:00:12. > :00:20.More needs to rout the night. Now Is it time for the doom-mongers to
:00:20. > :00:24.admit they were wrong about the world economy? The eurozone is
:00:24. > :00:27.intact, the US hasn't plunged off that fiscal cliff and even the most
:00:27. > :00:30.stagnant economy of them all - Japan's - is showing signs of life.
:00:30. > :00:35.Could it be that central bankers and politicians are finally ready
:00:35. > :00:38.to take bold decisions in their quest for growth? HARDtalk speaks
:00:38. > :00:41.to one of the world's most influential investors, Mohamed El-
:00:41. > :00:51.Erian, boss of the massive PIMCO fund management business. Caution
:00:51. > :01:18.
:01:18. > :01:25.or confidence, which is winning Mohamed El-Erian, welcome to
:01:25. > :01:30.HARDtalk. Thank you. The last time we spoke, a couple of years ago,
:01:30. > :01:40.you were pretty gloomy about the outlook for the world economy. One
:01:40. > :01:41.
:01:41. > :01:47.word you used words terrifying. Has the fear gone for you? To some
:01:47. > :01:54.extent, but not completely. I was terrified of the prospects of
:01:54. > :01:58.sluggish growth, persistently high unemployment, and social unrest.
:01:58. > :02:02.What we have seen in the last couple of years is exactly that.
:02:03. > :02:08.Sluggish growth, very high unemployment and unrest in seven
:02:08. > :02:14.countries like Greece. However, we have seen the actions taken back
:02:14. > :02:20.has delayed the second stage. I am glad about that. As a parent, I
:02:20. > :02:24.would rather see the world going into concerned then into a bad
:02:24. > :02:30.state. I have had the impression that you
:02:30. > :02:37.have felt that political leaders around the world, maybe most
:02:37. > :02:41.particularly in the advanced economies, when it up to the task.
:02:41. > :02:48.Thank you think it is time to modify the negative view you have
:02:49. > :02:53.of political leadership? I wish I could say yes. But not yet. The
:02:53. > :02:57.reason why the global system is in a better place has very little to
:02:57. > :03:04.do with the politicians and more to do with central bankers. They have
:03:04. > :03:08.stepped up to P-plate. They had used exceptional measures. It is a
:03:08. > :03:13.little bit like drug company putting out a medication that has
:03:13. > :03:17.not been clinically tested. They have bought time for the
:03:17. > :03:24.politicians to get that act together. But the politicians have
:03:24. > :03:28.not done their bit yet. They have not stepped up to the
:03:28. > :03:34.responsibility. There is one country right now where the
:03:34. > :03:38.relationship between politicians and central bankers might be being
:03:38. > :03:44.changed in an important and fundamental way. That country is
:03:44. > :03:53.Japan. The new Prime Minister has a clear democratic mandate to take
:03:53. > :03:57.some dramatic economic policy decisions. Decisions he will impose
:03:57. > :04:00.on the central bank. It is about listening monetary policies and
:04:00. > :04:07.changing the key objectives the central bank had been working
:04:07. > :04:11.towards. That is fundamentally important. It tells us about how
:04:11. > :04:17.the global system is operating. Japan is being forced into this
:04:17. > :04:23.debt. It has had its currency appreciated. If one central bank is
:04:23. > :04:29.pumping a lot of liquidity, as it is in the US, but other people have
:04:29. > :04:33.very difficult choices. I dare say it accept the consequences and see
:04:33. > :04:43.their currency appreciate, hollowing out their economy, like
:04:43. > :04:43.
:04:43. > :04:48.in Japan, or they could during the Fed in what they are doing. It is
:04:48. > :04:54.scored irresponsible responsibility. It is the right thing to do because
:04:54. > :04:59.someone else is being irresponsible as well. People look ready, not
:04:59. > :05:02.just as a hugely influential commentator, but as a real premier.
:05:02. > :05:08.You and you'll find, you look around the world for the wisest
:05:08. > :05:15.places to put your investors' money. Especially in bonds. Including
:05:15. > :05:23.government bonds. You look at the Japanese prime minister's attempts
:05:23. > :05:27.at stimulating the economy, rise of inflation in Japan and the devalued
:05:27. > :05:31.currency, you look at what is happening and think that Japan is
:05:31. > :05:37.still a place you want to put money? You sound like a good
:05:37. > :05:41.investment manager. You said exactly what will happen. They will
:05:41. > :05:47.target high inflation, and they will weaken the bin cut -- weaken
:05:47. > :05:55.the currency. We have to react to that. Owl role, as guardians of
:05:55. > :06:00.people's invention -- pension and savings, we have to deliver.
:06:00. > :06:03.Depended on which part of the Japanese market you are looking out,
:06:03. > :06:08.there are both risks and opportunities. The opportunities
:06:08. > :06:12.come from the fact that they're going for growth. That is good for
:06:12. > :06:17.certain markets. The risk is that they are going to weaken their
:06:17. > :06:23.currency, therefore you have to be careful about holding Japanese yen.
:06:23. > :06:31.We are talking about a country with a large running budget deficit. And
:06:31. > :06:37.even worse, a massive debt mountain which adds more than 220 % of GDP.
:06:37. > :06:41.I am surprised you are sounding so sanguine about the prospects. There
:06:41. > :06:47.is the potential of a massive collapse in Japan if this policy
:06:47. > :06:51.does not work. You asked me what was likely to happen. If you asked
:06:51. > :06:57.me what should happen, we would have a different discussions. The
:06:57. > :07:02.reality right now is whether it is Japan, or the eurozone, or the US.
:07:02. > :07:07.Everyone is taking short-term measures. They are not doing the
:07:07. > :07:13.hard work, which is structural reforms, dealing with many economic,
:07:13. > :07:18.political, social issues. They are looking to central banks for
:07:19. > :07:22.delivering a shot -- short-term outcomes. That is the world we are
:07:22. > :07:30.living in. The politicians have not stepped up to their
:07:30. > :07:35.responsibilities. They have to make tough decisions. Despite the time
:07:35. > :07:41.delay between me and you in California, I have to interrupt you.
:07:41. > :07:46.It is easy for you to sit there. You are not held to account by
:07:46. > :07:51.voters. You know that voters around the world, especially in the US,
:07:51. > :07:55.Europe and Japan, they have people will are not willing to accept high
:07:55. > :08:00.levels of unemployment and continuing sluggish growth. They
:08:00. > :08:07.have to deal with that. One way they have decided is to continue
:08:07. > :08:10.with highly stimulative policies, including quantitative easing. And
:08:10. > :08:15.instructing their central banks to not just be preoccupied with
:08:15. > :08:25.inflation targets, but also to think about removing the jobless as
:08:25. > :08:29.well. But has to be right for a politician. It is. They should be
:08:29. > :08:33.targeting higher growth and low unemployment. I have been saying it
:08:33. > :08:38.non-stop. Bad it is wrong of politicians to think that central
:08:38. > :08:43.banks can deliver what I call the immaculate recovery. Even central
:08:43. > :08:49.bankers are warning, whether it is Mervyn King in the UK, or Ben
:08:49. > :08:55.Bernanke. Do not depend on us. You need to do you roll so we can build
:08:55. > :09:00.a bridge. We cannot deliver the destination. The politicians are
:09:00. > :09:03.focusing on a bridge and what the people like is a destination. And
:09:03. > :09:09.that would not come until board decisions are made by the
:09:09. > :09:16.politicians. I want to give a quote to you. This man has not been a
:09:16. > :09:21.huge fan of you because he things you have been deeply conservative.
:09:22. > :09:25.Of Japan, he says, something remarkable is happening over there.
:09:25. > :09:34.The country that has pioneered economic stagnation may show the
:09:34. > :09:41.rest of us a way out. He thinks this could be a watershed moment.
:09:41. > :09:46.He is right. For him to deliver the watershed moment, which is possible,
:09:47. > :09:50.it is not probable. This is what needs to happen. The Bank of Japan
:09:50. > :09:58.needs to be convinced it can deliver what the Prime Minister
:09:58. > :10:04.wants them to do. Second, you need fiscal stimulus. Japan has a really
:10:04. > :10:08.bad track record current fiscal and skinniness. Third, you need society
:10:08. > :10:13.to accept the short-term cast which has higher inflation and higher gas
:10:13. > :10:19.prices. 4th, you need political harmony. We are looking at Japan,
:10:19. > :10:24.we are hoping they can deliver. But we are not under estimating what
:10:24. > :10:31.they need to do. You talked about Mervyn King, the current governor
:10:31. > :10:36.of the Bank of England. And you talked about Ben Bernanke. There is
:10:36. > :10:40.the idea that the old orthodoxies, inflation being the only key
:10:40. > :10:45.priority for motor policies and central bankers, has to be modified.
:10:45. > :10:51.There has to be a broader look at central banks taking responsibility
:10:51. > :10:57.for growth, not just for inflation. The new guy who will replace Mervyn
:10:57. > :11:02.King seems to buy into that. Do you? I do. From day one, I have
:11:02. > :11:06.recognised that inflation is a means to an end. The end is
:11:06. > :11:11.improving living standards and better opportunity for all. He she
:11:11. > :11:15.has shown that when you have high inflation, you do not just give up
:11:15. > :11:20.growth, but he also give up on income distribution because the
:11:21. > :11:25.poor cannot protect themselves from high inflation. Low and stable
:11:25. > :11:30.inflation is a means to an end. What people are finally realising
:11:30. > :11:36.is that you need to target the end more aggressively. I would not put
:11:36. > :11:42.all the burden on central banks. This is a shared responsibility
:11:42. > :11:51.among many economic agencies nationally and globally. Bellini
:11:51. > :12:01.much better policy called an Asian. -- we need much better policy
:12:01. > :12:06.called in. I imagine you are not thinking about the way in which the
:12:06. > :12:12.White House, and the US Congress are working together, or do not
:12:12. > :12:19.work together. The fiscal cliff was avoided by it is the sense of
:12:19. > :12:25.crisis still alive? Still alive is the underlying problem. The US has
:12:25. > :12:29.not as much of an economic issue as it does a political issue. We are
:12:29. > :12:34.seeing extreme political dysfunction in Congress. I am
:12:34. > :12:42.looking at this as an image of a divorcing couple arguing over a
:12:42. > :12:48.pillowcase. There are be the issues. -- bigger issues. But they cannot
:12:48. > :12:53.even resolved the argument over the pillowcase. If you're living in
:12:53. > :12:58.this country, you have very little heart in Congress. Less than 10% of
:12:58. > :13:05.the population think Congress is doing a good job. This political
:13:05. > :13:09.discussion is holding back growth and employment. Congress is looking
:13:09. > :13:13.to keep the can down the road when it comes to the debt ceiling. They
:13:13. > :13:19.have to lift it beyond the 16.4 trillion dollars it currently
:13:19. > :13:24.stands at. It was coming to ahead in late February but it looks like
:13:24. > :13:29.it will be put back three months more. Ben Bernanke says if this is
:13:29. > :13:36.not sorted, it could be a recovery ended event. Is it right to see it
:13:36. > :13:43.in those terms? It is. The longer this uncertainty persists, the more
:13:43. > :13:49.businesses will hold back in investing in people, equipment, and
:13:49. > :13:52.then the growth momentum will sigh. It is not just that this is
:13:53. > :13:59.dampening growth. It is taking attention away from other issues.
:13:59. > :14:04.We need help on the functioning of the labour market. President Obama
:14:04. > :14:08.set up an employment initiative six months ago. It got nowhere. We need
:14:08. > :14:13.help in the credit market. Small businesses cannot get credit. We
:14:13. > :14:17.need help in the functioning of the housing market. There are many
:14:17. > :14:21.items on the two to list in Congress. It is being crowded out
:14:21. > :14:27.by these continuous fight over the fiscal issues, that simply are
:14:27. > :14:33.repeated month after months. Before we finish a quick tour of the world
:14:33. > :14:37.economy, I have to take you to future of the euro. He said there
:14:37. > :14:43.were real fears that the euro, in its current configuration, would
:14:43. > :14:53.not survive. The eurozone has poured through. Are you prepared to
:14:53. > :14:56.I certainly underestimated the extent to which Europeans would
:14:56. > :15:00.throw money at the problem and delayed dealing with the
:15:00. > :15:05.fundamental issue, such as countries like Greece, that they
:15:05. > :15:10.are unable to grow within the eurozone, and that difficult
:15:10. > :15:17.decisions have to be made. Where I still stand, something has to give
:15:17. > :15:24.them. Either the eurozone would transition to a smaller, less in
:15:24. > :15:28.perfect eurozone, or Germany and other strong economies are going to
:15:28. > :15:36.sign up to end this checks to countries like Greece. One of the
:15:36. > :15:40.two decisions will be made. Let's be clear about this, when just the
:15:40. > :15:47.other day, in the HARDtalk student I had the vice-president of the
:15:47. > :15:51.European Commission, he told me quite confidently that the period
:15:51. > :15:59.of existential threat for the euro was categorically over, in your
:15:59. > :16:04.view, was he being premature? question is what the eurozone will
:16:05. > :16:10.look like. Here is a choice that has to be made by European
:16:10. > :16:15.countries. One is to opt for something that works better because
:16:15. > :16:19.there is better political, economic, banking integration. That is one
:16:19. > :16:24.possibility. The other one is to say that we are going to maintain a
:16:24. > :16:31.political project that does not make total economic sense, but that
:16:31. > :16:36.is OK because the credit Dyer's -- the creditors will subsidise the
:16:36. > :16:41.debt to tears indefinitely. And sure that make that decision,
:16:41. > :16:51.growth will not materialise. point to key decisions that I yet
:16:51. > :16:52.
:16:52. > :16:57.to be made. That leads me very easily to a discussion about the
:16:57. > :17:02.historic decision taken by Prime Minister David Cameron to go for
:17:02. > :17:05.the gamble of than in out referendum in the UK. It is about
:17:06. > :17:10.Britain and membership of the European Union. His argument is
:17:10. > :17:14.that he will go to Europe, he would negotiate a new settlement for
:17:14. > :17:19.Britain inside the European Union, a loose a settlement, as far as
:17:19. > :17:26.Britain is concerned, and then he will put it to the people as an in
:17:26. > :17:29.out referendum. As an outside observer of Europe at -- and as an
:17:29. > :17:36.investor, what you think of the strategy that can man has now
:17:36. > :17:42.adopted? -- that Cameron. It does not surprise me that he has gone
:17:42. > :17:46.down the path. I felt how strongly that people felt about the British
:17:46. > :17:51.sausage, I remember the Yes Minister series on that, so it does
:17:51. > :17:57.not surprise me. Pretend use the European Union as a means to an end,
:17:57. > :18:02.it is a common market that allows for more trade and employment. --
:18:02. > :18:06.Britain views. The Europeans, especially the Germans and the
:18:07. > :18:11.French, see it as an end in itself, it is about political integration,
:18:11. > :18:15.reducing the risk of something terrible. There is a fundamental
:18:15. > :18:19.difference in how people see this. This fundamental different
:18:19. > :18:24.perspective has not been resolved yet. The second thing it tells us
:18:24. > :18:29.is that the more the eurozone, the 17 countries, seat closer and
:18:29. > :18:33.closer integration, the more problematic it is for countries
:18:33. > :18:39.such as Britain that are members of the European Union but not members
:18:39. > :18:47.of the eurozone. You are a hugely influential investor and economist.
:18:47. > :18:52.In your opinion, can the UK afford to leave the eurozone -- the
:18:52. > :18:59.European Union, which is going to be one of the two options in this
:18:59. > :19:04.referendum? It will certainly suffer the consequences of a said,
:19:04. > :19:10.which will probably mean lower growth, lower investment initially,
:19:10. > :19:17.it will be a one of shock, and that is the economic cost of a political
:19:18. > :19:23.decision. Then it will be set, but immediately, it would translate
:19:23. > :19:27.into lower investment and lower growth. You would be aware that a
:19:27. > :19:34.senior figure in the State Department, Philip Gordon, recently
:19:34. > :19:40.came to London and said that the US regarded it as a key national
:19:40. > :19:45.interest for the UK to be inside the European Union. As a private
:19:45. > :19:49.investor in the UK -- the US, will be UK be less attractive to you,
:19:49. > :19:57.will it be the strong economy if it were to be outside the European
:19:57. > :20:01.Union? A lot depends on what conditions prevail on the outside.
:20:01. > :20:06.If he forced me to say in general, I will tell you yes, because it
:20:06. > :20:11.will have less preferential access to a bigger market, and that
:20:11. > :20:15.translates into law where economic potential. So yes, it will be worse
:20:15. > :20:21.off. But the only thing that I would caution is that let's wait
:20:21. > :20:26.and see on what condition this would occur. But on the surface of
:20:26. > :20:32.it, Britain economically will be less well off. And you would be
:20:32. > :20:36.loath to put more money into the UK if that is your analysis.
:20:36. > :20:40.problem that Prime Minister Cameron has to deal with is that when you
:20:40. > :20:45.make a forward announcement, and he has made a forward announcement,
:20:45. > :20:49.this referendum is not any time soon, people like a start putting
:20:49. > :20:54.in an uncertainty premium. If we are going to make investment
:20:54. > :21:00.decisions which will play out over five-ten years, what does the
:21:00. > :21:04.regime look like in the next five- ten years. It will go up when you
:21:04. > :21:10.are not sure what the relationship between Britain and Europe will be.
:21:10. > :21:14.We may face five years of uncertainty. If he were to win the
:21:14. > :21:18.next British election, he will insist on a referendum by the end
:21:18. > :21:25.of 2017. It seems to be suggesting to me that that potential length of
:21:25. > :21:30.time of uncertainty could be very damaging. It could. The one silver
:21:30. > :21:35.lining is that in that period, we will also get information on the
:21:35. > :21:39.eurozone. We have the eurozone, the inner core, and Britain on the
:21:39. > :21:43.outer core of the European Union, and Britain's well-being also
:21:43. > :21:49.depends on what happens in the inner core. We will have a lot to
:21:49. > :21:53.talk about. It is not just about what Britain does, whether it stays
:21:53. > :21:59.in the outer core goes out, it is also about what happens in the
:21:59. > :22:03.inner core. Right now there is speculation because our economic
:22:04. > :22:07.performance is poor, we may be close to losing our AAA credit
:22:07. > :22:12.rating. You follow this very closely because it is very Germaine
:22:13. > :22:18.to your business investing. Do you think that Britain is going to lose
:22:18. > :22:23.its AAA credit rating? It depends who is writing it. If you are
:22:23. > :22:32.talking about the rating agencies, Moody's, SNP, they have Roddis
:22:32. > :22:39.ignored a highlight of wood that Britain may lose its AAA C -- they
:22:39. > :22:44.have already signalled a high likelihood. We do not follow those.
:22:44. > :22:50.We use our own internal ratings. It suggests that British risk right
:22:50. > :22:57.now is less than it was in the past. There is likely to be a downgrade
:22:57. > :23:01.from the rating agencies. In fact, very few countries are likely to
:23:01. > :23:09.return AAA rating right now, given the course that everybody has
:23:09. > :23:14.embarked on, but investors, we make a different assessments. We have
:23:14. > :23:19.talked about Japan, we have talked about the US, the European economy
:23:19. > :23:26.as well. In this terrible phrase, are you more risk on all this off
:23:26. > :23:33.in your mind set at the beginning of 2013? We are taking risk off the
:23:33. > :23:38.table. We were based on, our clients benefited, and now we are
:23:38. > :23:44.taking it off. Let me explain why because this is very important.
:23:44. > :23:48.Economic fundamentals are here, the valuations are much higher, why,
:23:48. > :23:54.because central banks have created a huge liquidity which, if you
:23:54. > :23:59.listen to what Ben Bernanke said in December, he said the objective of
:23:59. > :24:05.monetary policy is to push investors to take more risk. He has
:24:05. > :24:09.pushed investors to take more risk, valuations have gone up, but the
:24:09. > :24:15.fundamentals do not validate these valuations. Valuations will come
:24:15. > :24:19.down. At this point, we are saying what, be careful because asset
:24:19. > :24:24.prices are artificially supported and there is a limit to how long