Hosted by Christina Ruffini and Sir Richard Dearlove
Guest
Mohamed El-Erian
Mohamed El-Erian is a renowned economist and the René M. Kern Practice Professor of the Wharton School of the University of Pennsylvania.
Episode Summary
In this episode of One Decision, hosts Kate McCann and Sir Richard Dearlove, former head of Britain's MI6, sit down with Mohamed El-Erian, renowned economist and the Rene M. Kern Practice Professor of the Wharton School of the University of Pennsylvania. They discuss how President Donald Trump's tariff policies have shifted the landscape of geo-economics, as countries struggle to adapt to US trade policies. They also examine the state of the US dollar and whether its position as the leading reserve currency may be at risk. Plus, how AI will change the global economy and how a universal basic income could protect against drastic labor impacts.
Episode produced by Situation Room Studios. Original music composed and produced by Leo Sidran.
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Transcript
COLD OPEN
EL ERIAN [0:00] We no longer live in a world of economics. We live in a world of geoeconomics. But let's not fool ourselves. We are in what Mike Spence, my friend and I call a rational bubble. It is a bubble because too much capital is being thrown at this promise.
INTRODUCTION
Mccann: Mohammed El-Erian, welcome to the One Decision Podcast. It's great to have you with us. EL ERIAN [0:24] Thanks for having me.
INTERVIEW
Mccann: So I think we want to start quite broad because, you know, there's so much to talk about in this space, but really Donald Trump's introduction of tariffs has shaken everything up. So where are we now in terms of the global economy post Trump tariffs? EL ERIAN [0:38] So it's a little bit like a duck. On the surface, everything looks fine. Underneath the surface, there's a lot of movement. On the surface, we are in a better place than the vast majority of economists expected us to be. Growth is holding up. There hasn't been much of a trade war. The European Union, the UK basically told president Trump, you can have what you want. And where there is tension, China, Brazil, India, there seems to be a truce for now. So on the surface, things are much better. Growth is higher. Inflation is lower, and trade hasn't collapsed. But if you look underneath the surface, what you're seeing is an attempt to rewire the way the global economy works, and that is causing all sorts of uncertainties, of inconsistencies, and companies in particular are finding it really tricky to navigate that world.
Dearlove: But Adam Tooze, who I'm sure you know, recently wrote a piece which was basically on the thesis of a polycrisis, saying, you know, there should be a polycrisis, but there isn't. I mean, is there a sort of deeper explanation? Is this a delayed impact or is it that the outcome of these rather radical and rewiring, the phrase you use, just haven't had the effect that people expected? EL ERIAN [2:16] So it's still early on, Richard. It's early on for two reasons. One is that the rest of the world is trying to adapt to the new US trade policy. And what's clear from the US perspective, it's not just one route, is that we've weaponized tariffs in such a way as to make it attractive to go back to that weapon over and over again. So the rest of the world, I think, has understood that this is a multi round phenomenon. Let's not forget also that we are shaking the world from below. AI in particular is a transformational change that is causing a rewiring at the micro level. So you have a rewiring at the macro level and a rewiring at the micro level. The result of which is it's too early to call where we actually end up.
Mccann: How solid would you say the sort of marketplace, the global economy is? I mean, is there such a thing as a global economy and how do we know how healthy it is? EL ERIAN [3:25] It depends whether you believe in the promise of AI and that promise has two elements on it. Those who work on AI and those who work with AI. If you believe that we are going to get continued advancement in AI, which I do. And if you believe that we're going to diffuse it, that we're gonna spread it out so that people can actually use it, then the global economy is on the verge of a significant productivity surge. It will not be equal. Some countries will be left behind, but there's reason to be hopeful. If you don't believe that, Kate, then you have to worry about high debt, high inequality, low growth, and it's a very different prospect for the global economy. The latter means fragmentation. The former means the sense, as Gordon Brown calls it, of managed globalization light. We still have globalization, but it's more managed and it's the lighter version than the Uber globalization that we had gotten used to.
Mccann: Where do you kind of stand on AI and who benefits? EL ERIAN [4:33] So I'm an optimist on AI, and I'll tell you, I'm not normally an optimist. I'm a warrior. I remember my mother when I was 10 years old told me, if you don't have something to worry about, you'll invent something to worry about. So me being an optimist on AI is notable in my own world. I'm an optimist because I've gotten close to the people who are on the frontier, and I do believe that AI is a significant productivity promise. In addition, it's not just AI. It's life sciences. It is robotics. And within five to ten years, it will be quantum as well. And if these things come together, and we're already seeing life sciences and AI come together, and robotics and AI will come together, the productivity gains are significant. What I worry about are four things, Kate. One is diffusion. We are so in love with the frontier of AI that we're not paying enough attention as to how do we get it in the hands of people. And that's really important. Second, the mindset in the corporate world. So far, the mindset in the corporate world is all about cost minimization or to use that awful phrase, labor displacement. But what really matters is labor enhancing. Retooling, retraining your labor so that they become more productive. The third element is something that Sir Richard can speak to, which is we're not doing enough to minimize bad actors' impact. And when you have something that's eighty twenty, where the 20 can be really bad, we cannot fall behind on limiting the risk to do with bad acts. And finally, the fourth thing we've got to manage is the financial side. So I am optimistic, but with a qualifier that we need to get our act together in those other four areas that are the enablers of the promising productivity gains.
Dearlove: But, Mohammed, can we, as it were, get to the situation that you're describing? And I too am an optimist without risking the bubble breaking. I was reading some statistics today about the rate of investment in AI and the capital needed to create the sort of conjunction of success that you're describing and the tiny profits that the AI companies, well, tiny income returns that they're making in comparison to the cost. Can we get through this really difficult period to the sort of Elysian plane, which delivers higher productivity and the completely new industrial revolution? EL ERIAN [7:32] So you're absolutely right. The funding requirements are huge, and so far, they haven't been an issue. They haven't been an issue because the companies on the frontier like Google, like Microsoft, have multi sources of revenues, and they've been able to fund a lot of their investments from their own revenue. You have a second group of companies, OpenAI being the leading example, who are able to borrow and raise capital without any issues at all. So, so far it hasn't been an issue. The capital markets and the earnings of some of the firms have allowed it. But let's not fool ourselves. We are in what Mike Spence, my friend and I call a rational bubble. It is a bubble because too much capital is being thrown at this promise. And it's being thrown not only at the Microsofts, Googles and OpenAIs, but also at companies that are simply putting an AI label on what they do and they attract money. It's a little bit like what happened during the dot-com where a company would simply put dot-com in its name and would attract capital. So there are bubble aspects that are going to end up in tears, but it's rational because the promise of AI and the payoff of AI in aggregate, they are considerable. They simply won't be captured by as many firms that are being invested in as there are today. So I'd worry less about the funding issues, but I do worry that at the end of the day, when this parade of funding ends, there will be losers that are gonna have to manage their losses.
Mccann: How worried should we be about some of those companies that have huge amounts of investment there? I mean, some of them are absolutely ginormous, bigger than, you know, the economy of European nations, for example. I mean, trillions and trillions of pounds. How concerned should we be? I mean, are those who are, you know, considering withdrawing money, betting against these companies at the moment. Does that worry you? EL ERIAN [9:47] So the hyperscalers are very big. They are very influential and they will become more so. There's an element of a winner takes all dynamic in this world. So yes, we are in a world where these companies are very large, very influential, but we're also in a world where these companies have learned. So if you look at the first round of the hyperscalers, the Googles, the Metas, Facebook at that time, they were so in love with the innovations that they didn't realize they were systemically important. They didn't believe in their responsibility because of their systemic importance. And we were all surprised when there was the election interference in 2016. I think this time around, there's a lot more focus on the corporate responsibility. What I worry about, Kate, is that we're not getting any global coordination at all. There is almost nothing going on in terms of standards, in terms of regulation.
Mccann: And that is a worry, but that speaks to the sort of fragmented world we're living in. How do you manage that global question then? Because it seems to speak to the same point that you're making about managing the bad actors. You know, it's quite hard to do that if everybody's trying to do the same thing individually. What does that require? How do we police these models and how do we do that effectively without limiting innovation? EL ERIAN [11:24] It requires leadership and shared responsibility. I think if you listen to Demis Hassabis of DeepMind, who's now part of Google, he has a very clear view as to what it takes. So there are leaders there that have the understanding. We just need to get better coordination. I hate to use the concept of game theory because this is not a game, but game theory forces you to specify what conditions are needed for the game to solve well. And what you need is cooperation. This is a cooperative game. And if you run it uncooperatively, then the 20% that we worry about become seriously worrisome for the well-being of the world.
Dearlove: But can I sort of draw a parallel maybe between something like disarmament talks during the Cold War, which in a way we saw at the time as being a matter of human survival because of the threat of thermonuclear obliteration? And in a way now, we have a technical challenge which the pessimists can be very pessimistic about in terms of what the consequences might be for humanity, and yet, from what you're saying, the urgency of, let's say, establishing cooperative international standards, certainly between the big powers, I mean, this takes us straight into geopolitics and the relationship between the United States and China. EL ERIAN [13:00] That's absolutely right. And the phrase you will hear over and over again is whenever you look from my perspective at the impact of innovations, virtually everything, we no longer live in a world of economics. We live in a world of geoeconomics. We live in a world where three things are much more important than economic logic and commercial logic. So Richard, you mentioned geopolitics. I would add national security and domestic politics. And increasingly, if you wanna understand outcomes, you have to think in terms of geopolitics, national security, and domestic politics. If you think purely in, in my world of origin, if you like, and commercial logic, then you will get it wrong. You'll get the policies wrong and you'll get the outcomes wrong.
Mccann: You know, generally speaking, there are huge benefits to be had if and when AI can improve productivity and help countries grow. But who benefits? I mean, do you think looking across the world at the moment, who is ahead in this race? Who is getting there first? EL ERIAN [14:11] So in terms of working on AI, the innovation part, the US still has a lead. When it comes to working with AI, it is China and very few people have noticed the United Arab Emirates, which has a policy of getting AI in the hands of each citizen. And that speaks to diffusion. Kate, the good news is if you froze the innovation at where it is today, just freeze it. Assume we don't make any more advances. And if you simply got the adoption correct, then you would have widespread productivity improvements. However, you need to work on what's called the small AI issues. You need energy. You need, of course, connections. So think of your African village. Think of how transformational for the health and education system AI can be. Suddenly your health clinic has access to world class health advice. Suddenly your school has access to an education agent that adapts to how your students learn. So if you get the enablers right, even today, you can have massive productivity improvements starting with health and education, which if you're in a developing country, that is a critical input to economic prosperity. You need a well educated, healthy workforce to get there. So it's about diffusion. It's about adoption. And unfortunately, as a society, we are so in love with those working on AI that we're not as yet paying enough attention to what it takes to work with AI. But I think it will come because the promise is so significant.
Mccann: We've been talking about China sort of on the periphery of this conversation. The question, I suppose, applies to both China and Russia. What Donald Trump was trying to do, or appeared to be trying to do with tariffs, is to bring these countries into line, you know, rein them in a little bit using economics. And I suppose there's a broad consensus that it hasn't really worked. EL ERIAN [16:27] The question I get asked the most going around the world is how did Russia do it? You told me, Mohammed, that in 2022, when Russia invaded Ukraine and when the first set of sanctions threw Russia out of the dollar payment system, SWIFT, you told me, and I did, that trade would collapse. As it turns out, trade hasn't collapsed. How did Russia do it? And, of course, the answer is Russia has this very inefficient trading system where it sells oil at a massive discount to China and India and then uses the proceeds in their local currency back through Turkey, UAE to import, and pays an enormous amount in all this because it avoids the dollar, but it works. So the first thing that the US has to worry about is that Russia has found a way to create an alternative system. It is very clunky, but if more countries join that alternative system, then it becomes a big pipe around the US dollar. It's not a replacement for the US dollar, but it's a big pipe around the US dollar. So the first thing that the US has to realize is that there's an alternative system that is in its early stages, but if it grows, it will be a problem for the dollar. The second thing is that image from two months ago, I'm sure you remember, that came out of China of the presidents of China, Russia, and the prime minister of India standing there and basically telling the world, we are the new custodian of the multilateral system. Trust us. And that for the US is a very worrisome picture because you can have, as we saw with the Asian Infrastructure Investment Bank, you can have new institutions emerge that don't even include the US. So the US has to realize that there are alternatives that are starting. They're still in the early stages, but the US has to reinforce the respect that it has at the center of the system. You know, the implicit contract coming out of the Second World War was very simple. The US is at the core of the system. It has enormous privileges. It issues a reserve currency, meaning it has a piece of paper that it is exchanging for goods and services. It is entrusted with the savings of other countries because of its financial system. It is given veto power in the big multilateral institutions. And in exchange of that, the implicit contract is US, you will manage the system responsibly. And in the last few years, that bit of the implicit contract is in doubt in too many countries. So do you see other countries joining this Russian workaround system? Back in the Asian financial crisis, Asia tried to create something called the Asian Monetary Fund, an alternative to the US dominated IMF, and the US was able to squash it. There never was an Asian Monetary Fund. A few years ago, China decides that the World Bank is dominated by the US, the Asian Development Bank is dominated by Japan and the US, it will create a new multilateral bank. There was no need for it because it simply was doing what the World Bank and the Asian Development Bank was doing. The US very confidently said, we will not join and we don't expect other countries will join. If you look at what happened, only two countries haven't joined, the US and Japan. All the other countries have joined. So, the US needs to pay attention because other countries are trying to diversify, if you like, their bets in the global system.
Dearlove: There's a risk to the dollar's dominance as a global currency from what you're describing. But is that risk, as it were, nascent rather than developed? I mean, you're describing something which is beginning to grow and being driven by regional needs rather than a global need. But at the same time you're saying there's a possibility. Now, if Trump's tariff war sort of continues to escalate, do these two issues then connect and you get, as it were, a greater risk to the dominance of the dollar? EL ERIAN [21:26] It's nascent, as you say. It's happening in different areas. It's happening in the payment system. It's happening in the institutional space. It's also happening in countries' reserve holdings. That is why gold has done so well, that at the margin, people are replacing dollar reserves for gold, but it is nascent, as you say, Sir Richard. So the question is, do you allow it to build momentum or not? Ultimately, there's nothing that can replace the US at the core of the system. There's lots of little things that can replace it. So don't think of the US being displaced from the core like Britain was after the world wars. This is about pipes around, meaning you diminish the influence of the core, but the core is still by the US. And there's a phrase that captures this, is if you compare the US to any potential replacement, the Euro, the Sterling, the Chinese currency, the US is the cleanest dirty shirt. It is not pristine by any means, but it is clean enough to dominate others that are less clean than the US. So the US will remain at the core of the system. But if it's not careful, influence will get reduced because it'll have all these pipes that are built around the US.
Mccann: Let's talk a little bit about policymaking domestically. The UK at the moment is looking at the budget in just a couple of weeks' time. There was a huge amount of conversation going on in this country about how successful the government can be, about what kind of measures the government may need to introduce. When you look at the way the conversation is playing out in the UK around taxes specifically and around increasing taxes on the population and trying to grow the economy that way. Do you look at that and think that's a good way to govern? Is that a good mix of politics and economics? Or is that a bad thing overall? EL ERIAN [23:35] So when the Labour government came in, they emphasized growth. I remember the speech by the chancellor a week after the election. I remember when the prime minister said it's about growth, growth, growth, growth. I think he said it four times in that sentence. There was a view that the government will understand fundamentally that budgets are not fiscal exercises. Budgets are economic exercises. And unless you treat them as an economic exercise, you'll be chasing your tail over and over again because you won't get economic growth. And when you don't get economic growth, taxation revenue doesn't go up, public services already under enormous stress. So things derail pretty quickly. And then we had a series of unexplainable developments. We had the winter fuel subsidy issue. We then had the welfare. Yes. Yes. We're gonna cut. No. We're not gonna cut. We had the black hole that was discovered. And the concern I have, Kate, is that the budget has become a narrow adding up exercise. So we all talk about, oh, we need a headroom of 10 billion. We need 20 billion here. We're going to do that, that. And we never talk about the bigger issue, which is, is the budget part of a growth oriented strategy that goes beyond housing, that goes beyond planning, that has an innovation element to it. So I worry that we're stuck in this very narrow mindset of let's make the numbers add up. And a) it's a difficult exercise without economic growth. It probably implies that you have to break your election manifesto. So it has a political side to it. And ultimately, it will simply be chasing your own tail. So I do worry, Kate, that if the UK doesn't turn its budget exercise into an economic event as opposed to a narrow fiscal event, the three of us will be talking about this in a declining Britain.
Dearlove: Given that judgment, which I think many of us sort of were in sympathy with, is the bond market sophisticated enough to make the same judgment, or will it, as it were, be more likely to give the benefit of the doubt to the government? EL ERIAN [26:00] So yes, the bond market is back and the UK experienced it during the Liz Truss moment, if you like, when the reaction of the bond market was so violent to the non funded tax cuts that it almost brought down the pension system and had the Bank of England not acted in an incredible manner, the pension system would have been in play. So yes, the bond market is there, but the bond market doesn't get fooled simply by all the fiscal rules being covered or not. The bond market looks for growth. The bond market understands this concept of sustainability. And if you cannot generate economic growth, then there's only three other ways to deal with high debt and all three are bad for the bond market. So, you know, the bond market understands that ultimately it's not simply about adding up numbers. It's about generating a fiscal outcome that is pro growth, that is pro productivity, complementing it with structural reforms.
Mccann: And in terms of the way that people are experiencing the economy in the US at the moment, I mean, we know how people in the UK feel. I mean, we are both based here. We know and we see every day that people are frustrated, frustrated by the amount of money they pay in tax, etcetera, etcetera. But how do people feel in the US? I mean, one of the things that often makes its way over here is, you know, the price of eggs. People are very worried about the price of eggs. And obviously Donald Trump is, we read in the papers, promising people lots of money back as a result of tariffs. What's the reality of that? EL ERIAN [27:47] So first, the numbers look great. I mean, the US economy grew by 3.8% in the second quarter. We didn't get the third quarter numbers yet because of the government shutdown, the longest in history, but it will be around 3%. So on the surface, the US economy looks really solid and certainly outperforming virtually all other advanced economies. However, there's two elements. One, you mentioned, Kate, affordability. And we saw this in the recent elections where affordability was the number one issue. And just like in the UK, US households are getting used to price levels that went up very sharply and aren't coming down. When people talk about affordability, they don't talk about whether inflation is lower. They are hoping that prices will be lower. So affordability is a big issue. The second issue is what's called the K shaped economy. The low income households are really under stress. And you see this in the lines at food banks. You see this in terms of the debt numbers. Meanwhile, the middle and higher income households are doing just great. So it's a K shape that the lower gets lower and the higher gets higher. And at some point, the pressure that's felt by the low will migrate up because they'll stop spending. And once they stop spending, it starts impacting the economy. So again, on the surface, it looks good, but affordability and inequality are big issues that could have a macro impact.
Dearlove: Following up on that observation, which is fascinating, one of the things that strikes me in the States is that people do have to work incredibly hard for relatively low pay. Holidays are short in the States. There is a sort of obligation to really earn even relatively low sums of money, which isn't the case in Europe to the same extent. I mean, here in the UK, the minimum wage, whether we can afford it or not, has lifted a lot of people out of the sort of problem that you're talking about. That is unlikely to change, I would assume, under a president like Trump. EL ERIAN [30:01] Yes. So the social safety net in the US is much weaker than in Europe. That's absolutely true. And you see this in the debates on health insurance as an example. And then you have two views. Okay. When the US look at Europe, they say, well, here at least the incentive is to work, and therefore, things are better. And, you know, there's quite a few people that believe still in the American dream that if you work hard, you will make it in a big way. And they look at Europe and they say the trouble with Europe is that it's not for work. And then Europeans look at the US and they say the US leaves lots of people behind. And that debate, I think honestly, the answer is somewhere in the middle. You want more of the welfare system of Europe and more of the work ethics of the US, and that solves well, but initial conditions are such that you don't get there.
Mccann: But that's so interesting because the political debate here in this country is about the welfare state being too generous and the amount of money that the government spends on welfare compared to the amount of money it's bringing in is widely seen across political parties to be too high. Do you think there needs to be a conversation about some kind of universal basic income or some kind of universal agreement between governments and citizens? And I'm thinking about this in the context of AI, you know, that's where we started this conversation, in the context of a technology that's going to come and sweep away lots of different jobs. Is now the time to be talking about that? EL ERIAN [31:47] So it's certainly the time to talk about it. Lots of people are talking. I would just qualify the sweeping away. The sweeping away need not happen if there is an understanding that AI is not just about cost minimization, it's about enabling labor. And if we get the retraining and the retooling correct, then like other innovations, it's not going to completely destroy the economy or the economy just will look different. The employment will look different. And what people do will look different. You know, the UK had its, is having its welfare discussion. You know, as an economist, I can tell you that if the incentive not to work is higher than the incentive to work, I'm talking about here the financial incentives, people will be rational. People will not work. And that's an issue. In the US, you don't have that problem, but the risk is that you have safety nets with big holes in it. So, you know, you need to get the balance. But it was interesting that the UK had its welfare discussion. What Labour put forward in terms of welfare reform was meant to focus the spending on people who really need it. And ultimately, even with this massive majority, it could not get that done.
Dearlove: As usual, Mohammed gets to the crux of the issue. I think that distinction between, let's say, the sort of social political pressures in the United States and what we're experiencing here in the UK, which is also characteristic of a wider problem in Europe. Maybe just one last question, which is specifically a European question, but I think it's an important one. I think many of us are extremely worried about what's happening in France and what the effect of, let's say, the French government spending is massively high. The French economy looks in much worse shape than anybody else in Europe, and France is a sort of bellwether for the rest of Europe politically. And I'm just wondering how you view the situation there. EL ERIAN [33:59] And thank you for waiting. Look. I'm worried. If Europe is to do well, then the two major economies, Germany and France, not just had to do well, have to be leaders. And if you look at what's happening in France, I'll give you just two indicators. One, going back to the bond market, is what is the risk spread? How does the market measure the riskiness of French government bonds? And an unthinkable development has occurred, which is the market believes they are more risky than Italy. Remember, Italy wasn't even part of the core of Europe. It was the periphery of Europe. So that's one element of concern. The second element of concern is how often they've had to change prime ministers simply because of the fiscal issue. So yes, France is a worry, and it is a worry for Europe because without a strong Germany and France, Europe cannot take the decisions that it needs.
Mccann: Does there need to be some leadership which reaches out to people in their homes and says, you know, look, it's time to wake up a bit here. EL ERIAN [35:04] You're absolutely right, Kate. Leadership in a democracy is you explain to people where you're going, what the destination looks like, and you give them the destination in terms that they understand. Why is it they should buy into that destination? Then you explain to them the journey, and the journey can be a very difficult journey, but you explain to them that it's a journey to a destination. And then you lead them through the journey by holding yourself accountable. That is what leadership means in a democracy. But very few leaders have sold their citizens a realistic destination where they are better off. And this issue of accountability has become also an issue. But you're right. It is ultimately about political leadership. This is not an engineering problem. Europe knows what it needs to do. France knows what it needs to do. It's a leadership issue.
Mccann: Well, Mohammed, it's been absolutely fascinating speaking to you. Really, really interesting, hearing your thoughts on all of that, and we really appreciate your time. Thank you so much for joining us on the podcast. That's it for this week's episode of One Decision, and thank you once more to our brilliant guest, Mohammed El-Erian. Really interesting to hear his thoughts on the global economy. And you can get more conversations like that one with leading decision makers and thinkers if you check out onedecision.com and our YouTube page, where you'll find all our additional videos, lots more commentaries and explainers. I'm Kate McCann and Sir Richard Dearlove has been my co-host. Thank you for listening.
