Mohamed El-Erian says there’s too much liquidity

Mohamed El-Erian of Pimco says easy liquidity are might be tamping global solvency and growth. He’s right about the problem, and hopefully he’ll also be right about the solution.

El-Erian contributed an article to The Huffington Post on January 30, in which he analyzed recent disappointing GDP numbers and pointed out how they are not fully reflected in the markets.

“Today’s markets are not pricing in fully the growth and solvency disappointments, and for good reason,” he wrote. “Central banks continue to pump a massive amount of liquidity into the system. And, this week, they again left little doubt about their commitment to this course of action notwithstanding [its] failure to deliver the desired economic outcomes.”

According to El-Erian, governments have little choice but to use their central banks to avoid a recession, and that has consequences.

“The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region’s debt crisis,” he writes. With the U.S. and Europe unable to change the situation, “attention naturally shifts to the emerging economies. Are they robust enough to tip the global balance in favor of high growth?”