The period of U.S. exceptionalism isn’t quite ended, according to Mohamed El-Erian, the chief economic adviser for Allianz and the former CEO of the bond behemoth Pimco.
“It’s been put on pause,” El-Erian told MarketWatch over the phone. “It’s too early to say if the damage inflicted is irreversible.” However, he stated that the tariff wars and the resulting uncertainties must end.
El-Erian, who is now running for the position of University of Cambridge chancellor and serves as president of Queens’ College, stated that he was not opposed to tariffs in general.
He can see value in temporary tariff restrictions and an escalate to de-escalate strategy if the end goal was to create a more equitable trade system with partners. El-Erian did, however, draw attention to the variety of goals that the trade wars were intended to accomplish, such as preserving domestic businesses and lowering taxes by increasing foreign revenue. “Some of these objectives are contradictory,” he stated, and “liable to inflict collateral damage.”
El-Erian noted that another effect of the tariffs could be that other nations impose duties on China or one another, which would result in fundamentally higher prices worldwide.
El-Erian was hesitant to say if the current flight of foreign investors from American asset markets was tactical or strategic. He said that when tariff wars started, the globe was caught off guard by American assets, but that this stance was mostly supported by American exceptionalism, creativity, and entrepreneurial prowess.
“The world outsourcing its savings to America,” he claimed, was justified by these circumstances. America, with its developed institutions and largest economy in the world, will likely always defend a long, secular tilt.
El-Erian responded to the argument that the technological advancement might simply be the result of the exceptionally low cost of capital brought about by the dollar’s position as the global reserve currency by pointing out that both Europe and Japan enjoyed the same low cost of capital but did not create any similar ground-breaking technologies, such as artificial intelligence, to increase productivity.
El-Erian was questioned about who could manage the long end of the curve, Fed Chair Jerome Powell or Treasury Secretary Scott Bessent, given that the 30-year Treasury yield BX:TMUBMUSD30Y was within a whisker of 5% at the time of the interview and achieved it on Monday. He asserted, “They can influence it only,”
The Fed could employ quantitative easing once more in an emergency, but this artificially suppressed interest rate has unfavorable consequences, including capital misallocation, the resurgence of moral hazard and the zombie economy, and, of course, the danger of letting inflation run amok.
El-Erian noted that since there was no inflation in the system, this was a less risky approach during the ten years following the global financial crisis. The inflation menace has returned.
El-Erian’s remarks came before Moody’s, the final rating agency to revoke the once-celebrated Triple-A designation, downgraded the U.S. debt rating. El-Erian stated in a social media post that while the action was historic, its effect on the market was probably going to be limited.
