a voting members at the federal reserve means we may be headed for more fun a taste of the easing that officials meet later this month and are reportedly expected to talk about making such a move but what does it really matter and how does the fed become ineffective at this point and on this friday the thirteenth that we delve into the paranormal. the paranormal of course is the world pimco the largest bond fund in the world believes we're living it and we go straight to the source to find out what this means for the economy not to mention savers we spoke to pimco c.e.o. mohamed el ariane about his predictions for q e three two he believes it is coming and also his larger outlook for the future of our monetary system let's get to today's capital account.

it's friday the thirteenth and boy does it feel like it luck does not appear to be on the side of the eurozone debt crisis that's for sure as the ratings agency standard and poor's is expected to announce a round of downgrades to several european nations france's foreign minister confirms that france is going to be downgraded a notch losing its aaa credit rating while the e.c. b.'s solution for its part does not appear to be going as planned meanwhile here in the u.s. a shake up at the fed the normal rotation of voting members this year on the federal open market committee means it could tip the scales towards another round of quantitative easing but is the fed out of bullets and what would the consequences of more action be and u.s.

president barack obama for his part today said he wants to shrink the federal government combine some agencies save some money but he needs permission from congress so is this going to be at another episode of political dysfunction getting in the way of getting anything done for the u.s. economy these are all examples of the unpredictable world we're living with one in which pimco the largest bond fund in the world is calling paranormal absa firms outlook for two thousand and twelve a world of fat tailed by model outcomes were inflation and deflation loom on the margins but what exactly does this mean for the global economy not to mention specifically for you and me well earlier i spoke with c.e.o. and co c i o of pimco mohamed el area and asked him all about it. today is in fact friday the thirteenth it happens to be a great day to get into the paranormal which is how pimco has described the world

going forward in two thousand and twelve this is beyond the new normal that you called the world after the financial crisis in two thousand and eight now we've had recessions before we've had financial crises before periods of slow growth so what's different this time. what's different this time is a very construct of the global economy is in play and the construct of europe is in place so the old normal is like a rubber band you stretch it and it comes back to a strip the new normal was a rubber band that you stretch and it doesn't come back but it's relatively stable in terms of low growth high unemployment the paranormal which we're going towards is situation that once you stretched a rubber band it changes shape completely and it's a much more uncertain world and it's a much more unpredictable world and in this unpredictable world you've described it as a by modal world that's dominated by these two fat tails you have on the one

side let's dissect it a little bit to simplify inflation and on the one hand deflation is central banks succeeding in printing money and inflating the economy on the one hand disorderly delivering of the financial system on the other it sounds like you me everyone we're all stuck between a rock and a hard place is that an accurate depiction oh absolutely it's a little bit like me telling you your plane is scheduled to leave at five pm but it's a by model distribution it may leave at ten am or ten pm what are you going to do it is a very paralyzing situation because you don't know whether you should target the one mode or the other and that's why it's so consequential i mean think of europe there is a significant. probability not the baseline but their whiskey scenario the eurozone for completely that is the left dale as we call it or the bad

equilibrium there is also a possibility the policymakers finally get their act together and create a stronger less imperfect eurozone so who do world we're living in right now and no one is one of having to navigate this by modal distribution and it is really consequential for everybody from policy makers to investors to households to companies absolutely and i want to get even further into this let's pick the tail where the fed and central banks like the e.c.b. which you kind of alluded to succeed in printing money and cause credit to expand over the past forty years every time there's been a recession it's been met with money printing do you think central banks have reached the limit of how much credit the financial system can absorb. i think central banks can no longer deliver economic outcomes they can deliver market outcomes for while but they can no longer deliver economic outcomes and the reason why is that their policies are ineffective and we see this the fact that you have

to go more and more unconventional you're not even sure how it's going to work shows you that you have issues on the policy side but in addition and critically laurin they are the only policy makers in play right now in the united states to treasuries asleep the housing agencies asleep the infrastructure agencies asleep we're not doing very much on the employment front so there's two issues one is the fed is the only game in town when it comes to policies and in addition the fed does not have good enough policy measures so as we've seen since the global financial crisis they can deliver market outcomes for a while but they cannot deliver an economic outcome in terms of employment. without the help of others and if they can't deliver economic under what scenario if any could you actually see that reflating the bubble and this leading to a real recovery this time around. very unlikely so you can see them trying to with markets you can see them push commodity prices higher but fundamentally people who

have healthy balance sheets on not spending and people who have unhealthy balance sheets cannot spend so you have this situation and the fed is not able to connect them so expect the fed to be active but don't expect the fed to be effective when it comes to economic outcomes and speaking of the fed two of the new voting members of the f o m c have recently suggested that they would support more asset purchases more quantitative easing as everyone knows it a little better but officials are reportedly likely to talk about the move at their meeting which is later this month do you think we're nearing another round of q.e. as you're kind of hinting at and you've been quoted saying q e three will not produce outcomes we want so what would it produce then. so i think we are and the reason why is that the fed does not want to be perceived as inactive the fed does not want to be characterized as not responding to america's unemployment crisis and

therefore even though the fed knows that it cannot deliver the outcomes it has to engage now in terms of what outcomes are delivered i go back to a wonderful phrase that chairman bernanke introduced back in august of two thousand and ten he said when we look at unconventional policies we must be aware that the of benefits costs and risks things that can go well collateral damage and unintended consequences and i think that part of the problem is that the more the fed uses it a largely ineffective policy instrument the more that balance from benefits to cost and which now you see this with q.e. two it was associated with a surge and commodity prices which undermines production and therefore undermines employment so there are consequences and i think the fed at the end of the day will

probably go along with q e three but the benefits will be small relative to the cost and the risks and speaking of their risks your colleague bill gross has said before that in the past forty years since breaking with bretton woods and going to a debt based money system the global economy has required constant credit expansion in order to grow if you're saying it's different this time does that mean growth is it the end of its rope and therefore this entire money system could be at the end of its rope to. so that's an excellent question i think the first thing we have to recognize is that there are two sets of countries in the world there is the west that has too much debt and too little growth and the reason why it has too much debt and too little growth is because it fell in love with this great age great not in the sense of wonderful great in the says it went too far of debt in title meant and credit and it did not work on the important elements of competitiveness you

have another set of countries the emerging world and trying as an example of that that have hit their development break out phase and in fact until recently the problem in trying is there was growing too fast not too slow so the global economy has these two characteristics that have to somehow be brought together in terms of the western economies it's not just an issue of economics is also an issue of politics and the social situation. and the politics we are seeing an incredible amount of bickering and by policymakers you see it in europe and of course you saw it in this country in the midst of last summer in terms of the crisis in terms of the social movements in the west they are pulling the political forces further apart so in the united states the tea party pulls the

republican further right and the occupy movement pulls the democrats for the left bottom line it's not just an issue of a willingness to implement policies it's also an issue of ability and that is why the west is struggling in terms of its growth dynamics and its dynamics so then do you think the monetary system just reiterate could be reaching the end of its rope . the big question then we know more about it is how does a monetary system operate when the middle is weak you know the middle and because the monetary system the middle used to be tripoli's lower and i remember not so long ago when you could say three phases and you could interchange them. who risk free aaa and government that. too many countries now you can no longer say that and therefore the whole of the system we've been working a lot of that and i tell you we don't know what the answer is we're going to continue working on it but this is

a major known unknown mama you're going to have to come back here into how it's going you know because we are dying to have that question answered. and we'll have more with mohamed el area and c.e.o. of pimco still ahead the threat of deep place in what financial repression means first savers for banks and how washington dysfunctional politics are holding up an economic progress for a still sick economy not strong enough to resist another virus the first your closing market numbers. you just put a picture of me when i was like nine years old i want to tell the truth.

i may confess and i am a total get over friends that high low gravity is a one trick. but it was kind of the jester day. i'm very proud of the will without you she has played. oh. oh. oh. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear see some other part of it and realize that everything is or you don't know i'm sorry welcome to the big picture. what drives the world the fear mongering used by politicians who makes decisions to

break through it's already been made who can you trust no one who is human view with a bill. the surety where we had a state controlled capitalism is called sessions when nobody dares to ask we do our tea question more. welcome back so in this paranormal world let's stick to this is there any hope for the u.s. economy with political dysfunction getting in the way seemingly at every stage is there any silver lining for the financially repressed saver and what could the savers financial repression have in common with layoffs on wall street and the drop in profits j.p. morgan reported just today let's find out from c.e.o. and co c.e.o. pimco mohamed el erian first though what's that other tail in this buy motile fat

tailed world now let's talk about though the other side of the coin and what would be required for central banks to lose control and for the system to deal lever central banks between the fed and the e.c.b. we know created trillions of dollars since this crisis began yet we still find ourselves on the verge just as we speak of more debt downgrades in europe today french t.v. channels are reporting is reporting that government officials are saying that as m.p. is going to downgrade france european central bank meanwhile said overnight deposits from banks rose to a record the most money there since the euro was introduced what does that signal to you and why is it the money that the e.c.b. is creating being used to prop up the sovereign bomb market. you know normally when you have a world of unthinkable and that's what we have today. people feel unsettled and uncertain so what do people do when they feel unsettled and uncertain they self

insure they start taking steps to try to limit their exposure so we see the following first we seeing banks that have tremendous liquidity refusing to lend it out they want that money at the central bank available to them we seeing multinationals with record record levels of cash on their balance sheet earning zero they would rather zero than invest because the world is so uncertain and so uncertain and the biggest risk and we start seeing it in some european countries are we seeing bank depositors get nervous we seeing bank depositors pull their money out of certain banks in greece as an example of that and go elsewhere so the general characteristic is that people feel unsettled they feel uncertain and therefore they're self insured that's problematic because the more you self insure the more you suck oxygen out of the global economy and the lower the growth and the lower the drop creation and the worse the income distribution and it seems kind of

to use an analogy it seems like the pipes are all clogged and central banks are trying to flush them out trying to clear the pipes with water but instead of unclogging the pipes that water is coming right back in but my question we have this much debt and the pipes cannot be unclogged what does this translate into for the real economy does it look like a depression. hopefully not so right now it's a multi-speed world the emerging countries will grow and four and a half five percent. the u.s. will grow at probably half a percent to one percent and europe will contract by about one percent but the balance of risk is to the downside. so if you put the whole global economy this is a global economy that grows at about two and a half a percent not great but surging out of depression but if europe creates much more of a headwind and europe goes into a major recession in the context of

a fragmentation of the eurozone then the downside risk with materialize and as i mentioned there whisks unfortunately tilted to the downside and just stick on the western economies that really does feel that you know they've got really sick three years ago the doctor stepped in with a heavy dose of antibiotics and you know we didn't die but we have been feeling too hot ever since people know something's not right they may not know what but they know something is wrong is this just it is this how we're going to have to get used to things going forward. so that's a great analogy the west was in intensive care in the midst of the wait global financial crisis intensive care and it is incredible intervention by the fed and by other government agencies the doctors that got us out of intensive care but we're still in the hospital right right and we need time to heal and the major concern is

while we're trying to heal we will get catch a cold or god forbid catch a flu from your right so great analogy we healing we healing slowly and we're not strong enough yet to resist another virus great point and as we're sitting here trying to heal you have said it's a world where several governments and advanced economies but particularly the u.s. have opted for what you have called financial repression what does this mean though for people who don't have the means to do anything other than say they're not investors they don't want to speculate they want to work and save. so if we weren't so critical for anybody out there right now. patients. prudence and optionality this is not a time to take a lot of risk. and if you have cash yes you're being financially repressed which is another way of saying that your earning a rate of return that's below the inflation rate yes yes that's that's right but it

gives you optionality because we believe that there will be many opportunities further down the road this year so it's important for people to realize this is not the time to be pedal to the metal in terms of taking risks this is the time to be. patient and have something that you can deploy if and when the world gets dislocated and good assets were traded very cheap prices at that time. and dizzier percent interest rates which were kind of talking about in combination with the flattening of the curve what is that doing it banks business models and is that part of the reason for what we're seeing in their earnings their stock prices and the layoffs yes it is so the banks had a goal. after the financial crisis they had a very steep yield curve they had guaranteed borrowing and they had relatively relatively high interest rates now the outlook estranged for banks they no longer

have borrowing the curve has for latin interest rates of floated zero so they can no longer gender weight this sort of earnings that they were joining with when you see this today in the j.p. morgan meanings in addition. governments around the world. and the levering the banking system it's a little bit like the reaction. on the highway you know where the speed limit want to minimize the chance of another accident you know what a speed limit so we're seeing banks. and not only by the markets but also by the policymakers ok and speaking of policy makers i want to stick to advanced economies and i thought it was really interesting in a recent article that you wrote on investing in this that tale world one of the first key problems you named for the u.s. you mentioned it earlier in this interview too is the persistent political dysfunction that's what keeping the u.s.

from properly controlling its economic destiny in your words what does this mean about where we are economically that politics is playing such a key role in the u.s. economy. it's not good news because it's not just politics it's dysfunctional politics so whichever party puts forward a proposal you don't get the normal give and take where your proposal iterates to something that's good instead you get total paralysis in the world that i'm describing policymakers have to be doing the right thing and right now even if even if they were willing to do the right thing they couldn't get it through congress in the united states so the political dysfunctionality is an issue and of course let's not also forget the whisks who would have thought who would have thought that the politicians in washington last summer could familiar with a default on the biggest bond market in the world and of course that contributed to

the downgrade of the united states from its aaa so the politics is certainly not helping right now and i'm just curious because you've been in this game a long time mohamed back years ago you were at the eye and in washington and you've been doing this for a long time is the u.s. economy being steered by the government or by the lack of effective government to a greater extent than ever before. so i would give you the image. the private sector is sitting in the back of the car right now it is not driving the car which is called the u.s. economy that is sitting in the back in the front you have the policy makers but the policy makers do not as yet know where they want to end up they don't have a map they don't have a destination secondly the bickering all the time so people sitting in the back of very nervous about this car because the drivers are becoming so that's why you get this self insurance is that it's yes policymakers are driving the car but they're

not driving it with the vision or are they driving it in the coordinated fashion. certainly at times it seems like you wonder if they even have their driver's license mohamed at the same time you were recently quoted saying despite all of this the u.s. dollar is still the cleanest dirty shirt despite all the u.s. economy's problems despite the bickering despite the u.s. downgrade of its credit rating what kind of an environment is that. the exchange rates. very different because they are relative price so it's the dollar versus the euro it's the dog versus the yen. so when you look at exchange rates you have to us to relative question not what does it look like on the standalone basis but what does it look like well it is to the exchange rates and here and this is the wonderful phrase of my colleague bill gross at pimco it's like the cleanest dirty shirt and if a simple analogy your business trip is extended you can get to the longer what are you going to do you going to wear your cleanest dirty shirt that's what you got to

do so the dollar is performing the role of the cleanest dirty shirt and lots of capital right now is flowing into the dog and not because it's great and conditions are great they're not but because it offers something better than the euro right and we're almost out of time last question before we go i've seen reports from him on opportunities in emerging markets you've been talking about their growth in this interview you used to head the division at pimco those bets on those markets were reportedly key to the returns you delivered at harvard can you talk about them those specifically in this paranormal world how are they faring against the problems the west is experiencing that perhaps are affecting them. so no one no one is immune to the problems of europe and the u.s. these are the two biggest economic zones in the world they are where the major banks it's where the major markets so no one is immune the question is how well can each country navigate this more difficult environment and here emerging markets as

a whole in much better shape than they've ever been they have high reserves no debt and good growth dynamics now there are some countries that don't have that hungry is an example of that and hungry right now is in crisis why it has high debt is they're nominated in mostly swiss francs so mortgage is all denominated in swiss franc so you get this dynamic so it's very. disruptive so on the whole the emerging market thesis is a valid however you have to differentiate enormously. and there you have it a full episode this friday the thirteenth dedicated to breaking down the paranormal world that we may be living in but did you hear that there might be a light at the end of the tunnel for savers mohamed believes maybe some opportunities later this year i know our viewers will appreciate that and that is it for our show today thank you so much for tuning in feel free to follow me on

twitter at more and list or give us feedback on the show at youtube dot com slash capital account and for the average man here at capital account thank you so much for watching have a great weekend and have a good night. for sure is that so much to know there's a huge music history of terrorism on the market in syria there are the regions of defiance as violence continues to intensify and spread you saw the regime says it is a victim of conspiracies. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize that everything you thought you knew you don't know i'm tom harkin welcomes a big show. down

the official t. hopefully cation to on the phone the i pod touch from the top story. on the go. video on demand. gold coast's. are a sense for you now in the palm of your what. on the dot com. the ball. is hitting you. if you.

if the military video gone viral or rain that you're in a ding on dead afghan bodies we covered it we were ready to move on but the overwhelming response we've gotten on our website says this story is far from over well we're listening and we'll read some of your responses. in politics there are kings and king makers question is where israel falls on that spectrum when it comes to electing the next u.s. president and why it has so much poll in the first place will question more. bipolar depression doesn't have to consume you here's me and here's my depression you know.