Mohamed El-Erian’s latest commentary elaborates on the newest theme in international finance, “the simultaneous and significant deterioration in the public finances of many advanced economies.”

“The shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.”

What makes this crisis different from past ones? 

“Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.”

The above analysis underlies PIMCO’s ‘New Normal’ thesis, which posits that the latest financial crsis “will have a widespread and long-lasting impact on global economic growth, government policy and the interplay between developed and developing economies,” and implies “lower growth, greater regulation and higher savings rates in the developed world, as well as relatively higher growth and a more prominent role in influencing global economic policy for the developing world.”

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