June 22nd, 2011
05:21 AM GMT
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New York (CNN) – In just over a week Ben Bernanke and his colleagues at the Federal Reserve will turn off the life support system that has kept the U.S. economy alive for the last two years. How will the markets respond? It’s anyone’s guess.

Optimists, like former White House Advisor Laura Tyson, say the economy - though still fragile - has healed enough to breathe on its own. The Fed has been clear about its intentions to end its program of buying treasury bonds and mortgage-backed securities, the market had time to prepare and the withdrawal of quantitative easing should end without much drama.

But executives at Pimco, the world’s largest bond fund, disagree. CEO Mohammad El-Erian is sticking by the firm’s bearish and controversial call that the end of quantitative easing will spark a sell-off in U.S. treasury bonds. I talked with both Tyson and El-Erian ahead of the Federal Reserve’s June meeting and he gave the following assessment.

“When a big buyer steps away, and the Fed has been a very big buyer, any investor has to ask the question who else is going to be buying and we can’t find another big buyer to step in. We are worried that other things being equal - and that is a critical aspect, other things being equal - that means higher interest rates unfortunately.”

Of course, all things aren’t equal. The prospect of a Greek default and fears about what that would do to the European banking system has sent investors running to U.S treasury bonds causing interest rates to drop, not rise.

That is a problem for Pimco investors who have missed out on the recent rally in treasuries. But it provides a window of opportunity for U.S. lawmakers who are struggling to reach a compromise to cut spending and get their deficit under control.

“I believe it would be much better for the economy, much better, if we could get the deal now,” said Tyson.

“I think there is great danger to kicking it beyond the (presidential) election, both in term of the world not believing the U.S. is ever going to get serious about its long run problem but also serious because we won’t able therefore to do anything about the short-term headwinds. This is a very important moment for action.”

Will EU and U.S. politicians step up? El-Erian is not that confident. “We encourage people to be cautious. Have dry powder. There will be opportunities because markets tend to overreact, but this is not the time to take massive risk.”

Can officials around the world prevent another global meltdown? Anybody brave enough to be buying here? Let us know your thoughts.



soundoff (16 Responses)
  1. meesha

    about bloody time we let the free market work on its own!!! The founding fathers and early presidents were smart not to want a national bank, I say let the economy run its course and stop fighting mr. market, he always wins

    June 22, 2011 at 7:33 am |
  2. lolcface

    wow they want the world governments to keep paying for their 300 million dollar salaries.

    June 22, 2011 at 7:48 am |
  3. Uh oh

    Uh oh seems your monopoly money printing press is closed.

    June 22, 2011 at 7:48 am |
  4. joshua

    Better to buy Brazilian or Uruguayan.

    June 22, 2011 at 9:14 am |
  5. Jarhead

    This is a time for the US to get into greater debts. It would create the missing momentum in the economy on the cheap. Interest rate will never be that cheap again, so let's borrow now. Makes perfect economic sense unless you are a diehard republican.

    June 22, 2011 at 11:45 am |
  6. Jarhead

    It's a perfect time for the US to get into greater debts. It would create the missing momentum in the economy on the cheap. Interest rate will never be that low again, so let's borrow now. Makes perfect economic sense unless you are a diehard republican.

    June 22, 2011 at 11:48 am |
  7. jan

    Investors have to choose between continents and the cuurencies they have and ask themselves what hast the most value. Comparing the natural resources, job opportunity and therefor employment possibilities and so growth opportunity. And last but not least the value of the cuurency in relation to export.

    For example the euro started at 0.83 years ago against the dollar, nowadays it is around 1.45. Comparing the debts of Europe with USA and taking with it the opportunities of each continent political and economically I myself wonder are things in balance and where I see investment opportunities. You should do the same and also take asia in account.

    June 22, 2011 at 2:45 pm |
  8. SA

    You can say that again.

    June 22, 2011 at 3:57 pm |
  9. Alex

    @Jarhead

    What you don't get is that the US government finances itself mostly using short-term instruments. If we borrow profusely now, what do you think is going to happen when we have to roll that debt in two or three years and interest rates are higher? The whole country will be like a subprime borrower who can't make payments once the rate resets. We wouldn't be locking in a long-term rate under your plan, that part of the treasury market is much smaller and can't support that much additional debt.

    Keynesianism, as practiced today, is broken, sorry. I love how his theories have been corrupted. Keynes would have never argued that more debt is the solution to a problem caused by debt. That's ridiculously stupid and that economists like Krugman don't know any better is beyond me. (And I'm not going to disclose who I am, but I'm not some simpleton spewing BS...I have a degree in economics from one of the top 3 US institutions, and have my own financial company)

    June 22, 2011 at 5:50 pm |
  10. Brickell Princess

    All this points to the fact that all business leaders are a failure. The White House did not lead the nation to this mess. Corporate CEOs led the nation to this mess. Last time I checked, companies have the free will and power to make and execute their own decisions. Such decisions led to this mess. As powerful and influential as they are, they had the Federal Government kick up the printing presses so that trillions of dollars were given to them to fund the loses of the mess they made. Businesses (banks included) have pocketed those trillions of dollars thinking that they are on top of the world right about now. Unfortunately for them, and pointing to their incompetence, their mighty piles of dollars are worthless. Once again, they failed to realize the reality and consequences of their actions and incompetence. That they hoarded piles and piles of worthless dollars.

    June 22, 2011 at 7:17 pm |
  11. Depression NOT Recession

    As history IS repeating itself. . . We ARE in a depression and we need to buckle down, NOT borrow and spend more.

    June 23, 2011 at 1:36 am |
  12. MainStreetEconomist

    @Princess:

    Yes, CEOs blew it, but there were safeguards in place since the 1930's when they last jumped the tracks. And all of our politicians just watched as first Reagan shredded a bit at those safeguards, then Clinton tore the remaining regulations out. This is why neither party is very vocal about the real reason the CEOs screwed up...both parties have a hand in the guardrails being removed. Once again politicians allowed themselves to be bought out by the same Wallstreet that created the previous Great Depression. Same business ethics – same results. But you can bet that the unemployment and foreclosure rates in the general population don't run true through our congress...no sir.

    June 23, 2011 at 7:07 am |
  13. scootie

    money making money is not an economy. if the fed can "print" money out of thin air then why can't they just take a loss and zero out what the government would "owe" in these QE ops?

    June 23, 2011 at 11:59 am |
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