :23:27.don't invest on the basis of what should happen, because we don't
:23:27. > :23:31.control out comes, we are part of this global system, so you have
:23:31. > :23:35.been asking me about what should happen, and we invest on the basis
:23:35. > :23:40.of what is likely to happen. In a perfect world, the two converge,
:23:40. > :23:44.but we don't kid ourselves that we have that power. That power lies
:23:44. > :23:47.and has a policy makers, and we operate, like everybody else, in a
:23:47. > :23:51.world that we must understand in order to navigate well for our
:23:51. > :23:55.clients. A final thought. I began by asking you about pressure. Let
:23:55. > :24:02.me end by asking you about control. Do you feel more helpless today
:24:02. > :24:05.doing your job than you have ever felt before? I feel that every
:24:05. > :24:09.morning, something will happen that will disrupt markets, and we are
:24:09. > :24:13.going to have to react to. I feel we are living in a world that is
:24:13. > :24:17.incredibly volatile, a world full of unthinkables. We used to keep a
:24:17. > :24:24.list of unthinkables. Now we just do it every quarter, because they
:24:24. > :24:28.have been so many unthinkables. We live in a very uncertain world, but