One thing I regret is that I never was a serious policy maker. At the IMF, you advise, you are a sort of co-pilot to the policy makers, but you don't own the decisions. The policy makers know that is owned by the country. So, if I had one regret in my career is that I never got that opportunity.
Few economists get a seat at the table when it comes to dealing with sovereign debt crisis. He had many at the IMF across a 15-year career. He went on then to join PIMCO and run one of the world's largest pools of capital. Ultimately, he served as the co-CIO, chief investment officer and CEO. It is Dr. Mohammed El-Erian. He is now the economic adviser, chief economic adviser at Allianz SE, chairman of grammar fund management and the author of The Only Game in Town. More recently, president of Queens Cambridge, his alma mater. He's also now a prof at Wharton School. That's the University of Pennsylvania. He joins me today on the Inside Brief.
Mohammed, great to have you with me. I'm going to start off with a little bit of Irish prose, okay? It's from Sean O'Casey. It's from 1922 during the Irish Civil War. And he wrote this of one of his characters. The whole world is in a terrible state of chassis. Now, chassis Mohammed is not a state of crisis. It's just a constant state of very high angst. How would you describe the world that you observe today in terms of chassis or crisis?
Hello and thank you for having me. I think that is a great way of describing the world. I would go one step further but without all the poetry unfortunately Manis and I apologize I'm not a poet. I would say that we are on a bumpy journey to an uncertain destination. And I make that distinction because there's a journey part and a destination part. And both of those are providing angst right now.
And that journey, Mohammed, what do you think is the most disconcerting issue that you observe at the moment? Because they're multiple, aren't they? Whether it's geopolitical in Venezuela, whether it's the Federal Reserve. I mean I could rinse a laundry list to you. So what is the most discomforting part of the journey right now?
So for me there's two parts of it. There's a top down part and a bottom up part. The top down part is we've lost our unifying narratives. I grew up in a world in which there was common agreement on two things. One is globalization, the ever closer integration of goods, services, investments with a view to making everybody better off. And the other one was a domestic consensus called the Washington consensus that if you want to flourish, you deregulate, you liberalize, you respect the independence of your central bank and you're fiscally responsible. Those are gone and they haven't been replaced with anything. So there's no unifying narrative on top down. Bottom up, we're living through one of the most exciting transformations that will result in us doing things differently. I'm not just talking about AI. I'm talking about, of course, artificial intelligence. I'm talking about life sciences. I'm talking about robotics. And soon I'm talking about quantum. And that raises a whole host of issues that increase the uncertainty. Even though the outcome should be better, getting there is very uncertain. So that is how I think of it. And the minute you put that in play, you start getting very strange outcomes that don't make sense for marketplace correlations that have broken down. On the economic side, things that shouldn't coexist but do coexist. So, lots of puzzles because of both top down and bottom up disruptions.
And it's interesting because Mark Carney, if we listen to what Mark Carney had to say recently at various press conferences, he said, 'Get ready for a new world order.' That new world order is breaking down as you say spheres of influence is one of the reference points that we have. Deglobalization, protect yourself, is critical from an economic point of view Mohammed because that's the prism through which you and I talk perhaps the most. What is that new world order? Do we even have a sense of what that new world order could look like for global economies?
Yeah, Mark's speech was a very powerful one and he added the importance of middle powers in deciding this new order. I think of it in terms of the terms that Gordon Brown uses. We are somewhere between total fragmentation and a managed globalization light. So total fragmentation is we break up into different spheres of influence. There are constant trade tensions. You can't assume anything. Companies have to have lots and lots of supply chains. Resilience becomes a really major issue. Globalization light that is managed is this notion that somehow we decouple from total globalization but we settle into an equilibrium. I don't know Manis where we're going to end up but that's the range now and that's really far away from where we were which was ever closer to globalization.
And do you think so then I look at it through what you've just said I look at it through the prism of market reaction function what are markets telling me and I look at the dollar and I look at the dollar down now over 10% I think over 12 months so 9% last year one and a quarter this year and there's more pressure to come on that do you think that that lack of faith in the dollar is driven by the unknown knowns that you've just laid out. Or something just simpler which is to do with rates and to do with a bigger concern about where we're going on that side. Where do you fall on that dollar debasement side?
So it's a complicating picture. I think the biggest thing going for the dollar is that there's no other currency that can replace it. If there were another currency that could replace it, we would see the world diversify away from the dollar. Why? Because the world has started overweight the dollar. So the world would look to reduce its overweight because of different configuration. However, there is no single currency that can replace the dollar at the center of the system. So what you see instead is very gradual diversification into multiple things. Gold being an example, you see little pipes being built around the dollar system. They're not replacing the dollar system, but they're fragmenting the dollar system. And that is what you see going forward.
When we look at everything that has happened so far this year, you mentioned gold, we're talking about the dollar, you know, parabolic moves in gold, in silver, etc. When you see those kind of red warnings happening, what does that say to you, Mohammed?
So I think the most troubling if you like development is when we had equity prices at a record level and many records and that is risk on and gold at a record level and many records and that is risk off. And trying to explain that is you've got to realize that we living in this world where the international investor somehow wants to go long US innovation, long US corporates and they want to short the sovereign mess. That's what people are trying to do. They want to keep a claim on US private sector but protect themselves against US public sector. And I suspect you and I will agree that that's a very hard thing to do. You can't totally separate the sovereign from the corporate. But that is what a lot of these things are telling you is people are trying to find a way to navigate this very uncertain world.
On that sovereign side, Mohammed, I'm curious. I look at the price action in the bond market recently that in theory is down to the better inflation numbers that we had last week. A little bit of a move on the short end. But given what you've just said there, lots of people are talking about a potential debt crisis explosion depth charge. You choose your superlative on the sovereign side. Have we still a way to go before that's a reality in the US bond market?
So you know today I went out on X and asked for help. I ask for help because I cannot interpret the puzzle you just put forward. I cannot interpret what the 10-year US Treasury is doing at around 4%. Because it's counter to fundamentals and it's counter to valuation. So, there must be a technical factor. Why is it counter to fundamentals? As you just said, Manis, there was a better than expected headline inflation, but it was offset by all sorts of things that call for higher rates, a strong employment report, strong GDP growth. We have evidence latest from China of foreigners losing appetite with US treasuries. We have the debt issue. We have a whole host of fundamentals that will suggest higher rates. Then on the valuation side, it's hard to argue that you should have a 10-year rate at 4% when the economy is growing at 4%. You would expect something for nominal GDP. So it should be higher. So it must be a technical factor, but for the life of me, I can't figure out what it is. So what I did today is I went out on X and said, 'Please give me your thought. Help me here because I can't explain this puzzle.'
Well, given what you've just laid out there and I'd be curious to see who comes back to you. You know, that screams 5%, doesn't it? That the landscape that you've just verbalized there. But then this takes us to your FT, your op-ed that you have in the FT. And I want you to just expand on that for our listeners and for our viewers because I think it's critically important. You reflect on the strong jobs numbers. Yes. You flagged the revisions and some of the soft data reports, Atlanta Fed, etc. you then juxtapose that with the job cuts that are the highest since 2009. Can you just paint that picture of decoupling for me and what it means in your mind?
So, normally there's a self-reinforcing dynamic between high growth and high job creation. High growth leads companies to employ more people. The more people that are employed and paid more, the more they consume. So there's this notion that there is this virtuous dynamic that goes on. The US has seen accelerating growth. So we started the year quite muted. Third quarter was 4.4%. The fourth quarter may well come in just under 4% or 4%. That is a really high growth rate for the US, double what people think is capacity growth. However, massive worries about the jobs, the employment market and the revision showing the weakest employment year outside of recession. So, how why is that happening and what are the consequences and would it persist? The first thing you notice is yes, we've had three jobless recoveries in the 90s since the 90s, but all of them were coming out of a recession. And that makes sense. Companies don't want to hire people in a recession. They want to make sure that the growth will stick. This one is happening when we've not been in a recession since 2020. So very unusual. It also is likely to be more persistent. Why? Because this is not just about firms rethinking how much people they should employ, but we have this potential AI disruption and too many companies unfortunately Manis are thinking of AI as cost minimization, labor displacement. The other one is labor enhancing. So you have this tug of war in mindsets between how do you think about AI and unfortunately too many companies are thinking of it as labor displacement. So companies aren't hiring and they're laying off people, layoffs highest since 2009. So we've entered this period of potential jobless growth and in a country that already is under socio-political pressure that is really consequential and it's something that we should look to mitigate and we can mitigate but it requires what the UAE has which is an AI diffusion policy. The US doesn't have an AI diffusion policy.
Just expand on that, Mohammed, because you're either saying to me companies managers are making a huge mistake. And they're putting a great phenomenal store of value on what AI is going to deliver for them. So, they're restraining themselves at the moment. CEOs that I talk to say we're getting a 10x uplift in productivity in certain areas, 100x productivity uplift in certain areas. Are you saying to me, look, it's too soon to be that presumptive about the productivity uplift, the real productivity uplift from AI?
No. On the contrary, I am one of the biggest bulls out there in terms of the potential of AI and productivity. It is what you think next. So if I come to you as a CEO and I say there is this massive productivity uplift, there are two ways you can react and I'm going to force you into extremes. One way is great, I can do the same with fewer people. And I call up my HR person and I say we are going to have major layoffs because I can now do more with less people. Same with less people. So let's think about who we going to displace. That's the automation side of AI. And that's where most companies are. The other mindset is you tell me this productivity. I say that's wonderful. If I can get my workers to be more productive, I can do more with the same people and even more with more people. That is labor enhancing. That is not automation. That is augmentation. But for that to happen, you have to have someone you don't call your HR person, you call your AI person, someone who's native AI. And you say, 'What does it take?' And that person will say we have to retool our people. That person will say we have to think about how our data is organized. It's a completely different mindset. And I talk to both. I can tell you companies that are here which I won't because I don't want to insult them. But talk to the CEO of Accenture. Talk to the CEO of Walmart. Talk to people at Google. They are here because they realize that the power of AI is in labor augmentation, not labor displacement.
And economically then it depends who you listen to or who you read. You know robotics and AI will fuel this again a paradigm shift to quote as we both know we both lived through it. Alan Greenspan the invention of the internet and what it did for all of us. So is this a paradigm shift that will deliver significant productivity gains and growth? Mohammed?
If we get it right. So you know last year we were spending all our time absolutely fascinated by the advances made by the frontier models companies. You know Satya Nadella of Microsoft has a very good way of putting it. He said when we first heard about AI chat GPT it was about you ask it a question and it answers. A year later it became you give it a task and it performs the task. Now it is your constant intellectual companion. It allows you to access a 100 PhDs with tremendous amount of information. Are they always right? No. But they are much more informed than you are. And you can interact with them continuously. So all the focus was on those working on AI. And with the exception of the UAE and China, we didn't pay virtually any attention about those working with AI, the diffusion, the adoption side, and that's what impacts productivity. So we need to get the diffusion right. We need to get adoption right. It's not automatic, but the most important element is the mindset element. I can't stress this enough, Manis. It is thinking of AI more as labor enhancing than labor displacing.
And you think that diffusion, that approach here in the UAE, Mohammed, and I know that you'll be here in the first quarter at some stage. And I think what's happening here with the likes of G42, the infrastructure that's being built and it's embedded into our culture. I almost can't convey that enough to you in terms of how it's embedded from government top down to use your phrase, from top down and bottom up. What is it that you think we're doing that maybe the rest of the world can look at and go, you know what, that's not a bad model.
I think the UAE has the most wonderful leadership that always asks the question what is around not just the next corner but the corner after that. So I witnessed them getting interested in AI very early on. I witnessed them understanding that it's all about adoption. I witnessed them come up with this notion of AI for every citizen and that is about adoption. AI for every citizen. And when you go around the UAE, you get answers to a question that a lot of US companies find very difficult to answer. And European companies are nowhere. So I want to stress that, you know, Europe has an even bigger problem than the US. And it's the simple question is the following. If you grew up AI native, what would you look like? And most people cannot answer that question. But unless you can answer that question, you will not realize the full potential of AI.
That's a pretty sobering thought. Tell me this, what I mean, I don't know whether you can say which products you use. I very openly say I use Perplexity. I use Claude. I use ChatGPT. I do fact check a lot of stuff that I get given. Okay. I don't get it to write the questions for this interview. What do you use and what has enhanced Mohammed El-Erian's world from an AI perspective?
