PIMCO CEO: Federal Reserve's Actions 'Overinflated' Brazil, China

Forget the United States, maybe it should be called the Federal Reserve of the world economy.

El-Erian, CEO and co-CIO of PIMCO, the largest bond fund in the world, gave some insight into the effect of the Federal Reserve's bond-buying program known as quantitative easing, or QE2, on emerging nations, during an appearance yesterday on CNBC's Squawk Box. In El-Erian's opinion, the program may have affected emerging economies more than the U.S. itself.

The original purpose of the stimulus program, put into effect last November, was to combat deflation by pumping newly-printed money into the economy through the purchase of $900 billion worth of government bonds. With the program ending this month without confirmation of an extension, economists like El-Erian are now looking back and questioning the degree of its success.

And while its domestic effect remain debatable, how it affected emerging economies is already more clear, he says.

"The QE2 splashed everywhere. It splashed into the commodities market, it splashed into other countries and some of it splashed here and we got a bit of a cyclical recovery. But we're finding out we're not getting enough of a cyclical recovery," El-Erian said.

El-Erian might be unsure that quantitative easing succeeded in the United States, but he's more certain of its effect elsewhere. Asked why economies such as Brazil and China have slowed, El-Erian responded: "Because we've so overinflated them, all this liquidity injection, they're having to tap the brakes and slow down."

Specifically, economists are increasingly concerned about China's Real Estate bubble while Brazil's first quarter growth was so strong the central bank recently raised interest rates by 1.25 percentage points.

As for another round of quantitative easing, El-Erian called the idea "unlikely" since he doesn't foresee the economy double-dipping into a recession. "There's simply too much liquidity in the system," he said.

Watch El-Erian's segment on CNBC here:

Comments

[structurequity]

06:02 PM on 06/12/2011

Yes, speculative liquidity as in the US speculated with the emerging economies and they are self-regulating with higher rates although the economy cannot support man made higher rates; while we cannot support any of the crazy policy we are enacting so our end result will be a depression that will do its best to also feed the world and its inhabitants with non-access to bread on the table and the very means to get it...

[gokulram arunasalam]

03:02 PM on 06/12/2011

Inflation was fine as long as the economies were growing at near 10% levels, but as growth is now moderating, the excessive inflation is hurting. Likely to see EM currencies strengthen as they would at least be able to achieve lower commodity costs.

[AlanBannacheck]

02:13 AM on 06/12/2011

Whether we experience massive hyperinflation, stagflation, or a continuum of the deflationary death spiral is anyone's guess. The Federal Reserve is like a magician, sure the tricks looks like magic, but they are simply clever disguises.

[flamenfiddle]

05:51 PM on 06/11/2011

If you haven't seen this, it is funny and informative.
www.youtube.com/watch?v=PTUY16CkS-k

Check the weight changes on sugar for example. Instead of 5 lbs, they are now 4lbs for the same price. Inflation fighter fro sure LOL

[nelore]

09:39 AM on 06/11/2011

Stop the madness and call Wall Street for what it is. A Gambling Consortium. It is no longer a place to invest in companies that has something to sell, but a paper shuffling Consortium. They deal in paper and computer clicks, while Vegas still use chips. Why would anyone trust Wall Street when the game is played with faulty rules. They control Congress, the only place that could make them legit for the average american to invest in his own economy.
How long must the country go on before the American public presses a RESET button on the USA.Start over, the first experiment failed and the Union has grown weaker. Lets try again but this time Regulate the crooks so they can not take the Republic down, in the name of greed. She is innocent.

[taurus58]

09:13 AM on 06/10/2011

http://www.youtube.com/watch?v=ErsbN8dvcvw&feature=player_embedded

[frank day]

09:03 AM on 06/10/2011

China manipulates its currency refusing to let it rise.

We can't afford to let them continue this fraud.

[cmbg78]

12:14 PM on 06/10/2011

We are basically doing the same thing....

[oldstudent10]

12:54 PM on 06/10/2011

Yes, yes we are. Our protestations about Cina is akin to what Doc Hollidy said in Tombstone, "My hypocrisy knows no bounds."

[KennyFox]

11:06 AM on 06/12/2011

The dollar is "weak" because of our historic low interest rates. But the dollar is also "strong" insofar as it remains the dominant world reserve currency. Not even the euro comes close to that, despite being a stronger trade in the forex market at this time. There is simply much more demand for dollars in the world than there are euros or any other currency. Our dollar looks week because interest rates are low and our economy sucks. If traders and fund managers believe interest rates in the USA will stay low, they will be alternatives to the dollar -- gold and oil.

[ConnaPrison]

06:22 PM on 06/11/2011

They're no more fraudulent than Wall Street, the Federal Reserve, and D.C.

Your hypocrisy knows no bounds.

[jo smith456]

08:06 AM on 06/10/2011

addendum,

Part of US Treasury's QE2 (in partner with Fed Reserve) was diverted to the US Big banks's own capital infusion strategy to improve their bottom line and financials INSTEAD OF diverting those funds to help domestic companies (e.g. stimulate US economy) and domestic job market.
No wonder many big US banks and their hedge-fund partners (to which billionaires and multi-millionaires put their money) have been harvesting big net income and returns on their investments!!

[Cipo]

04:52 PM on 06/12/2011

Actually QE2 was a concentrated, and successful, effort to bail out foreign banks (again).
http://www.zerohedge.com/article/exclusive-feds-600-billion-stealth-bailout-foreign-banks-continues-expense-domestic-economy-

[jo smith456]

07:57 AM on 06/10/2011

SO, Fed Reserve targeted to increase monetary liquidity (to stimulate US economy) but ended up more stimulating the economy of Brazil, China, and possibly India, etc.? And China and Brazil are two of the top few big buyers of US treasury bills.

WHAT HAPPENED? One big reason? Many of the biggest US banks (that facilitated the liquidity easing) worked and maneuvered with their wall-street-financier friends and partners to divert a big chunk of the proceeds of QE2 to be invested in the BRICS, instead of investing in the US.
IOW, the US big banks, which are members of Fed Reserve, diverted much of the proceeds of QE2 to support their own investment portfolios!!! Americans are fooled again by the banks and their wall-street-financiers friends and partners!!!

[Majestry]

05:52 AM on 06/10/2011

You mean to tell me that the capital class isn't investing their free money here in the US but instead elsewhere?

I'm shocked, shocked I say!

[Kache]

03:20 AM on 06/10/2011

Well, that's half of the story. But, look at what inflation in China means. Understand that 12% inflation was the fuel behind Tiananmen Square 22 years ago, and that the government fears nothing more than a repeat. So, this year, due to the inflation of Benny Bucks, Chinese industrial wages have risen 20% (25% for government employees). And that is not high enough, Chinese industry is running at below 90% of capacity because they have a shortage of labor at that wage. And now that Chinese workers know they can demand and get more, they will. Result - the yuan has risen 12% since QE2 began. If that rate continues for 6 more months it will cost less to produce a widget for the US market in Alabama than in Shanghai. The US is currently at the highest rate of exports in 22 years. That's the part of the story PIMCO does not want to mention because of it's effect on PIMCO's investments in China.

[frank day]

09:04 AM on 06/10/2011

Bingo!

you get it.

[crease]

12:35 PM on 06/10/2011

Imagine that,slave labor wanting a better life for their families,What will Walmart do,raise their prices or just find the NEXT China to keep doing business with slave labor,non existent environmental standards or production standards when it comes to ISO standards levels of arsenic,lead and other chemicals that have harmed people around the world.

[outnow]

12:59 AM on 06/10/2011

There was a solvency problem with banks. They made bad loans. The Fed threw liquidity at the banks. This is highly inflationary. The US has the world's reserve currency. Inflation is exported to the periphery. That was the intent of QE2, or at least an effect. Then the dollars are recycled because oil is traded in dollars. These countries then are forced to buy our bonds. Even as the other countries are back off from buying our bonds, we just have the Fed buy them. PIMCO sees a problem with the bonds going down.

The real estate bubble burst and deflation was Bernanke's biggest fear. Now what to do with the inflationary spiral in China and Brazil. Meanwhile, we have slow or no growth and no jobs and the real estate market is getting worse.

[bllnsinchnge]

02:03 AM on 06/10/2011

Deflation is a contracting economy. Real estate is now in process of deflating. It is not something to fear, it is the cure. The cure for the malinvestment that stimulus, government management and guaranteed loans have produced. That stimulus, (more dollars with no production of goods or resources) was the disease. Our currency and way of life are dying a slow death.
www.mises.org
www.schiffradio.com

[Peter Combs]

12:19 AM on 06/10/2011

Back when QEI was starting the FED and Treasury all argued it wasn;t at all inflationary....no problem...when QEII was starting they said the same thing....while everyone knew they were lieing...SO now we have liquidity...with a weakend currency...and no changes as promised. Great Job!! Just great...

Meanwhile we're going to be paying back the countrys who lent us money with diluted currency..they must be thrilled. Thanks CHina!, Japan, Germany! et al.

[angelavictoria5]

11:00 PM on 06/09/2011

Guys, what happened to that short firm leash on newly printed money because the economy is fragile and unstable? WE ARE NOT INVINCIBLE.

[yinca]

10:21 PM on 06/09/2011

now you tell