Mohammed El-Erian, Chief Economic Adviser at Allianz, PIMCO’s parent company, where he was previously CEO, recently appeared for an interview on CNBC to discuss inflation, the Federal Reserve and Bitcoin’s price surge as a result of monetary policy .
In the interview, El-Erian was asked what would happen to gold, bitcoin and other cryptocurrencies if his predictions that the Federal Reserve (Fed) would change its inflation target came true.
“They both go higher,” El-Erian replied, but understanding his prediction makes them much more meaningful. The interview began with El-Erian being asked to explain the state of inflation in the economy.
“Basically, I think markets have understood that we have three problems: first, high and persistent inflation is with us, second, the Fed is way behind, and third, the path for orderly disinflation is pretty narrow,” he said El-Erian the reporter. “Because of that, now you’re starting to have questions about growth.”
El-Erian went on to explain that Goldman Sachs has stated that there is a 35% chance of a recession occurring within the next two years. The fear associated with applying this large allocation to the idea of a recession adds complexity when attempting to navigate corridors of inflation and growth measures.
“I think crypto people are concerned that this drop is occurring at a time when gold has been rising and reaching close to $2,000,” El-Erian explained in response to the reporter’s question about what’s happening in the market. “Because the big argument for crypto is that it is a diversifier. In times of inflation it is attractive.”
El-Erian went on to explain the trade-off between liquidity finding new forms of investment and money exiting its traditional vehicles in times of rampant inflation. He called the current market price of bitcoin and other cryptocurrencies a “value recovery” and assured viewers that what is happening is good for the market.
“We are entering a paradigm where liquidity is no longer abundant,” El-Erian told CNBC. “And it’s unpredictable anymore.”
El-Erian was then asked what people should do, as the reporter noted that the economist was proposing further declines in what he called the Restoration. El-Erian responded with resistance, saying yes that prices were likely to go down.
“We must take seriously the fact that stagflation has become the baseline,” El-Erian explained. “This recession has become the risk scenario that we are no longer close to the Goldilocks scenario. Yes, I would be cautious in general.”
He went on to say that “inflation has peaked mechanically” and explained that base effects were becoming more favourable. But El-Erian made it clear: “We cannot declare inflation to be over, but expect that core inflation in particular will remain at high levels. We are far from the end of our inflation challenge.”
El-Erian then detailed his lack of confidence in the Fed’s ability to restore their hopes for 2% inflation over the next two years and suggested they need to adjust their target. El-Erian was then asked what would compel the Fed to change its target and specifically what that target might be.
“What will compel them to change their goal is the realization that their credibility is threatened if they are so late that they cannot reach that goal,” El-Erian replied. “They will also worry that if they hit the brakes too hard, they could push this economy into not just a short-term recession, but a longer-term recession.”
El-Erian explains that this pressure would cause them to shift the target from 2% inflation to 3% inflation as a way out. When they create a moving target that’s easier to reach, it looks like the economy’s central planning is still redeemable, given their ability to make the changes they claim they have the power to make have, and thus restore credibility.
“This is what you get when you’ve waited too long to recognize what inflation is and take action,” El-Erian explained. “We should have started QT (quantitative tightening) last year, but we didn’t.”
The reporter then asked his final question: “Ok, Mohammed. If you’re right, and they do. What happens to gold and what happens to crypto on this day?”
“In a world like this, they both go higher,” he replied.