Viewpoints                                                                                                                                       Mohamed A. El-Erian  |  September 2010

• The U.S. Administration’s announcements today will be closely watched by markets and will likely impact equity and bond valuations around the world.
• A disappointing performance today would be met with even greater market skepticism, higher “self insurance” by households and companies and further disappointment among America’s friends and allies.

­­­­This article was originally published on ftalphaville.ft.com on September 8, 2010.

The U.S. Administration will seek today to regain the economic policy initiative. Think of it as an overdue attempt by officials to be seen to be more engaged, and to influence a narrative that has slipped away at a time of unacceptably high unemployment, muted growth and deficit concerns.

According to public schedules, President Obama’s speech in Cleveland today is to be followed by several media appearances by Treasury Secretary Tim Geithner and White House Senior Advisor Austan Goolsbee.

All of this will be closely watched by markets and will likely impact equity and bond valuations around the world.

So, what would constitute success for such an important high-profile effort?

I would suggest three key considerations:

 First, success in announcing a set of self-reinforcing measures on both the demand and supply side that (i) signal the Administration’s recognition of the seriousness of the economic situation (including an end to all the happy, and unrealistic, talk about the “recovery summer”); (ii) address the increasingly visible structural headwinds that undermine high growth and meaningful job creation; and (iii) stand a good chance of implementation.

 Second, success in changing the widespread perception that, to date, economic policy responses have been ad hoc, piecemeal, uncoordinated and reactive. This requires the Administration to communicate a credible and clear medium-term economic vision – one that is strategic in nature, unifying in design, and closely linked to measures that inform, influence and lead developments on the ground.

Third, success in placing the Administration in a more credible global position. This is key to countering the continued erosion of America’s ability to get the buy-in from other countries that is supportive of sustained economic growth and financial stability.

This is not an easy undertaking, especially given the currently polarized political environment and the anti-Washington mood in the country as a whole. Yet, for those who care about the welfare of current and future generations, there really is no alternative.

A disappointing performance today – whether in substance or in process – would be met with even greater market skepticism, higher “self insurance” by households and companies (including cash hoarding by companies) and further disappointment among America’s friends and allies.

With the November elections looming, the Administration must hit a home run. If it fails, U.S. policymakers will experience yet another blow to the economic policy leadership required to promote economic growth, job creation and financial stability.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material was reprinted with permission of the Financial Times.  Date of original publication September 8, 2010.