Slate Money – "The End of the World as We Know It Edition"

Date: February 13, 2016
Host: Felix Salmon (Fusion), with Cathy O'Neill (Mathbabe), Jordan Weissmann (Slate), and guest Mohamed El-Erian (author and economist)

Episode Overview

This special episode features acclaimed economist and author Mohamed El-Erian discussing his book, The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. The episode dives into the precarious global economic moment of early 2016, exploring El-Erian's thesis: the world economy is at a turning point—facing what he calls a "T junction"—with central bank policies nearing the end of their effectiveness and real structural decisions looming. The conversation covers why the global system feels so fragile, what might come next, and whether politics can catch up to urgent economic needs.

Main Themes and Key Discussion Points

1. The “T Junction” Metaphor: The End of the Current Economic Road

[04:37] Mohamed El-Erian introduces the central image of his book: the world is at a "T junction," where the familiar economic path (reliance on central banks to smooth over dysfunction) ends, and stark choices must be made.

• Explanation:
  "I came across what the British call a T junction… the road you are on ends. And then there are two roads that come out… but they point in different directions." (El-Erian, 04:37)

• There is no predestined path; nations must choose and act deliberately.

• Two options: a “bad” outcome of recession, populism, and instability; or a “good” outcome where leaders implement comprehensive reforms promoting inclusive growth and stability.

2. The Ten Interlocking Problems Facing the World Economy

[08:00] Felix Salmon summarizes the book's central diagnosis: El-Erian identifies ten major, mutually-reinforcing risks threatening the global order.

• List Highlights:

  • Inequality and exclusion from growth
  • Unemployable people
  • Trust deficit in institutions
  • Political dysfunction
  • Lack of global leadership ("G0 world")
  • Migration crisis
  • Financial and liquidity risks

• Crucial Insight:
  "What’s worse is they all exacerbate each other... it just gets worse and worse." (Salmon, 09:13)

3. Assessing the Odds: Are We Doomed?

Felix and Cathy press El-Erian on the real likelihood of a good outcome at the T junction.

• [12:08] "Since I’ve written it, it’s become a little bit less 50/50. I would say it’s more like 60% a bad outcome, 40% good outcome. But... we can change those probabilities pretty quickly if the political class steps up to its responsibilities." (El-Erian, 12:08)

• Notable quote:
  "Most economists agree on what’s needed. This is a political implementation problem." (El-Erian, 10:30)

4. The Failure of Politics and the Overburdened Central Bankers

[12:54] Cathy uses El-Erian’s metaphor of “bad parents” to highlight how politicians have abdicated economic stewardship to central banks.

• [28:45]
  El-Erian compares the economic situation to a structurally impaired patient who gets too much pain medication (QE), but never the underlying treatments needed:

  Quote:
  "I am giving you consistently medication that is not well suited to your problems. At some point, the negative effects of that medication start being stronger than the benefits." (El-Erian, 29:26)

• There are limits to central bank tools; negative side effects (market volatility, distorted asset prices) are mounting.

• Central banks lack the legitimacy and policy range for deep, structural reform.

5. What Needs to Happen: The Four Broad Solutions

[16:00-34:36] El-Erian says most economists and mainstream political parties agree on the main things needed:

1. Refocus investment: Shift from financial engineering to real economic engines, like infrastructure and human capital.
2. Tackle inequality: Address the split between the "will to spend" versus "the wallet to spend."
3. Deal with excess/unproductive debt: Reduce debt overhangs in troubled areas.
4. Promote smart global coordination: Counteract beggar-thy-neighbor policies and destructive competition.

Quote:
"We as a society fell in love with finance… We forgot why it is called the financial service industry—that at best it services something else." (El-Erian, 16:54)

6. Why It’s So Hard: Domestic Politics vs. Technocratic Consensus

[18:50] Felix homes in on the gap between what economists prescribe and what domestic politicians can or will do:

• Frustration, anger, and populism are pushing politics away from pragmatic, coordinated policy—even as problems increasingly ignore borders.
• Growing anti-establishment sentiment is both a symptom and an accelerant of instability.

7. Can Crisis Spur Action?

[21:06] The hosts debate whether only a new, acute crisis can create the political will for reform.

• El-Erian: Past crises (e.g., 2008 global coordination at G20) show it’s possible, but action receded as the sense of emergency faded.
• Cathy: Fears that elites have insulated themselves too well; next crises may not bring leaders together.

Quote:
"You cannot be a good house in a bad neighborhood..." (El-Erian, 21:44)

8. What Can Individuals Do?

[20:31; 39:00] Recognizing that politics may not deliver, El-Erian’s book closes with advice for individuals to prepare for uncertainty:

• Focus on resilience, optionality, and agility – be prepared for a world with very different possible outcomes.
• Use the story of the "Rumble in the Jungle" to illustrate that surprises are possible even in seemingly predetermined situations.

9. Numbers Round: Indicators of Instability

[42:33-47:41]

• 30%: The value loss in Deutsche Bank’s "coco" bonds, highlighting market turmoil and signaling stress in the financial system.

• Zero: Number of rate hikes expected by BNP Paribas for 2016–2017, reflecting expectations of stagnation.

• 30% (again): The share of global government debt trading at negative nominal interest rates – evidence of extraordinary economic and policy conditions.

• $6 trillion: Total global debt with negative yields, driven sharply higher by Japan’s move to negative rates.

  Quote:
  "30% of global government debt is in a situation where the lenders are paying the borrowers." (El-Erian, 46:14)

10. Ending on a Note of Hope

[48:12] Despite the gloom, El-Erian points to technological empowerment and new models (like Airbnb’s disruption of the hotel industry) as reasons for optimism. Rapid, unpredictable positive shifts are possible if we don’t underestimate human ingenuity and adaptability.

Quote:
"They are being enabled and empowered to do things that were unthinkable for me... This is how fast things change." (El-Erian, 48:12)

Notable Quotes and Memorable Moments

• "It is a wake up call. A lot of people believe that we can maintain this world of low growth and we can rely on central banks to do everything for us and somehow they can hold it together." (El-Erian, 09:46)

• "You cannot be a good house in a bad neighborhood." (El-Erian, 21:44)

• On central banks: "I am giving you consistently medication that is not well suited to your problems. At some point, the negative effects of that medication start being stronger than the benefits." (El-Erian, 29:26)

• "Most economists agree on what's needed. This is a political implementation problem." (El-Erian, 10:30)

• On the optimistic scenario: "If the political class steps up to its economic responsibilities... we can change those probabilities pretty quickly." (El-Erian, 12:25)

Key Timestamps for Important Segments

• 04:37: The T junction metaphor explained
• 08:00: List of ten systemic risks facing the global economy
• 12:08: Probability of good/bad outcomes at the T junction
• 16:00-34:36: What needs to happen – four agreed economic reforms
• 21:06: Can crisis spark effective political action?
• 28:45: Central banks’ limitations and the “wrong medicine” analogy
• 39:00: What individuals can do amid uncertain outcomes
• 42:33-47:41: Numbers round: economic indicators of instability
• 48:12: Final note of optimism—technological empowerment and rapid advances

Conclusion

This episode offers a sobering yet nuanced analysis of the world economy's precarious position in early 2016. With Mohamed El-Erian’s guidance, the hosts dissect why the policy status quo is unraveling, what could go right—and mostly, what could go wrong—if political leaders remain gridlocked. While realistic about risks, El-Erian ends with a reminder not to underestimate society’s creative capacity to adapt and thrive, even at apparent dead ends. For listeners wondering “where next?” for the global economy, this episode is both a diagnosis of our financial malaise and a challenge to break out of political complacency.