Mohamed El-Erian Says We Can Not Assume The Dollar Will Retain Its Reserve Currency Status

Tyler Durden's picture

Mohamed El-Erian made one of his regular media appearances today (in addition to his almost daily Op-Ed, released earlier) appearing on Bloomberg Surveillance with Tom Keene and talking the developments in the Maghreb. While the full highlights are presented below, there are two items of note. El-Erian once again hits on what we believe will be the keyword of 2011: stagflation. To wit: "we have to appreciate that in the west, what is happening in Egypt and North Africa results in stagflation in the short term. So higher inflation and lower growth because of higher oil prices that take away purchasing power and transfer wealth somewhere else; because of higher geopolitical risk, which tends to diminish animal spirit and therefore impact investment; and let's not forget that the Middle East is a market, particularly for European exports. So from an economic perspective, it is important for the west to understand that these are stagflationary winds that have been added to the global economy." It is important, but not necessary: as long as the manipulated, liquidity glutted market continues to misrepresent the true state of the economy, nobody will care until it is too late. And speaking of "too late", validating our sarcastic observations over the past several weeks that the dollar is no longer the "flight to safety" currency (that would be the PM complex, and the swiss franc if anything), is the Pimco CIO's suddenly very dour outlook on the weakening US Dollar: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S., worrying about the level of debt and what they're hearing about states and municipalities. I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past." That's a given - the question however remains, which fiat currency, if any, is willing and ready to step in and replace the USD? With all eyes continuing to be look at the CNY, how long before China finally takes the plunge to find out just who is the real reserve currency in the world?

From Bloomberg TV:

On unrest in the Middle East:

"I think that a common factor that's been driving all of that is a combination of youth unemployment, high food prices, and political repression. But as you say, Libya is different. The revolutions in Tunisia and Egypt were relatively peaceful. Libya is far from being relatively peaceful.  There is a tremendous amount of human suffering and casualties there, making this protest more unpredictable and more dangerous. In addition, Libya is a major oil exporter, so suddenly developments in North Africa and the Middle East have a systemic impact on the economy."
 
On other oil producers in the region:

"Everyone in the Middle East and beyond understands that this is a movement that has to be taken seriously. That it is better to be ahead of the curve rather than behind the curve. The story of Egypt, Tunisia and Libya have been regimes that have been consistently behind the curve. The lesson that has gone out to not only other Middle Eastern countries but to the whole world, is take seriously these economic and political issues."
 
On political and economic intelligence for Libya:

"On the economic side, the data that you can confirm on the other side, particularly trade data where there is a trading partner and therefore you get another number, tends to be pretty good. It tells you that Libya is an export of about 1.5 million barrels per day, which is not insignificant. This is one of the top 10 or 11 oil exporters. When it comes to internal data--GDP numbers, inflation numbers--then it becomes more difficult. On the political aspects, what we have learned is that western intelligence has been behind the curve in terms of understanding the dynamics in those."
 
On what the western world can do over the next 48 hours regarding the unrest in Libya:

"Three elements. One is the reality that in countries like Libya, the rest of the world cannot do very much other than condemn and try to put pressure, but ultimately that's not going to bear very much.  Second, In countries that have gone to the first phase of revolution--Tunisia and Egypt--the west is able and willing to step in to help the process towards democracy. It is encouraging that the British prime minister went to Egypt yesterday. Thirdly, we have to appreciate that in the west, what is happening in Egypt and North Africa results in stagflation in the short term. So higher inflation and lower growth because of higher oil prices that take away purchasing power and transfer wealth somewhere else; because of higher geopolitical risk, which tends to diminish animal spirit and therefore impact investment; and let's not forget that the Middle East is a market, particularly for European exports. So for an economic perspective, it is important for the west to understand that these are stagflationary winds that have been added to the global economy."
 
On persistent stagflation as the new normal:

"The new normal is just a recognition that the western world is not going to grow as rapidly as before. That unemployment will be a persistent issue. That social safety nets will be very stretched. And that government intervention will continue in the economy. What we're getting on top of that now are headwinds from higher oil prices, higher geopolitical risk, and a concern that one of the reactions to higher commodity prices will be for consumers to stockpile. So I suspect that right now a lot of airlines are likely saying that with oil where it is now, should we be hedging now? What you get is an overshoot, just like we saw in 2008. That is a concern in terms of the stagflation headwinds."
 
On Pimco's strategy and how to react to unrest as an investor:

"Last week, Friday in particular, when the crisis started impacting countries like Bahrain, we recognize that things were morphing. That it would impact commodity prices and oil prices in particular. We identified a process of morphing that went on. When the crisis was focused on Egypt and Tunisia, when those countries were going to their peaceful revolution, they were not systemic in nature. The influence on the global economy was limited.  They were not large economies. They were not major exporters of commodities.  And they did not owe anyone lots of money. When the crisis and turmoil started to hit Libya and Bahrain, this whole phenomenon has morphed.  And it has morphed into something that in the short term means higher oil prices, greater risk aversion, and a somewhat flight to quality.  Although it's interesting to see that the dollar has not benefitted that much."
 
On higher oil prices:

"The global economies are going to have to live with these for a while. That is just a reality of the world we are living in today."
 
On the events in Egypt over the past week:

"They have taken important steps. You've seen ministerial changes, you've seen a timeline announced.  And most importantly, you've seen the protest movement saying that we will be the check and balance. We're going to make sure that this revolution that was started will end up with democracy and greater individual freedom. We're seeing progress. It's a bumpy road that does not happen overnight. But every day we are seeing progress."
 
On what the weak dollar is signaling:

"It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S., worrying about the level of debt and what they're hearing about states and municipalities. I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past."