Economy Hitting Stall Speed Because of Debt: El-Erian

Policymakers have taken the wrong approach in dealing with the global economy's numerous problems, shuffling debt around while avoiding making difficult decisions, Pimco's Mohamed El-Erian said.

Mohamed A. El-Erian
Jonathan Alcorn | Bloomberg | Getty Images

"We used all of the wrong bullets," the co-CEO for the largest bond fund in the world told CNBC. "We tried to throw money at the problem. The issue is not money, the issue is that what we have are structural impediments and structural challenges need structural solutions.

Five problems confront the U.S. economy, he said: Housing, unemployment, public finances, infrastructure and clogged credit markets.

"Until we get movement on those five things, we're at stall speed," he said.

El-Erian compared the U.S. economy to a jetliner trying to maintain speed and in danger of crashing if it does not.

"The concept of stall speed is not something that's familiar to the markets," he said. "That's what I find is terrifying. We can talk about the probability of recession when unemployment is already too high, when the financial deficit is 9 percent of (gross domestic product), when interest rates are already at zero percent and when a quarter of the homeowners are already underwater on their mortgages. That is a terrifying concept. That is why everything must be done to avoid a slowdown in growth."

The U.S. economy is growing at about a 2 percent pace, but some economists believe even that low number could decrease depending on whether consumers can weather the storms of a high jobless rate, weak housing market and the other barriers that the debt crises in Europe and the U.S. pose.

Policymakers need to stop dodging the real problems, El-Erian said.

"It means making difficult decisions," he said. "We went too far in terms of leverage and debt and now we have to allocate the losses. We have to allocate the losses, deal with that and move forward."