Welcome to "the new normal."
That was the message delivered Thursday by Robert E. Rubin and Mohamed El-Erian, two of the most prominent figures in global finance, at the Financial Times View From the Top conference in New York City.
During a discussion with Martin Wolf, the FT's Chief Economics Commentator, Rubin, Co-Chairman of the Council on Foreign Relations and a former US Treasury Secretary, and El-Erian, CEO and Co-CIO Pimco, the world's largest mutual fund, painted a picture of a global economy that has crossed a Rubicon of sorts. In the West, at least, economic growth may not return to earlier levels, at least not any time soon.
A Tough Spot
"I think we're in a very difficult situation," Rubin said. "This is the most uncertain, and most difficult, set of circumstances in my adult lifetime."
The former Chairman of Goldman Sachs expressed alarm about the fiscal situation in the United States and urged the Obama administration and Congress to embark on a course that will address it within the next two or three years. "It is imperative that we get back on the right fiscal track, but there has to be room for public investment in critical areas," Rubin said.
Rubin said that he believes that the US intervention in the financial system has been "effective" and that financial regulatory reform was "sound." Still, he said, "there is no question there is strain between the business community and the administration."
Despite calls for another economic stimulus, he doesn't favor that path, because it could adversely impact business confidence and market psychology. Also, there's no guarantee it would work, Rubin said.
Rubin says he doesn't favor extending the Bush-tax cuts for those making over $250,000 per year.
For his part, El-Erian said his firm Pimco has placed a 55% probability of continued sluggish growth – eg. 1.5-2% increases in GDP, well below healthy growth rates – and high unemployment. He places a 15% probability that "we are surprised on the upside." Finally, he places 30% probability of a double dip recession, in which the economy returns to negative growth.
Both Rubin and El-Erian highlighted the tough political choices facing US policy-makers seeking to dig the economy out of its hole.
"The politics of austerity are proving to be very difficult," El-Erian said. "What is economically desirable is not politically feasible." Further exacerbating the problem, he said, is the fact that "policy outcomes have fallen short of policy expectations."
Asked about whether investors should be bullish on stocks, El-Erian, the world's largest bond manager, endeavored to answer the question "delicately."
"Our collective expectations of returns should be coming down," El-Erian said. "Returns are a function of the health of the economy. Returns coming from outside the US will be higher than returns coming from inside the US. The most dynamic growth is coming from the rest of the world."
Rubin declined to take a position on the question. Wolf, the moderator, said: "We are not going back to where we were in 2005 and 2006, and that's a good thing, because that was deranged."