The potential of a financial crash, cryptocurrency, and Brexit: there was a lot to discuss with Wharton Prof. Mohamed El-Erian, chief economic adviser at Allianz and Senior Global Fellow at the Lauder Institute, when he sat down with Wharton Business Daily host Dan Loney to chat about the state of the global economy.
Here are some highlights from Prof. El-Erian’s interview originally published on LinkedIn Live:
The state of the global economy
El-Erian: “Fragile is the word I would use. For the last few years, and in particular since the global financial crisis, we have been on a painkiller. And that painkiller has been incredible liquidity support by central banks. They’ve kept the economy going. They’ve certainly helped asset prices with stocks at all-time highs. But they haven’t solved what’s holding back genuine inclusive economic growth. They haven’t done anything and cannot do anything to help with infrastructure, labor re-tooling and re-training, education reform — all the key things that drive genuine growth. They were supposed to build a bridge to a comprehensive policy response, which requires politicians and has so far been a bridge to nowhere, especially in Europe. It’s a real issue in Europe, much more than the U.S.”
A financial crash in the near future?
“The way I answer that question is that if I had sat with you four years ago and said: ‘With a high degree of confidence, this is what’s going to happen in the next four years.’ What would you have thought of me? I would have said: ‘We’re going to have $17 trillion of bonds.’ That’s a lot of bonds, trading at negative yield, which means people will be willing to lend their money and pay for the privilege of lending their money. There isn’t a single textbook that says that’s a possibility.
If I told you the U.S., the champion of free trade, would become the most protectionist country in the world. If I told you the U.K. would vote for Brexit. If I told you we’d get all these anti-establishment outcomes. If I told you Hong Kong would be on the verge of something that could be very significant. All these were unthinkable, and yet they became a reality.
Our tendency, because we don’t like to be taken out of our comfort zone, is to say that these are isolated, but they’re not. The system is under tremendous stress. We’re starting to see the unintended consequences of being addicted to a painkiller that’s not having much impact in terms of what really matters.”
A “no-deal Brexit” vs. hard landing by China’s economy
“No-deal Brexit is an issue for the U.K. and for Europe, but less so. For the rest of us, it’s a curiosity, honestly because the impact is focused on the U.K. and Europe. China’s very different. China is the second-largest economy in the world. There are a lot of linkages that go through China, both on the supply side and on the demand side, so a Chinese hard landing would have global consequences well beyond what Brexit would have.”
The future of cryptocurrency
“I think they’re going to always exist as part of the ecosystem, but I do not believe they’re going to develop into a big, fully accepted currency and by fully accepted currency, [I mean] that it’s something that serves three purposes. One is the medium of transaction that everybody accepts with full trust. Second, it fulfills a precaution demand you can save. It’s the store of value. Third — which it will do — it becomes a speculative element of that. The reason why is because central banks won’t allow this to happen. The issuance of currency involves huge benefits and that’s not something that they’re going to give up easily. Plus, crypto, in particular, can enable a lot of bad actors. But, at the same time, I’m not of the view that this is an absurd concept. It’s not. I think what’s really exciting about cryptocurrency is the underlying technology. I think blockchain technology is going to spread both in the private and public sector.”
— Emily O’Donnell
Posted: December 10, 2019