The influence of emerging economies is on the rise, while developed countries are retrenching. Monetary policy in the developed countries will remain extraordinarily accommodative for an extended period, with policy rates pinned close to zero and use of quantitative easing. PIMCO will therefore position its duration and curve strategies accordingly: overweight investments in the developed world, concentrated in the 'belly' of yield curves. In contrast, an increasing share of its positioning in the 'spread sectors' will be allocated to the emerging markets, including their currencies.

It is in virtually no country's interest - including that of the United States - for China's economic development to derail. China is the world's strongest growth engine, its largest creditor and its biggest trade partner. Rather lecturing China on its exchange rate, the United States should be doing more to push its European allies to allow a larger Chinese voice in multilateral forums. Beijing, in turn, should think carefully about how it can help the United States and the global economy to bridge the hole of balance-sheet repair.

The economic drivers that once pumped up asset prices and favored the production of paper over commodities are now retrograde. The reality during Stan Druckenmiller's 'old normal' was that prosperity and overconsumption were driven by asset inflation that in turn was correlated with leverage and interest rates. Investors are now faced with bonds yielding 2.5 percent and stocks staring straight into new normal real growth rates of 2 percent or less. There is no 8 percent there for pension funds. There are no stocks for the long run at 12 percent returns.

The failure to reduce risk spreads in peripheral European countries means that the public sector bailout is not working. The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level. This week will shed light on whether policymakers can do anything to deal with these two issues.

The Obama Administration's announcement Wednesday of its new economic policy initiative 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.

The main debate in Washington today is whether or not to do more of the same: another fiscal stimulus and another round of quantitative easing by the Federal Reserve. This conflicts with evidence that a broader and more holistic response is needed. Policymakers must address key structural issues, including the drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.

Americans now know that housing prices don't always go up, and that they can in fact go down by 30-50 percent in a few short years. Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.

Conventional monetary policy is undergirded by the doctrine of central bank independence, founded on the proposition that fiscal authorities, hostage to the political process, inherently are prone to an inflationary bias. When the economy suffers from private sector deleveraging and a fat-tail risk of deflation, however, conventional monetary policy is not enough. In such circumstances, the central bank has a profound duty to act unconventionally, ballooning its balance sheet by monetizing assets, either government or private, or both.

Tuesday's Federal Open Market Committee statement confirmed what the high frequency partial data have been signaling for a few weeks now: that the U.S. economic recovery has lost momentum. Expectations have evolved in an interesting manner - from the more familiar bell curve (a dominant mean and thin tails) to a much flatter distribution with fatter tails. In such a universe of expectations, short-term news can have a disproportionate impact on market valuations. When you are potentially on the road to deflation, a small change in probability will have an amplified impact on markets.

The employment picture constitutes yet another headwind - and a significant one - to the already-faltering U.S. recovery. More Americans are struggling to earn enough to maintain their standard of living. The time has come for Washington to realize that the existing policy mix is not appropriate for the task at hand.

The unusual uncertainty in the economic outlook reflects the disruptive combination of deleveraging, reregulation, structural unemployment and other ongoing structural changes. It seems that, wherever we look, the snapshot for 'consensus expectations' has shifted from traditional bell-shaped curves to a much flatter distribution of outcomes. This changing shape of distributions affects conventional wisdom in the investment world.

The economy's New Normal of deleveraging, reregulation and deglobalization will neither be aided nor abetted by a slower-growing population, or by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. It would be far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly health care services.

What the developed world faces is a cyclical deficiency of aggregate demand, the product of a liquidity trap and the paradox of thrift, in the context of headwinds borne of ongoing structural realignments. Front-loaded fiscal austerity would only add to that deflationary cocktail. And that's what the market vigilantes are wrapped around the axle about: They are not fleeing the sovereign debt of fiat currency countries but rather fleeing risk assets, which depend on growth for valuation support.

Will the testing of 91 European banks by regulators stabilize the region's finances? After all, a similar approach in the U.S. last year may have helped normalize financial markets there. The U.S. stress test, however, applied to institutions that were the main cause of the financial instabilities, and the government had budgetary room to support the sector. Europe's concern about banks is a derived concern, reflecting worries about sovereign debt in some countries and the overall economic situation; and there are greater limits today on budgetary resources.

The US faces a low growth/high unemployment trap, which would have four consequences: erosion of skills in the labor force, pressure on social safety nets, dampened spending by those who are employed, and less risk-taking by companies. El-Erian suggests several policy initiatives to combat unemployment.

The lack of global aggregate demand ? resulting from too much debt in parts of the global economy and not enough in others ? is the essence of the problem. The solution, according to William Gross, may be to add the letter 'R' to your name (as in Roubini, Reinhart, Rogoff, and Rosenberg) or, better yet, to embrace the words 'New Normal.'

Mohammed El-Erian digests the 'unusually long communiqu from the G-20 Summit in Toronto.' El-Erian expresses his concerns about the future of a post?global financial crisis world that is in desperate need of better cross-border policy coordination and harmonization.

This weekend?s G-20 meeting will likely fuel, not resolve, the heated debate triggered by a combination of exploding debt and deficits in industrial countries, and the recognition that many now face a future of muted growth and high unemployment. In one corner stand the 'growth now' camp, arguing that expansion is a prerequisite to service their debt sustainably. Against them stand the 'austerity now' camp, who want budget cuts to lower risk premiums and stave off disruptive debt restructurings. The two sides are both right, and wrong.

Sovereign wealth funds are generally well-equipped to navigate financial markets after the crisis of 2008 and amid current fiscal strains in Europe. Yet they too face potential challenges, as the global economic recovery is unlikely to follow a straight and simple path. How these funds confront these challenges will speak directly to their effectiveness in investing national wealth to benefit current and future generations, as well as their contributions to stabilizing a fluid global economy.

Thirty years ago, virulent inflation demanded robust monetary authority independence, so as to pursue a draconian monetary policy that even disciplined fiscal authorities when their loose policies contradicted the overriding goal of winning the war against inflation. For the past decade, however, a more collaborative relationship between monetary and fiscal authorities has been required in order to cut off the fat tail of deflation risk, notably in recessions. The European Central Bank needs to realize this, even if future policies threaten to unmoor long-term inflation expectations.

High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. But that growth has significant longer-term implications. If the current pattern is sustained, the global economy will be permanently transformed. Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50 percent mark when measured in market prices.

The recent G-20 communique is a further confirmation that structural and balance sheet realities are imposing themselves on the global economy. Compared to what the world has known for the last 40 years, this results in a highly unusual configuration of growth, debt and deficits. It also raises legitimate questions about the prospects for self-sustaining private sector recoveries in industrial countries. Finally, it loudly illustrates the limitations of cyclical policy responses and international coordination, as well as associated problems with unintended consequences and collateral damage.

Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that will likely face muted growth rates and a continued bumpy journey toward their destinations. Investors must respect this rather tortuous journey in the months and years ahead for what it is: a deleveraging process based upon too much debt and too little growth to service it.

Having over-romanticized the cyclical bounce, some investors are now scrambling to reposition their overextended portfolios now that structural problems are undeniable. The disruption in financial markets is not a garden-variety market fluctuation. Instead, it?s an overdue recognition that the global economy faces an uncertain future that involves slower growth and greater government regulation. Structural problems require structural solutions. The question is whether policymakers in Europe will acknowledge this, or remain hostage to hope for an immaculate recovery.

The beneficial impact of last weekend?s $1 trillion 'shock and awe' intervention by Europe to save Greece and safeguard the euro is fading - even more quickly than officials had feared. This is the result of two main factors. First, having analyzed the news out of Europe in depth, markets recognize that the liquidity-based approach cannot sustainably address what is at heart a solvency problem. Second, markets are concerned that short-term stability is being pursued at the cost of long-term viability.

Mohamed El-Erian recounts the results of last week's PIMCO Secular Forum on the three- to five-year outlook for the global economy and the markets. Participants concluded that we are heading toward a world that is re-regulated, de-levered, and growing less rapidly in the industrial countries. It will be a world in which concerns about the dark side of globalization temper enthusiasm for its net benefits, and in which politics matter a lot for markets and the economy. The drama playing out in Europe these days is a vivid illustration of this general secular characterization.

This commentary contains remarks by PIMCO's Paul McCulley at last month's Hyman Minsky Conference on the State of the U.S. and World Economies. McCulley says that the Federal Reserve, the FDIC and the Treasury all provide public goods to banking by guaranteeing that demand for liquidity will not exceed bank assets. It's quite natural that levered-up non-bank financial intermediaries don't want to be treated like banks. If they are going to have access to the public goods associated with banking, however, then they must follow the same rules that banks do.

The Greek crisis has already morphed into a regional shock. It now stands on the verge of morphing into a more global phenomenon. Some countries will benefit, mainly on account of capital flows coming out of the euro area. The majority will not. And even those that do benefit should remain vigilant and responsive. Like most other countries in the world, they will also end up suffering from the consequences of lower international demand and renewed disruptions to the global banking system.

If a chef were to concoct a gourmet investment recipe, he would likely blend a teaspoon of intelligence with a tablespoon of common sense. The rating agencies in recent years have displayed little of either. In addition, they have brazenly sold their reputations for unbiased judgment to the very companies they purported to judge. Those looking to profit at their expense will dismiss them. They no longer serve a valid purpose for investment companies that are free of regulatory mandates, and that can think with a teaspoon of intelligence and a tablespoon of common sense.

Sunday's loan announcements from the European Union and the International Monetary Fund will not mark the end of the Greek debt crisis, nor will they constitute a much-needed turning point that can be sustained for many months. Instead, they will part of the multi-stage process that still has a few rounds left. If design and implementation issues emerge, future rounds may involve a reopening of negotiations and a recasting of the approach in some areas.

The Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and what started out as a Greek issue has become a full-blown crisis for Europe. Absent some remarkable change in the next few days, things will get even more complex for the public sector. It may have no choice but to combine its own exceptional financing efforts with talks on a controversial approach that will be familiar to emerging market observers - private sector involvement.

China has come to a point where its size and global impact are large. Policy in China will have to be set within a delicate balancing act between domestic growth and development and distributional challenges on one hand, and recognition of global impacts on the other. The large developing countries need to understand better than they currently do that their growing size and presence in trade in goods and services is forcing uncomfortable structural change in the advanced countries as well.

The triumphant announcement from Greece, the European Union and the International Monetary Fund a couple of weeks ago has not calmed markets, nor has it lowered Greek borrowing costs. Buoyed by a cyclical recovery, markets around the world have yet to recognize the complexity of this situation. When they do, it will also become apparent that Greece is part of a wider, and historically unfamiliar phenomenon ? that of a simultaneous and large disruption to the balance sheets of many industrial countries.

In an interview, PIMCO Managing Director Paul McCulley discusses his firm's cyclical economic outlook and its impact on investment strategy. PIMCO's cyclical outlook revolves around two core tensions in the global economy. The first is the huge disparity in the rate of recovery between highly leveraged developed countries and relatively balanced developing countries. The second tension is the resistance to cyclical recovery in the developed world due to deleveraging and other headwinds.

In a technical discussion of monetary policy, McCulley argues the 2 percent real federal funds rate constant in the Taylor Rule should be toast. In a world of deleveraging and cash hoarding, it makes absolutely no sense to reward holders of cash with an after-tax real rate of return. May Wall Street relearn the doctrine of profit-motivated stewardship, he says, and unlearn the false god of speculation-driven avarice.

Prudent lending must be directed not only towards sovereigns that can escape a debt trap, but ones that can do so with a minimum of reflationary consequences and currency devaluation. A unit of quality credit spread will do better than a unit of duration. Rates face a future bear market if global reflation is successful as central banks eventually normalize quantitative easing policies and 0 percent yields. Spreads in appropriate sovereign and corporate credits are a better bet as long as global contagion is contained. If not, a rush to the safety of Treasury bills lies ahead.

The simultaneous deterioration of public finances in many advanced economies represents a significant regime shift with consequential and long-lasting effects. In 2008 and 2009, governments had to step in to counter the simultaneous implosion of housing, finance and consumption, and now the world must deal with the consequences of how they did this. Governments will not be able to rely on growth or private sector holdings to overcome their debts. Policymakers will need to make difficult decisions about higher taxes and lower spending.

A lack of global aggregate demand, brought by twenty years of accelerated globalization, is the fundamental economic problem of our age. Many states have used government debt to make up for shortfalls in aggregate demand. But as the crises in Dubai, Iceland, Ireland and Greece show, not every state is able to pay off its new debt load. Investors should therefore concentrate on states that have lower credit or inflationary risk, such as Germany and Canada, and avoid higher-risk states such as Greece and the U.K.

Bill Gross reviews two recent analyses (the Reinhart/Rogoff book and the McKinsey study) of the plight of economies faced with large fiscal deficits. He says that these support PIMCO?s view of the Ne