Under a strategy of financial repression, governments often require banks, pension funds and other financial institutions to hold government debt, ostensibly for reasons related to the safety and soundness of the organizations concerned.
Economists Carmen Reinhart and Belen Sbrancia wrote in a March study that financial repression helps keep interest rates low and can help pare debts, identifying the years 1945 to 1980 as an era of financial repression with interest rates in advanced nations in negative territory for about half the time.
Such a situation may occur now because almost four years since the start of the financial crisis, "the world has seen little meaningful reduction in the size of the excess liabilities accumulated" beforehand, El-Erian said. "Rather than be addressed in a convincing manner, most of the excess liabilities have simply been shifted around the system, and importantly to public balance sheets and taxpayers."
'Grand Bargains'
El-Erian nevertheless sees "some encouraging signs that speak to an accelerated healing of the global economy." He also said a stronger expansion could materialize if policy makers begin striking "grand bargains" to tackle challenges such as Europe's indebtedness and structural needs of the U.S. economy.
"While the probabilities for these grand bargains have increased in recent months, they are still far from dominant," he said.
Pimco's outlook was crafted at a three-day forum held last week at its headquarters and repeats a tradition dating back almost four decades. The aim of the meeting is to establish the "guard rails" to observe when investing in coming years.
Among the guests this year were former U.K. Prime Minister Gordon Brown and economics author Dambisa Moyo.