Economy Economic thinker Mohamed El-Erian fears the Fed has made one of its “worst mistakes.” Now he explains what to think about the exceptional economic situation.

New normal is perhaps the most stressful of the choke of a coronary pandemic. In recent months, Helsingin Sanomat has claimed that singing together, teleworking, selfishness and high electricity prices are now “new to normal”.

However, few know where the concept of the new normal originated from. It rose to its current everyday vocabulary just over ten years ago. Let’s thank you for that Mohamed El-Eriania.

El-Erian is one of the most famous economic thinkers in the world.

He has a long career on Wall Street and at the International Monetary Fund (IMF). For several years, Foreign Policy has elevated him to the top 100 in the world.

HS Vision discussed with El-Erian a new normal, economy and future.

El-Erian is answering a video call from England, where he is the director of Queens’ College, University of Cambridge. Behind the pixel mass, a bookshelf, an antique table, a plush mustache and a wide smile stand out.

El-Erian has returned to his old class after nearly 40 years of international career.

“I used to study economics here in Cambridge. I was seriously looking for an academic career. Then my father died, my plans changed and I had to make a living. ”

He ended up in Washington, the International Monetary Fund (IMF), and enjoyed there for nearly 15 years. After the IMF, another career began on Wall Street. Initially at the hottest investment bank in the 1980s at Salomon Brothers and then as treasurer at Pimco, a legendary investor Bill Grossin under the authority of the

“

The descriptions of the present are usually confusing, contradictory, and foggy.

El-Erian rose to the attention of the general public in the aftermath of the financial crisis. He became a standard commentator in the media at the time when he had to understand where the world was going. Above all, he summed up the decade that followed the financial crisis in two words: new normal.

What did you mean by the new normal just over ten years ago?

“Most politicians, officials and investors at the time thought the financial crisis would have been a normal cyclical fluctuation. According to the old norm, the recession should have been followed by a similar upswing as before, ”says El-Erian.

Instead, the new normal that El-Erian had at the time was something else: growth would be subdued and central banks would play a key role in driving the economy and markets.

The descriptions of the present are usually confusing, contradictory, and foggy. Periods of history usually seem clear only in retrospect.

That is why the crystallization of El-Erian from the new normal in 2009 was so exceptional. He defined the 2010 world economy before it even had time to begin.

“

No one can say what economic growth or inflation will look like in a year’s time, let alone in the longer term.

Now In the 2020s, a new normal has penetrated everywhere. How does El-Erian react to the fact that the new normal he has made known is being cultivated around him?

“It’s nice that the term is used so widely.”

El-Erian believes the popularity of the word pair is the result of at least two things.

“The world is changing fast now and many things that were previously taken for granted have been questioned. The new standard, on the other hand, is appropriate for this time, as it indicates a structural change. ”

Then followed by a surprise. El-Erian does not want to tell itself what is the new normal for the 2020 economy.

“It is too early to say what is normal and what is transient in this economic situation.”

The current economic situation is absolutely special. No one can say what economic growth or inflation will look like in a year’s time, let alone in the longer term. China’s closed economy, geopolitical tensions, shortage of microchips and the transformation of the energy sector are all unpredictable trends.

No one can accurately calculate their combined impact on the economy, El-Erian says.

Not even central banks?

El-Erian laughs.

“No no no. Not even the central banks. ”

“

The unpredictable communication of central banks also does not inspire confidence.

Economic situation unpredictability is most evident in the evolution of inflation. The US Federal Reserve had time to declare inflation “transient” and repeated this throughout last year. During the winter, the Fed has had to spin its stance. Inflation seems to be a more permanent phenomenon.

“The Fed classified inflation as transient, and it may be one of the worst mistakes in Fed history,” El-Erian says.

Now the Fed will have to tighten its monetary policy quickly, which in itself is a risk to the economy. The unpredictable communication of central banks also does not inspire confidence.

According to El-Erian, the CEO of the Fed Jerome Powell claimed inflation to be temporary because he wanted to send a reassuring message to people. At the same time, the Fed remained a prisoner of its own communications.

“When you name a phenomenon, it starts to shape behavior as people start believing their own words. However, in the face of uncertainty, it would be important to be open-minded and to avoid deadlocks. ”

The time for a new normal is only when it can be said with sufficient certainty.

However, some guidelines for the future of El-Erian dare to give. The role of the state will be stronger in the future, at least in some areas of the economy.

“It is clear that many problems require greater investment from the public sector. Climate change and the problems it brings cannot be solved without states. Inequality is also an issue that requires public authority to address. Equality then meant income inequality, wealth or equality of opportunity. ”

However, El-Erian is wary of the extent to which state influence can grow. Perhaps the state will not play a key role in all sectors of the economy, and the Nordic welfare state is not the only model that all countries are heading towards.

“

“In the end, we end up being forced to stay in the stock market, despite the risks.”

Uncertain the economic situation is reflected in the financial markets. Stock market volatility has risen in recent weeks and the prices of many technology companies have come down.

Investors are looking for safe havens for their money, and therefore there is little to no return on safe investments.

What risk-averse investor can do?

El-Erian says the situation is awkward for all investors, but especially for those who are risk averse. He says he sits on the boards of numerous charities, and their meetings describe the situation.

“Almost every meeting starts the same way. We congratulate ourselves on our excellent returns in the stock market and want to cash out our profits. Then we thought about where we would transfer the money from the shares. We go through different options: stock prices are high, interest rates are very low, inflation eats up the value of cash. In the end, we end up being forced to stay in the stock market, despite the risks. ”

What kind of future does El-Eria have for a small, export-dependent open economy like Finland?

“Europe is very strong in the green transformation of the energy sector,” El-Erian begins.

He acknowledges that there are structural problems in the EU and the eurozone, but that does not necessarily mean disaster.

“The energy revolution is a great thing, and it can be a unifying theme that will allow the EU and Finland to move forward together.”

However, the next few years may be difficult for countries dependent on world trade.

According to El-Erian, globalization is now on hold, or even taking a backseat. China and many other countries are balancing with interest rate restrictions, making production chains unstable.

Countries living on exports will have to get used to this for at least the next couple of years.

In addition, Europe is dependent on imported energy. If oil and gas prices continue to rise, it is a problem for Europe, whether fossil energy came from Russia, the Middle East or the United States.

When tensions between Russia and the West are added, there are enough uncertainties.