PIMCO CEO: World's Economy Is 'On A Knife's Edge'

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PIMCO CEO Mohamed El-Erian says the economic future is still uncertain because of the eurozone crisis, China's slowing economy and worrisome U.S. structural components. He talks to NPR's Guy Raz about his Foreign Policy piece "The World on a Knife's Edge."

GUY RAZ, HOST:

It's WEEKENDS on ALL THINGS CONSIDERED, from NPR News. I'm Guy Raz. In a moment, a reporter who crashed corporate Super Bowl parties and lived to tell the tale.

But first, to an article that appeared in today's Washington Post. It was written by Mohamed El-Erian. And in it, he essentially says those unemployment numbers that came out on Friday - well, don't pop the champagne just yet because the global economy is very much on a knife's edge. And this year, he says, could be a make-or-break moment.

Mohamed El-Erian is the CEO of PIMCO. That's the largest investor of bonds in the world. And he joins me from his office in Newport Beach, California. Mohamed, welcome to the program.

MOHAMED EL-ERIAN: Thank you.

RAZ: OK. In the Washington Post - I open it up today - everybody is saying, look at these great jobless numbers; unemployment's going down. And you, you have to ruin this good cheer by saying hold on, wait a minute; the party hasn't started yet.

EL-ERIAN: Well, it's saying, really, the party is finally moving. We got a set of really good monthly numbers. Think of it as winning a battle in a war, but we're still losing the war. And the reason why, Guy, if you go beyond the headline numbers - you know, we get captivated by the headline numbers, and they were great: 240,000 new jobs; 8.3 percent unemployment, the lowest in three years.

But look behind, and there are structural components that are worse: 5.5 million Americans have been out of jobs more than 27 weeks - that number is stuck there. And then the number that scares me the most is that 23 percent of the 16- to 19-year-olds are unemployed. And at that age, if you're unemployed for long, you become unemployable. So we still have a lot to do.

RAZ: By structural, you essentially mean there are huge sectors of the American economy that are falling by the wayside, and the jobs won't be there when we do actually recover.

EL-ERIAN: We fell in love with certain activities, and overproduced them and overconsumed them. Housing was one of them. Construction was another. Finance was a third one. Now, in the past, we've done that before so it's not the end of the world. But we have to take seriously that we face a challenge of retraining and retooling our labor force.

RAZ: OK, you are somebody that many of us talk to because you're pretty risk-averse, right? Is that fair to say you're kind of risk-averse?

EL-ERIAN: Yeah. I worry a lot.

RAZ: You worry a lot, OK. And you helped Harvard increase its endowment, and you run the biggest bond fund, and we often think of bonds as less risky than stocks. You recently wrote an article in Foreign Policy magazine, called "The World on a Knife's Edge." You're saying that this year is the moment of truth for the global economy. How?

EL-ERIAN: So we have a situation that the statistician will tell you bimodal, which - another way of saying that you can't simply kick the can down the road anymore. Something either really good is going to happen, or something really bad is going to happen.

RAZ: All right. Let's talk first about the worst-case scenario that you outline.

EL-ERIAN: The euro collapses; you have 17 countries trying to get back to some sort of local currency. There is no game plan because no one ever anticipated that we would be in this situation. And therefore, we get a moment of paralysis in the global economy at a time when the U.S. is still weak. And that could cause a major, global depression.

RAZ: All right. What is the best-case scenario that you lay out?

EL-ERIAN: So we've talked about Europe. Now, there are two other economic powers that can heal and go forward, consequently. The U.S. - the U.S. is healing. If we can get what we've called the Sputnik moment in Washington, which is a recognition that we need to deal with the housing problem, we need to deal with the credit system, we need to deal with long-term unemployment, you can unleash a tremendous amount of capital on the sideline in the United States.

You know, businesses are holding a massive amount of cash; not investing. If they start investing, that changes the outlook. Similarly, you have one other place that has the wallet to spend but not the will to spend. And that is the emerging consumer, especially in China. And if you can convince them to save a little bit less and spend more, suddenly you have significant engines for this global economy.

RAZ: What role, specific role, must the U.S. play in order to avoid the scenario - the worst-case scenario that you outlined?

EL-ERIAN: The U.S. has to understand that it faces structural challenges, and has to proactively manage them. This is not an engineering problem. This is a political problem. The engineering solutions are there. We just need political agreement to implement them.

RAZ: That's Mohamed El-Erian. He's the CEO and co-chief investment officer of the investment management firm PIMCO; and the author of "When Markets Collide." Mohamed, thank you so much.

EL-ERIAN: Thank you.

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