Hosted by John Raine and Sir Richard Dearlove
Guest
Mohamed El-Erian
Mohamed El-Erian is chief economic adviser at Allianz, a role he has held since 2014, and the Rene M. Kern Professor of Practice at the Wharton School. He is one of the most closely followed commentators on the global economy, markets, and central bank policy. In June 2026 he became chair of the board of the Center for Global Development.
He was chief executive and co-chief investment officer of PIMCO from 2007 to 2014, after first joining the firm in 1999 to work on portfolio management and investment strategy. Between his two periods at PIMCO he ran Harvard Management Company, which manages the university's endowment. Before that he was a managing director at Salomon Smith Barney/Citigroup in London. He began his career with 15 years at the International Monetary Fund, where he became a deputy director. From 2012 to 2017 he chaired President Obama's Global Development Council.
He was born in New York. His father was an Egyptian diplomat, and he spent part of his childhood in France while his father was ambassador there. He later served as president of Queens' College, Cambridge, which he has called the most satisfying job of his career. He is the author of When Markets Collide, which won the Financial Times/Goldman Sachs Business Book of the Year award, and The Only Game in Town. He co-wrote Permacrisis with Gordon Brown and Michael Spence. He writes columns for Bloomberg and the Financial Times, and Foreign Policy named him one of its Top 100 Global Thinkers four years in a row.
He holds a BA in economics from Cambridge and a master's and doctorate in economics from Oxford.
Episode Summary
War with Iran, record diesel prices, and a global bond sell-off: how much more can the world economy take?
Mohamed El-Erian (Wharton, Allianz, former CEO of PIMCO) joins Sir Richard Dearlove (former head of MI6) and John Raine to explain what's driving the bond market sell-off, why the US is exporting instability to the UK, France, and Japan, and why AI is "80% asset, 20% liability." Plus: how PIMCO really navigated Lehman's collapse, and the one decision he's watching.
In this episode:
(00:00) Intro
(03:07) Why this crisis is different
(04:04) Permacrisis and "minilateralism"
(05:46) What's driving the global bond sell-off
(07:32) The hit to US households: mortgages, car loans, the K-shaped economy
(10:10) "Our yields, your problem": UK, France and Japan
(13:05) France, Mélenchon and Europe's leadership vacuum
(17:59) AI: 80% asset, 20% liability
(20:35) US-China AI Race
(31:30) Did PIMCO predict Lehman Brothers collapse?
(35:58) Who wins in today’s economy?
(44:51) Can finance ministers fix what politicians can't?
(46:32) How important are AI companies to the economy?
Hosted by Sir Richard Dearlove (former MI6 Chief) and John Raine (International Institute for Strategic Studies).
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Transcript
COLD OPEN
[00:00] ELERIAN: Don't wait for the US to sort itself out, because it has a longer runway to be fiscally irresponsible. It's a global currency. It has the biggest financial markets. You will continue to import bond market instability and you have to deal with it at home. The cooperative approach is of course the best approach, but I see the middle powers losing trust in the multilateral system and looking for an alternative — but you can't build an alternative overnight.
INTRODUCTION
[00:29] RAINE: Hello and welcome to One Decision, conversations about intelligence, statecraft and the forces that drive world politics, with people who've been in the room and on the ground. I'm your co-host, John Raine.
[00:38] DEARLOVE: Hi, John, and I'm Sir Richard Dearlove, the former Chief of MI6 British Intelligence. And today actually I'm sitting in a hotel rather unusually in Arizona — in fact in the Arizona Desert — but it's a rather lovely spot.
[00:52] RAINE: Great, very good to see you, Richard. You're guaranteeing a transatlantic perspective today. Let's hope that the line holds. We have an insightful and topical interview for you today. To keep up with all our content, subscribe wherever you get your podcasts, like this episode or drop us a comment on YouTube. That will help others find the show.
Let's get on with the business of the day, which is the global economy. How is the global economy weathering the long and growing list of largely geopolitical headwinds that it faces? Against a worrying backdrop of not just the US-Iran war, but also Russia's war in Ukraine, energy prices and inflation are on the rise. The economic models of the Gulf states are being threatened. Government borrowing costs are surging around the world. The Trump administration's tariff policies are continuing to disrupt international trade. Where is this lethal-looking combination of geopolitical events, conflict and economic statecraft all going?
Joining us today to help make sense of both the visible and the invisible hands that are shaping the global economy is Mohamed El-Erian. Wharton School Professor and Chief Economic Adviser at Allianz. Mohamed's previous roles include CEO of the bond giant PIMCO, Deputy Director of the International Monetary Fund, and Chair of President Obama's Global Development Council. Mohamed, I'm going to ask you a few questions about the bond markets because it's so topical. But just before I do that, could I ask your help in scene setting what is going on on the grander scale? We were all struck by the coincidence of global conflicts, real economic challenges, some economic models themselves being fundamentally challenged. And I wonder, in your long experience of commentating on financial and geopolitical crises, how bad is this one? Is there something special about this set of challenges that sets it apart, or should we take confidence that we've ridden out worse before?
WHAT MAKES THIS PERIOD DIFFERENT?
[03:07] ELERIAN: I think what makes this period different is two things. One, the uncertainty is structural — it's in the system itself. And the second is that we've shifted, in my world of economics and finance, to a world of geoeconomics, where increasingly geopolitics, domestic politics and national security determine economic policy, determine economic outcomes, and in turn that feeds back to geopolitics. That is most clear in the United States, but it's also evident in Europe.
THE COOPERATIVE VS. UNCOOPERATIVE GAME
[03:44] RAINE: You've spoken and written very eloquently on the Permacrisis. One of the memorable conclusions — seems obvious enough — is none of us can solve this on our own. Are we in an age where the dependencies that are generated by a global economy are now outweighed by the vulnerabilities?
[04:04] ELERIAN: That's certainly how it feels. Much of economics and much of finance — in game theory terms — has to be done as a cooperative game, as people participating for their good and for the greater good. The minute you turn this into an uncooperative game, which increasingly has happened, you get very strange outcomes. We see this across the board.
And the solution lies in going back to a cooperative game. Now, there are two types of cooperative games. There's the old-style globalization, multilateralism, but there's little appetite for this. And there's a new emerging proposal which is called minilateralism — let's depend on smaller coalitions of the willing. The middle powers are particularly interested in doing this, but you see it also when it comes to how do you address the AI risks. You see it there, you see it in trade. So this notion of, we can't go back to a world of globalization and multilateralism — can we settle in a world of minilateralism to avoid total fragmentation?
THE BOND MARKET SELL-OFF — FOUR DRIVERS
[05:17] RAINE: Mohamed, on that theme, the new style of economic statecraft protectionism that we're seeing — America has under President Trump certainly played a leading role in that. Could you help us understand the bond market sell-off? This seems to have come about quite suddenly. What was the path, the series of decisions or events that took us to this apparent decline in American creditworthiness?
[05:46] ELERIAN: It's a global phenomenon. And I'm surprised when I hear people say they're surprised that it has happened so quickly, because the drivers behind it have been evident for a long time. Think of the four major drivers. The first and most important one, and the one that's least talked about, is there's a fundamental imbalance between those who want to buy long-term bonds and those who need to sell long-term bonds. Governments, and increasingly the hyperscalers — the tech companies — are major issuers of bonds. They need funding. On the other side, your traditional reliable buyers are less so. I'm talking here about China, which wants to buy fewer US treasuries for geopolitical reasons; Norway, which announced it was reducing its holdings; Japan, which has things at home that it needs to deal with and cannot buy as much; and of course the Gulf countries, which are spending more money at home and in fact are no longer buyers — they're now sellers of bonds. So you have this fundamental imbalance that has been well telegraphed.
The second thing — and Richard can speak to that — is the uncertainty about the endpoint as to what's happening in the Middle East and therefore what's going to happen to oil. I can argue for an oil price of $120, I can argue for an oil price of $80. I just don't know which is more likely. The third issue is inflation and the fact that, with governments having difficulty on the fiscal side, central banks are going to have to hike more. And finally, the biggest players in this market have become the hedge funds. So it tends to overshoot on the way up, and it will overshoot at some point on the way down — but not for a while.
US DOMESTIC CONSEQUENCES — THE K-ECONOMY
[07:33] RAINE: What, Mohamed, do you think the consequences are going to be in the US domestic economy of all of this? The US is carrying an enormous amount of debt. Does it have to take out more debt in order to service the current debt? What are its options? Where do you think they're going to come out?
[07:49] ELERIAN: So there are economic, social and political consequences. The economic one is that the interest rate-sensitive sectors are being hit hard — it's housing. People find mortgages more expensive. If you have to refinance your mortgage, it's a different world right now. And it adds to the affordability pressure, which is real. The second is car loans. People don't think about this a lot, but many Americans fund their cars either through a lease or through a bank loan, and that price is going up. So what's going to happen is you're going to hit these traditional sectors hard, to make room for the hyperscalers and for governments to be able to raise the funding they need — they are interest rate-insensitive. So it's the interest rate-sensitive element. The social element is that this hits the low-income household the hardest. And this notion of a K-economy, where the rich are doing better and the less fortunate are doing worse, is going to continue, which then has a political aspect to it. The US bond market is the deepest in the world, and to hear the US Treasury Secretary wanting to intervene in that market to artificially lower the yields just gives you a sense of how much of a political debt issue this is, as well as an economic and social issue.
THE INTERNATIONAL YIELD PROBLEM
[09:11] DEARLOVE: But Mohamed, what you're describing is a sort of economic and political bind, and there is no obvious route out of it at the moment. And obviously there are governments struggling — if you look at France and you look at the UK, despite the sort of projection in the UK with the new Prime Minister of the feel-good factor, there's no apparent solution being offered. You've mentioned the need for maybe a cooperative approach to the problem, but it seems that we're miles away from that at the moment — and so much depends on what the Trump administration chooses to do next. Is there an obvious route that you would recommend? And even if you had that, how long is it going to take to unlock this situation and find the sort of sweet spot that is going to improve outlooks for national economies?
[10:10] ELERIAN: Those are great questions. Let me deal with them sequentially — first, the international effects, and secondly, what about the US? What should it do?
You know, back in 1971, the Treasury Secretary in the US famously said, our dollar, your problem. Today the US is basically saying, our yields, your problem. And your problem — you mentioned the UK, you mentioned France — I would add Japan. You have three G7 economies that are very vulnerable to the yield instability that the US is exporting. And it's important to stress: these are G7 economies, these are economies at the core of the global system. These are not the peripheral economies, these are the core economies. You're right, Richard, to raise the global issue.
As to where to solve it — I like the positive spin on this. The US is lucky to have financial markets that are willing to fund a massive innovation that, if we can risk-manage the bad aspects, has the potential of delivering higher productivity and higher growth. The US is unique in having these capital markets. But you have to make room for it. There are two ways of making room for it. One, you leave it to the market. And the market, in making room for it, will hit the most vulnerable segments of your society, and in the process will turn a financial and economic issue into a social and political issue. The other way is you smartly make room for it. And that speaks to US fiscal policy. It speaks to a 6% deficit at a time when the US has full employment. This is a time for fiscal containment. Otherwise we're going to get a crowding-out that's going to be really problematic.
I was taught early on in my career in markets: what you think should happen matters less than what you think will happen. So what will happen? We're not going to have the sort of fiscal adjustment we need. It's not going to come for a few years, and we're going to have a crowding-out effect that's going to polarize the country even more. And I'm sad to say that, but that's the most likely outcome. And that should be a very clear message to other countries.
[12:31] ELERIAN: Don't wait for the US to sort itself out, because it has a longer runway to be fiscally irresponsible. It's the global currency. It has the biggest financial markets. So you will continue to import bond market instability and you have to deal with it at home. The cooperative approach is, of course, the best approach, but Richard, I don't see it happening right now. I see the middle powers losing trust in the multilateral system and looking for an alternative — but you can't build an alternative overnight.
COULD FRANCE TRIGGER A SYSTEMIC CRISIS?
[13:05] DEARLOVE: Mohamed, supposing there is — let's say — a trigger crisis in one of the medium economies. I'm thinking specifically of France. We've got a presidential election coming up, and we've actually got Mélenchon, the left-wing candidate, who could win — okay, he's not necessarily the front runner — actually advocating a policy of burning French debt. And you know, this has caused a huge dispute in the EU now and across Europe and politically in France. Is that significant enough, as it were, to knock the global economy in a profound way — in terms of what the reverberations would be through the system? Or is it not sufficiently large to alter the picture you've just painted?
[13:55] ELERIAN: It's significant for Europe. Europe's decision-making process, Europe's economic stability, has always relied on two core countries — France and Germany — with a few around them, the Netherlands being an example. And that holds the system together as others converge in a positive way to something better. Now you have France, as you pointed out,
[14:07] DEARLOVE: there.
[14:21] ELERIAN: having economic, financial and political uncertainty that's really high. Germany has its own issue. Germany is dealing with the China shock and has its own political issue. So for Europe, the ability to make decisions quickly, the ability to follow leaders, has been undermined. Is it a problem for the world? No. Because they are part of the Eurozone. The ECB provides a form of collective insurance that certainly could help France deal with this issue. It's not going to be pretty, but it can deal with this issue.
Richard, I worry much more about the UK and Japan when it comes to the G7 economies than I do about France. I find it interesting that French spreads are now more risky than Italian ones. Who would have thought that a few years ago? So I find that interesting. But if you're looking for systemic effects, it is more Japan and the UK among the G7.
DEFENSE SPENDING AND FISCAL CONTAINMENT
[15:16] RAINE: I just want to go back to your comments on fiscal containment and your smart observation — lesson well learnt — that what you think should happen is probably not what is going to happen. So fiscal containment may seem unlikely, but the big challenge on fiscal containment, certainly for the economies you've mentioned in Europe, is the new defense burden, the defense commitments. How do you see a way through that? Because whilst the social implications of not meeting those wouldn't be immediately high, the reputational, national security implications, and implications in terms of your reputation as an ally could be very high indeed. Do you see the defense spending commitments in the end naturally being shaved in order to meet other commitments? Or do you think in fact they might rise, because most defense budgets do?
[16:04] ELERIAN: I really can't speak to what should happen on the defense side, other than we should modernize the way we do defense — I think that's obvious to many, many people. Is that going to mean a bigger budget, a smaller budget? I don't know. What I do know is there are some very difficult choices that need to be made on the fiscal side. And these are political choices — they will need leadership. We're not in a world where your initial conditions are what you want them to be. There's the old joke: how do you get somewhere when you don't start from here? Well, we have to start from here. So we're going to have to make some really difficult choices. It's doable. There's a difference between the engineering issue — can you come up with an engineering solution? And the answer is yes, you can. And can you minimize the collateral damage and the unintended consequences? Yes, you can. But then you need implementation, and that requires leadership.
I have this discussion with my daughters all the time. They complain about the legacy that my generation is leaving behind. And it's not something to be proud of. You say, Dad, you're leaving us with high debt, high inequality, low growth, a climate crisis, a defense deficit. Thanks. Your generation really messed it up. And I say: we did. But your generation has tools that we never had. And if you manage these tools properly — and there are many aspects to that simple phrase — but if you manage these tools properly, you can address all these issues in a way that we could never address them. And when I look at what's happening on technology, when I look at what's happening on life sciences, when you look at robotics, quantum — these are really exciting developments that can fundamentally change the paradigm and make the engineering solution easier to implement. It requires leadership.
AI: 80% ASSET, 20% LIABILITY
[17:59] RAINE: Do you think, Mohamed, that those assets that you have listed — which your children's generation have — do you think they are part of the core strengths of the US economy? Or are they currently, the way that they are structured and capitalized, actually a huge risk?
[18:15] ELERIAN: They are 80% assets, 20% liabilities. And let me explain. The rest of the world recognizes this. Data were just published in terms of foreign investment flows into the US. And what you see is investment in the private sector is at a record high. Investment in government bonds is coming down really quickly. And the rest of the world — to quote again my daughter — is saying: we are willing to go long US innovation, long US private sector entrepreneurship. We just want to shed the mess, the sovereign mess. That is how they see it. So yes, 80% of it is good — it is fundamentally good.
You can either look at what they call small AI, what it can do to health, what it can do to education — it can fundamentally transform both and has a very positive social impact. Or you can look at big AI, which can fundamentally move the productivity needle and therefore the growth needle. Are there risks to be managed? Absolutely. And we're seeing them very clearly — there are risks to be managed. And they can be managed. A friend of mine puts it really succinctly. He says, we are witnessing not just the Industrial Revolution — which was the notion of a general purpose technology coming in and changing how things are done. Electricity is a general purpose technology. But also the Enlightenment. Because AI is not just a GPT, a general purpose technology — it's also an IMI, an invention machine for invention. It's like bringing in the microscope, and suddenly you're seeing new things that you've never seen before. So this is really transformational, but we need to manage it.
And managing the 20% downside is critical while at the same time unleashing it. You know, the US tends to focus on: let's unleash the 80% and the other stuff will take care of itself. Go to Brussels — they want to regulate for the 20%, then they forget about the 80%. You've got to embrace both. And if we embrace both, I think we can turn the legacy issues around.
THE CHINA-US RELATIONSHIP — A STRATEGIC STALEMATE
[20:34] DEARLOVE: Mohamed, one crucial aspect of the AI revolution — or whatever you like to call it, and you've described it so beautifully — seems to me, looking through the geopolitical optic, is the relationship with China on this issue. Now we've just seen Xi in Washington: strong on visuals, empty on content. Or at least that's my opinion. But the mere fact of the meeting, and the fact that these two competing but also conflicting economies can meet — does sound a note of optimism. And it seems to me that the AI revolution is intimately connected with what happens in this economic relationship between China and the US. That will largely dictate the global shape of the AI revolution. And without that arrangement, the framework is lacking. And I think at the moment the nervousness about AI is that it has no framework. It hasn't reached that point of development, although it desperately needs it. You're something of an economic commentator, but you can't avoid here a geopolitical judgment as to how that relationship is likely, in your opinion, to evolve.
[21:50] ELERIAN: You know, Richard, you can speak to that much better than I can.
[21:54] DEARLOVE: Well, I'm so concerned about it because the negative aspects of the relationship seem so predominant. And you know, I'm actually very vociferous on that issue as regards the UK's relationship with China. But on the other hand, I would like to feel that there is a sweet spot somewhere that can be established without getting into direct confrontation and conflict. But at the moment it doesn't seem that the United States in particular is working hard to achieve that.
[22:28] ELERIAN: Yeah. I worry that this sweet spot you talk about is what I would call an unstable equilibrium — that it's there simply because both countries want it there but don't trust each other. The economists had a wonderful phrase for it: strategic stalemate. You get to a strategic stalemate where your interdependencies are both your strengths and your weaknesses. So they can either be weapons or they can be vulnerabilities. And you just freeze there. But you know deep inside — you being US and China — that whoever wins, quote-unquote, the AGI race, the artificial general intelligence race, will have not only an economic advantage but a fundamental national security advantage.
I think the reality is both countries are going to continue doing what they're doing. They're using completely different models, so it's going to be interesting to see which model wins. And at some point you would hope — just like happened in the nuclear world — that there would be an agreement. But for now I see: let's first build domestic coalitions, and then let's build coalitions among allies, before we try to build coalitions with an adversary. So it's going to be sequential, and hopefully we'll get there. And the question to you, Richard, is: you saw it happen with nuclear weapons. It was the same sequence. Do you think it happens here? Or do you think it's just going too fast for it to happen?
WHAT WOULD AI ARMS CONTROL LOOK LIKE?
[23:55] DEARLOVE: If you look at the later stages of the Cold War, you had the SALT agreement, you had the MBFR talks — I mean you had a whole range of discussions and relationships which ultimately were designed to mitigate the risk of thermonuclear war. And they worked reasonably successfully. And funny enough, I was just writing something yesterday in which I said that the model for AI, if you take a longer-term view, has to be some sort of — maybe disarmament negotiations is the wrong phrase — but some sort of high-level talks which develop over time into not necessarily a balanced relationship, but a relationship which avoids crisis. I guess I'm looking at a minimalist outcome, but something that guarantees — the motivation on both sides is that humanity doesn't destroy itself. I'm sorry to put it so fundamentally as that. And I don't think the Chinese view of that is different from the American view. But on the other hand, finding that spot, particularly if you're in a crisis over — let's say Taiwan — makes it that much more difficult.
THREE CRITERIA FOR COOPERATION
[25:09] ELERIAN: Game theory I always find very illuminating when it comes to things like this. If you think of the three conditions you need, you have two of them. One: you just stated — a common objective. And I think both countries will buy into the common objective at some point. Two is the perception that you both win. Cooperative outcomes don't happen when one side believes that they're losing in a big way. You could probably formulate it as both sides win. The third one is the one I worry about — is trust. And you brought Taiwan into this. You need trust for it to work. So you have two of the three conditions, and the question is: how do you get that third condition? And like you, I think it's going to take time.
[25:50] DEARLOVE: You know, we had a modicum of trust with the Soviet Union in that we expected them not to do certain things. Okay, that was a limited concept, but it actually served its purpose. And if you look at something like the biological and chemical weapons agreement — there were violations, but essentially it has over time delivered what it was intended to do. So there are models out there which meet your three criteria, which I think is fascinating.
[26:20] RAINE: Those three criteria bear transference to the Gulf, Mohamed, but not necessarily in an optimistic way — they don't seem to be present. I just wanted to get your views on a couple of things there. Going back to your comment on structural reforms and the structural damage that we're now seeing — how deep do you think the structural damage is going to be to the Gulf economies? They've ridden out some extraordinary hits, including Kuwait being wiped off the map. They've ridden through COVID and they've ridden through prolonged tension in the region. Do you think this time they're going to be forcibly reshaped? In which case, how might they look when they come through this?
THE GULF ECONOMIES — RESHAPING
[27:06] ELERIAN: I'll speak to the economic side. They will look much more diversified in terms of supply chains, in terms of assets, in terms of resilience. They're going to be different. I think they've realized that they need to be both more resilient and more agile. And the good thing about the GCC is they actually have the resources to make that happen. So I see the region bouncing back, but at different speeds. The UAE will bounce back really quickly, and it will be much more diversified, much more able to absorb shocks than it has before. Others will be slower, either because they have fewer resources or because they don't adjust very quickly anyway — it's not in their DNA to adjust quickly.
I think what's going to happen with the rest of the world — and there's a very interesting debate going on in the US right now — should it ban diesel exports? Because we've learned two big things in terms of where the adaptation is in the global economy. Why is it that oil prices didn't go to $150? Because it turns out we had a swing producer and a swing consumer that we didn't know much about. The swing consumer was China. China was able to cut its imports by 40% to allow for other countries to get oil at prices that didn't go to $150. The US increased the taps, if you like, opened up the taps, and became a major exporter to the rest of the world. So you saw contracts being reformulated. And now we have a debate in the US because of not the price of crude, but the price of refined products. You know, I never thought my whole life that the first price I would look at every morning is diesel. But I look at diesel now, because diesel is something we don't appreciate enough. It's an input to virtually anything we buy in a store. It impacts the prices and it impacts the speed with which we get things. And its price is at record levels in the UK and in the US. And that is having a big impact.
[29:29] ELERIAN: So we have a debate in the US right now in the administration: should the US ban diesel exports? And the argument is very simple — we have it, let's keep it. But against that, you've just established new contracts. And do you really want to be the unreliable supplier again? The GCC comes back quickly, but this whole rewiring that's happening — it's not even clear that that rewiring is stable. And that's why I stress: this is not just uncertainty, this is structural uncertainty — when the very structure of the global economy, of global finance, is unstable.
SCENARIO PLANNING AND OPTIONALITY — LESSONS FROM LEHMAN
[30:06] RAINE: And some economies are going to be much less resilient in that period of instability. Nonetheless, they're going to have to make plans and they're going to have to make estimates around costs. If you combine the gas crisis, perhaps as we go into the North Atlantic winter, with the diesel crisis — where do you see us being in a couple of months, let's say three months, next quarter, in terms of the ability of governments — I'm thinking particularly the Western governments, maybe the G7 governments that you were mentioning — in meeting our energy requirements? Are we simply going to have to reduce consumption? Or do you think that there will be a cooling in the market that restores manageable prices?
[30:55] ELERIAN: There will be a natural amount of what's called demand destruction. Prices are such that certain activities are going to change. Do we need on top of that — let me be extreme — rationing? I think it will differ from country to country. I think the realization is now happening that we need to focus on refined products. The problem is refined products — it's not crude, it's refined products. And that you cannot solve quickly. Every country is going to have to decide: do you want to leave it to the market, and then you can protect your most vulnerable segments of the population? Or do you want to do rationing? It's a tough decision.
And that's why I go back and say: remember the three things you need. If I offer you an uncertain world and you start building different scenarios, you have to get used to scenario analysis and forget about this comforting probability distribution — what we call a bell curve or normal distribution, which has a very high likelihood of a certain outcome and thin tails. No, you have a multimodal world where there are lots of possible outcomes. Well, you need resilience to be able to navigate this. You need agility to move quickly. But critically, John, you need optionality. You need the ability to think: how am I going to react in different scenarios?
I'll take the example of the global financial crisis. If you read the records of the global financial crisis, the firm I was working at predicted the crisis. And the reason why that is the history is because the firm I was working at made money for its clients — we navigated it well. And its founder Bill Gross and I have spent almost 20 years saying that's not true. We didn't predict anything at all. In fact, we had the completely wrong prediction. The weekend before Lehman Brothers collapsed and the crisis really took off, we were all sitting together in a room with three scenarios on the board. Scenario one: Lehman will not default. Scenario two: Lehman defaults in an orderly fashion. Scenario three: Lehman defaults in a disorderly fashion. And we asked the people in the room to attribute probabilities to the three scenarios. Scenario one, Lehman will not default, got 85% probability. So the notion that we predicted the crisis was completely wrong. In fact, scenario one and scenario two — neither of which happened —
[33:22] ELERIAN: added up to 97%. And we only gave 3% to what actually happened. So why is it that people think we predicted it? Because we had an action plan for every single scenario. We didn't fall into the trap of saying, this is a low-probability scenario, let's not have an action plan. So the minute we realized, very late on Sunday, that it was going to be scenario three, we knew which lawyer was going to bring the form of failure in order to re-establish all our swap positions. We knew exactly who was going to do what when. And I think this is important: you need this optionality mindset — to say, I don't know, this is a fundamentally uncertain world, and I have to be open to doing different things. And yes, am I going to spend time on scenarios that are not going to happen? Yes, I am. But that's much better than a scenario that actually does happen and I have no plan for it whatsoever.
[34:15] RAINE: A very strong point on optionality, Mohamed — and not least it helps guard against optimism bias.
[34:21] ELERIAN: Absolutely. And denial. And reframing, and all the behavioral traps we fall into when we're taken out of our comfort zone.
[34:27] DEARLOVE: But that sort of optionality is exactly what governments don't do. I mean, you know, a private company may do it in a crisis. But they're so constrained by their political circumstances. If you take the UK at the moment, that sort of optionality isn't possible to the government because of the division you get across the party. It's beholden to bits of the party which prevent optionality.
Look, Mohamed, one of the things — and I think I've mentioned this to you before — one of the things that has fundamentally changed over time that doesn't get much discussed is the advantages to the United States economy of being a truly significant exporter of energy now, and the benefit of that to the US economy. We're always thinking about the downsides, the cost, and the fragility of the president's political position coming up to the midterms. But on the other hand, if you pull back and look at the circumstances for the US economy, there must be an aspect of that which, taking a longer-term view, is going to be very beneficial — because it detaches the US from having to be so fundamentally focused on Middle Eastern politics. I'm thinking of the geopolitical, but I'm also thinking of the economic advantages. Can you talk a little bit about that perspective?
IN THIS NEW WORLD, YOU WANT TO BE THE US
[35:56] ELERIAN: You're absolutely right. In the old world of globalization — where we all bought into this unifying theme that the ever-closer integration of trade, of investment, would result in a bigger pie — unfortunately we didn't pay enough attention to the distributional effects. But in that old world you wanted to be Singapore. You wanted to be small, you wanted to be very dynamic, and you wanted to be able to turbocharge your domestic growth by taking advantage of the global economy. In this new world of fragmentation, of energy uncertainty, of changing trading relationships, of tariff volatility — you want to be the US. And you want to be the US because: first, you have a huge domestic market; second, you're energy-sufficient — in fact, you're
[36:48] DEARLOVE: Yeah.
[36:53] ELERIAN: an energy exporter, as you pointed out, Richard. And thirdly, you have a very entrepreneurial private sector. The characteristics of how well you do have changed. Open, small economies that in the old model were viewed as the ones most likely to develop quickly — Korea, Taiwan, Hong Kong, Singapore — if you want to bet on someone, you bet on the big countries with the big domestic markets, especially if they are energy self-sufficient. Brazil is another example of a country that can navigate this world well if it gets its domestic politics sorted out.
CHINA'S UNWILLINGNESS TO REFORM
[37:33] DEARLOVE: Just following up on that analysis — the one area where China, which we've already discussed in terms of its importance as a partner and a player, has completely failed is in restructuring its internal economy. It seems frozen when it comes to reform, and it's driven by an external market, not a domestic market. And it seems politically unable to deliver that change because it would create such a fundamental upheaval in terms of the shape of its politics, the shape of Chinese Communist society — and I think that word Communist is relevant there. Do you see that as such a fundamentally important point when looking at these issues and how they're going to play out in the future? I would love to hear your comment and analysis on that aspect of China.
[38:31] ELERIAN: I would say unwilling rather than unable.
[38:33] DEARLOVE: Or unwilling maybe. Yeah.
[38:59] ELERIAN: Their growth model is weaker and weaker, but it's still potent. Why? Because they're able to flood some countries with exports. I'll give you two numbers. In 2025, Chinese exports to the US were down 25%. In 2025, Chinese exports surged to the rest of the world, and they recorded a record trade surplus of $1.2 trillion. Where did the exports go? They went to Europe and they went to Asian countries. And there was a wonderful headline in one of the German newspapers about the outcome of the recent election where the extreme right did extremely well. It said: China Shock 2.0 delivers political earthquake in Germany. And what you're seeing is that China is deindustrializing in an accelerated fashion the manufacturing sector in Germany. So there's a limit to the safety valve that China is using right now, which is to run exports much hotter in order to compensate — as you rightly say, Richard — for domestic demand that's not there. That has a limit, believe me.
China needs to move. Is it able to move? It is able to move. But as you rightly pointed out, it has political consequences. They are able to restructure their economy to rely more on domestic growth. They're just unwilling to do so right now. And they don't feel the urgency, because they've been able to use the export sector as an escape valve over and over again.
THREE VISIONS FOR THE GLOBAL ORDER
[40:17] RAINE: You were talking earlier about the move away from multilateralism and the move away from an economic order which took multilateralism as a give-and-take global approach to trade and global approach to finance. Presumably in that scenario, in that new normal as you've called it, vulnerability to shocks — or ability to deal with shocks, such as default, economic failure — goes down, and countries are simply exposed and the dependents suffer accordingly. Is there any way that the risk that that entails can be contained? Is that what minilateralism does? Is it something that private money does? How do we build back resilience against those big shocks?
[41:13] ELERIAN: I often joke with my two co-authors of the book you mentioned at the beginning of our conversation — Permacrisis. It came out too early. It came out in 2023. And Permacrisis had three sections to it. One is: understand that we're in a world that is subject to more frequent and more violent shocks. Two is: link that to the structural uncertainties that we talked about, and show how uneven they are, and how they are a source not just of volatility but of dispersion. And three: answer how do we make things better? Again, the engineering solution is not hard. The engineering solution is what's called pooled insurance. If you're facing more and more shocks, then you sit around and say, what sort of insurance do we have? Let's pool our insurance, because these shocks are hitting us unevenly, and let's collaborate to manage that.
In global order terms, it doesn't mean a return to globalization — that's not going to happen. It means the interim step of a managed globalization light. So notice there's manage and there's light that are introduced. Globalization light recognizes that the political environment is not conducive right now to going back to globalization. And the managed part is: we've got to manage whatever pooled insurance mechanisms we have better. If we fail to do this, we go to fragmentation. And fragmentation increases structural uncertainty. So it goes back to the beginning of this conversation.
It can either be — and we saw it last week at UN week in New York — there were three visions put forward. The US vision: this global order is going to continue to be a US-led global order, but with an important qualification — the US will pursue its own objectives to a much greater extent than it did before. But it's still US-led. And the US can be the conductor, if you like, of the global orchestra. The second proposal was by China: China will reinforce multilateralism and will become the guardian of multilateralism — that's what China was offering to the rest of the world. And then the third one — and it started with an op-ed by the leaders of the EU, Canada, Kenya, and Brazil — was the middle power alternative: the world of flexible coalitions of the willing that come together and solve these issues.
These are the three models. And if none of them hold — and all three of them have issues — then we go to fragmentation. That's the world we're looking at right now. It is solvable. There's a notion that maybe we need something like the global financial crisis. You remember the G20 and the G7 didn't really operate properly until April 2009, with the G20 summit in London chaired by Prime Minister Gordon Brown. And they came together — the world came together — to address something that could have resulted in the Great Depression. The question is: what is the catalyst for this managed globalization light model? And I hope it's not a crisis.
ONE DECISION TO WATCH
[44:50] RAINE: Can economists and finance ministers succeed where politicians have failed in creating that unity of purpose?
[45:00] ELERIAN: No, they need the political leaders. A lot has been written about the summit of April 2009. They were talking about the problems, and the French president complained there is no solution, and then President Obama said, actually Gordon has a solution. And Gordon had his economist hat on from his time as Chancellor. But you had the political avenue for that. Without the political masters enabling this, the ministers and the governors can't do it. They can coordinate at the edges, and the central banks do a great job of doing that — the central banks coordinate really, really well. The ministries don't do so well, but the central banks do really well.
[45:44] DEARLOVE: If you look at this problem through the eyes of Europe — I'm thinking specifically of the EU — the one organization that should find this relatively easy, given its internal structures, is the European Union, the Commission. And it's completely failing amongst itself to reach any resolution of the problem that you've articulated. I find that pretty depressing. It's the one part of the world which should have all the aptitude for behaving in a sensible way. But the disintegration amongst the national objectives is pretty much infinite at the moment.
[46:23] ELERIAN: It is. And there's this notion that Europe ends up doing the right thing but needs a crisis to get there. I hope that doesn't repeat.
[46:30] RAINE: Mohamed, the final question will be the one that we ask all our guests, which is: what is the one decision or development that you're going to be watching? And perhaps particularly the one that might either stabilize the global bond markets or the one that might stabilize oil prices?
[46:47] ELERIAN: I think the solution comes from the tech side. The tech companies — the frontier labs — are going through the same recognition that others have gone through, which is: you do your own thing and then suddenly you wake up and realize you're systemically important. And when you're systemically important, you have to think differently. I'm going to be asking the question: when do they start thinking differently? Because they've become really systemically important. We could do a whole podcast on NVIDIA — it's not only too big to fail, it's too dangerous to fail. There has been a significant development in terms of systemic influence, and the firms that are now the leaders of that systemic influence haven't quite realized that they're systemically important. So that's the one thing I'm going to be looking at.
[47:36] RAINE: That's terrific. Mohamed, thank you for being with us today and for giving us the topic for another podcast. Thank you very much.
[47:45] ELERIAN: Thank you so much.
POST-INTERVIEW DISCUSSION
[47:48] RAINE: Well, Richard, that was, as we expected, a fascinating wide-ranging conversation with Mohamed. A couple of things I made a note of that I need to take away and think about. But what was it immediately that struck you?
[48:06] DEARLOVE: Well, it's the best analysis I have heard from anybody of the current global situation of indebtedness. And I think what's striking when you're listening to Mohamed is he's very clever at encapsulating the problem and not offering crazy solutions. But at the same time, he's very constructive — he will explain the pathways and encapsulate in a few sentences how the situation has altered over a period of time and what the pathways might be for the future. And I think his answer on the one decision at the end is: at what point do the leaders of the big tech companies, particularly in the United States, understand that their role has become systemic? And when it is understood, how then do they react and behave? And clearly they have a role ultimately — which I think we've understood — that may be more important than political decision making at the state or federal level in the United States. And there were so many points in his answers where he encapsulated the cooperation light and the 80/20 balance of risk in AI. I just felt so much of it resonated with things that I feel. But he's so much better as an economist at making them comprehensible and describing them and putting them in language where you think, God, he's really got that right. He is remarkably talented.
[49:45] RAINE: Yeah, he has a great gift for making the arcane business of economics accessible and not entirely dismal. I thought he was happy to talk about where solutions might lie as well as future problems. Like you, I thought his answer at the end was fascinating, because that was very much behavioral rather than technical, wasn't it?
[50:05] DEARLOVE: Yeah. Well I think this puts the finger on — and I feel this from my time being in Cambridge — the great economists emphasized the behavioral aspects of the subject matter. I mean, he is clearly a phenomenal technician as an economist, but on the other hand he does understand that so much of it is behavioral, and how you react and the decisions you take. And the other point he made in relation to your question was the essential role of political leaders in decision taking — and that okay, central bankers have a role to play and they're quite good at coordinating, but without that political input you don't get the result that you want. There is so much in that podcast that is terrifically valuable for all of us to have a better understanding of the times we're living through.
It reminds me of a quote from the historian Tony Judt. He says, history's not written by those that live it — because so many of the people involved in history don't really understand what's happening to them and why. And I would say that Mohamed is the exception par excellence, because he does understand what's happening to us and why, and he's able to describe it. And in a way, he's writing — or speaking — contemporary history in a beautifully articulated and comprehensible fashion. I take my hat off to him.
[51:45] RAINE: Yeah, well I agree with you. It was a real pleasure to talk to him, and his ability to describe and chart a way through problems is inspiring. Let's hope that some of his more optimistic prognoses come to pass — they're certainly based on deep experience.
Well, that's all for this episode. Please do join us every Thursday for new episodes. Subscribe to One Decision on YouTube so you never miss out on a conversation, and leave us a comment on YouTube — that will help others find us. Check out onedecision.com for commentaries and explainers that you might have missed. I'm John Raine. Thank you for listening.
