The End of the World as We Know It Edition

Summary

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)

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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.

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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.

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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)

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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)

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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.

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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)

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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.

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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)

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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.

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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)

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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)

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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)

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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

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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.

Transcript

[A]

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[B]

Hello and welcome. Welcome to a super special the End of the World as We Know it edition of Slate Money, your guide to the business and finance news of the week and a world which seems to be falling apart at the seams. I'm Felix Salmon of Fusion. I'm joined, as ever, by Kathy O', Neill, the blogger and data scientist and mathbabe.org proprietor.

[A]

Thank you. Hi.

[C]

Hi, everyone.

[B]

Hi, Gabby. We have, as ever, Jordan Weissman, the Money Box columnist at Slate.

[D]

Hello.

[B]

And as promised, we have probably the most special guest ever to have special guest appeared on Slate Money, the one and only Mohamed El Erian.

[A]

Hi there.

[B]

So, Mohamed El Erian needs no introduction, which means I'm going to give him an introduction, because whatever you know about him is probably not half of what he's managed to achieve. I probably don't know half of it myself, but the short version is a long career at the imf. What were you doing at the imf?

[A]

Mostly so mostly advising countries and thinking about issues that have to do with capital flows and debt.

[B]

Which you will if you read this book. Because of course, he's here with a book. It's called the Only Game in Town and all books have subtitles. Central Banks Instability and Avoiding the Next Collapse. So that's the book. If you read the book in the sort of context of IMF's advising country job, you can see where a lot of the book came from. But then from the IMF you had a brief moment on the sell side at Salomon Brothers, then moved over to the buy side, both Pimco and then Harvard and then back to Pimco, and now you're just a kind of eminence grease.

[A]

No, I wouldn't call that. I say now I have a portfolio approach which involves lots of things, including spending some time writing, which.

[B]

You have a regular column at Bloomberg View.

[A]

I do. And one in the Financial Times.

[B]

And one in the Financial Times. So you can read Mohammed just about anywhere. But we are going to be concentrating, basically, in a wonderful coincidence of timing. This book was presumably finished many months, almost a year ago, and it was talking about how there was a certain point at which things would start falling apart. And guess what? It seems to be publishing, seems to be being published at exactly that point. Which is. Which is incredibly prescient of you.

[A]

Or pure luck.

[B]

Or pure luck. So, Kathy.

[C]

Yes.

[B]

What is going on in this book? I'm asking you rather than the author.

[C]

Right. Because that makes sense. I'm going to ask the author. That's how we do it here. Well, look, the book is amazing. It covers just all sorts of things, but especially economies across the world, the current situation, where you have 10 problems with the current situation and four possible solutions for the current situation. And then the second half of the book deals with what is actually going to happen. Instead of people listening to your advice, we are going to do something. We're going to come upon something called the T junction. Can you explain the T junction to our listeners?

[A]

Sure. So I was looking for an image to try and convey a very simple notion that the road on which the global economy has been on, in which central banks have played a remarkable role, that road is ending. So first I needed an image that showed that a road was coming to an end. Then I needed an image to show there was nothing predestined as to where we would come out, that there were choices to be made, that we controlled our destiny. And then I came across what the British call a T junction. We think of it as a crossroad where the road you are on ends. And then there are two roads that come out. They're both perpendicular, but they point in different directions.

[C]

Right. And if you're a nerd, like I am, you like thinking it as well as a distribution, what's called a bimodal distribution, where you don't know exactly what's going to happen, but you have a distribution of things that could happen with various probabilities, and one is on the Right. With a big bump, possible things happening. And then one thing's on the left. So what is the right and what's the left here?

[A]

So think of the two humps of a camel. The. I don't want to use left to right because that has all sorts of political connotations. The bad outcome is that we don't do anything about to control our destiny. And what has been a period of frustrating low growth turns into recession. What has is now becoming a period of more financial volatility turns into financial crisis. And we undermine not just this generation, but also future generation. That's one road. The other road is what I call the handoff that we hand off from excessive reliance on central banks to a more comprehensive policy response that we get truly inclusive growth. So growth whose benefits are shared much more widely than what we've had so far. And we get general financial stability. That is the choice we face. And it's a bimodal distribution because as you point out, the middle, which is low growth and a bit of volatility, but not much, is going to become much less likely. And the two tails, the two extremes, become much more likely.

[C]

And so how do we know if we've hit that end and have we hit it this week with all the crazy market volatility?

[A]

So it's hard to say whether we've definitely hit it. And that's why I use the phrase within the next three years. Timing is always difficult, but you know that the system will start signaling contradictions, will start signaling tensions. And that's what we're seeing not just on the financial side. It's easy to point to volatility, but not just volatility. We have improbable things that have become fact. You know, this notion of negative interest rates, that if you want to lend the government money, you also pay them interest to lend them money. That was unthinkable. It has happened.

[C]

And in the book you also talk about things like the emergence of the Tea Party, like political unrest and kind of extremism as symptoms of this hitting the end of the road.

[A]

Absolutely. You see it on the economic front, we're no longer able to generate growth. You see it on the financial front, we're no longer able to repress volatility. You see it on the social front, people start worrying about inequality. And you see on the political side that you get anti establishment movements coming up in response to people's feeling of insecurity and anger.

[B]

Okay, so this is where I want to jump in, because you have all of those Four reasons why things are going to fall apart. In fact, you have this longer list of 10 reasons, each of which gets its own chapter in the book. And I'm just going to sort of like run through these very quickly because it's probably the most clearly argued and deeply pessimistic segment of any book that I've read in years that you have what you're talking about. You have the inequality. There's no way to include everyone in growth. There's unemployable people, there's trust deficits, there's political dysfunction, there's lack of global leadership in what ian Bremmer calls G0 world where no one's in charge anymore. There's the migration crisis, there's financial risks, there's liquidity risks. It just goes on and on. And you put all. And what's worse is they all exacerbate each other. There's this vicious cycle where any one of those makes the other ones worse. And it just gets worse and worse. And by the time you finish those 10 chapters, it's really hard to come out of this with any kind of feeling that, you know, this handoff which you talk about has a probability greater than about 1%. So when you talk about the T junction being like, well, it's a 50, 50 thing. We could be. It's bimodal, it could go this way, it could go that way. The message I'm getting from the book is it's really not bimodal. We are, it's all going to hell in the handbasket.

[C]

Technically, the bimodal doesn't have to be 50, 50. One bump could be much larger than the other bump. But I agree it is pretty. It's a daunting project.

[A]

Okay, so first and foremost, these 10 things that speak to inherent contradictions that are becoming more apparent and I don't think anybody would agree, would disagree with these 10 things they become fact speaks to why the current world is ending. And it's 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. So the first element and these 10 things is a wake up call is look at what's happening and play it forward a little bit. And then play forward what you said, Felix, which is the interactions. And suddenly you have a very unstable situation. So that's it. Now, it's funny, on the T junction, I was sitting with a friend who said, you have no idea about marketing the last thing people want to hear is a wishy washy economist on the one hand. And the other, no one cares about your T junction, no one cares about bimodal distribution. They just want to know what's going to happen. And I told them, you know what, it's appealing to say that, but I've spent a tremendous amount of time looking at this in detail. And the intellectually honest thing to say is that there are two very, very different possibilities. Why? This is not an engineering problem. Most economists agree on what's needed. This is a political implementation problem. So the first thing is that when it's not an engineering problem, it's not as inherently complex as it could be otherwise. The second is that there are good things happening in the global economy that we must not forget. And third, there's a ton of cash sitting on the sideline. Companies have accumulated a ton of cash earning 0%. They're not willing to invest it in plant and equipment. If anything, they get forced to give it back to shareholders. And if that money gets deployed positively, it will make a huge difference. And finally, innovations. I can cite you a number of innovations that have been firm specific and sector specific that are about to go economy wide. So when you put these things together, you end up by coming to the conclusion that it's not 99%, it's the end of the world and 1%, it could be better, it's much more even.

[B]

So I'm going to put you on the spot here. When you say much more even, are you really saying that it is evenly balanced, that it's pretty much 50, 50 either way?

[A]

So since I've written it, it's become a little bit less 50, 50. So I would say it's more like 60, 40, 60 a bad outcome, 40 a good outcome. But I will also tell you that we can change those probabilities pretty quickly if the political class steps up to its economic responsibilities.

[C]

So that brings me to my favorite metaphor you used in this book, which is that of the bad parents. You sort of said that basically during the financial crisis. I'm going to paraphrase, but tell me if I'm wrong. Congress, at least in this country, right? There's different stories in different countries, but not too wildly different. Congress just basically gave the economy to central bankers, like bad parents abandoning their child. And I think that's a really apt metaphor. And basically what you're saying is they have to take it back, they have to take responsibility as parents.

[A]

Correct. And I'm also saying that don't Expect the central bankers to be able to be really good parents. They simply don't have the tools to be really good parents. So the parents, which are the people who enable a comprehensive policy response, have to now step up to their responsibilities.

[B]

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[A]

Okay, so let me tell you, when I wrote this book, I expected three criticisms and I've Only received two so far. One criticism is the wishy washy thing, right? What do you mean, a T junction? Just give us one.

[C]

We're intellectuals, we get nuance. Don't worry about that.

[A]

The second criticism is the softer parts of the book, which tries to explain to people why it's so hard to make good decisions when we face bimodal distribution. And both criticisms have come in. He's not deterministic enough. He does all this soft stuff. The third criticism I expected hasn't occurred and it relates to your question. I argue in this book that most economists would agree on the four things we need. And what they would disagree on is on the importance, the relative importance, but they would not disagree on these four things. I expected to get quite a reaction to that. You know what? Most economists do agree, and that's really important because whether you're on the left or whether you're on the right, you know that there are problems with the system as it is now. You know that we mal invested in growth engines. We as a society fell in love with finance. We raised finance to a new level of capitalism. We thought that somehow finance could produce growth. And we forgot why it is called the financial service industry, that at best it services something else. And we stopped investing in engines of growth. Secondly, most economists agree, and that's why both the right and the left are talking about income inequality, that we've got into a situation where we have divorced the will to spend from the wallet to spend. And when that happens excessively, you then have a problem of aggregate demand. Most economists agree we have too much debt concentrated in certain parts of the system and that we need to do something about it. And most economists agree that we have inadequate global policy coordination and therefore it's in the interest of each country to pursue policies that actually harm other countries. These four things are not just agreed to by economists, they're also agreed by most political parties. And if you look at core elements of solutions, there's quite a bit of overlap. Not all. So when I look at that, I say to myself, at the end of the day, what's stopping the political class from coming together? It is the realization that if they do, the reaction will be positive, not negative. Right now, people do not want to collaborate, they don't want to reach across the aisle, because I think the minute they do that, they undermine their reelection. But if awareness increases and you get what's called the Sputnik moment, when people suddenly realize that unless we do something right now, we're going to lose control of our destiny. And that's what happened in this country in the late 50s, when the Soviet Union, the USSR, the Evil Empire, as Reagan called it later on, succeeded in sending a satellite. Suddenly people felt incredibly insecure. Well, people should feel incredibly insecure economically today. And my hope is that that is what triggers a good outcome. Do I think it's a done deal? No, I don't, but I think it's certainly a possibility.

[B]

So I'm going to just jump in one more time, then give it over to Jordan. But I asked you about politics and you gave a very smart answer, which included the word economists about 40 times. And this is the big tension that, that I see that your book is a very technocratic book. You can see policies that economists would agree on. You can look at the entire world as this interconnected economy in a way that almost no domestic politicians ever do. And you can see in the way that only a handful of people at the IMF and the World bank tend to do, like the. The way that everything is working and what needs to be done. And you think, well, you know, maybe other people might be able to see this too. And then as an obstacle to these, like, correct things which should be done, you see domestic political forces, you see the rise of Donald Trump or Jeremy Corbyn or, you know, Pegida, or, you name your extremist political party.

[A]

And the.

[B]

Anger and frustration of the electorate is a force basically preventing politicians from becoming good global technocrats, rather than one which is pushing them to these solutions. And so what I see in this book is a very deep tension between democracy on the one hand, which is becoming increasingly polarized, and, and like the correct technocratic solution on the other.

[A]

And I think that's right. And that's why the book has a section on what should happen, and then it has a section on what's likely to happen, and then it goes even further. And it basically tells individuals we cannot rely on our politicians, the political system is challenged, and here's what you can do in order to be able to navigate better this T junction. So I don't disagree with you. What I'm not willing to give up on is saying that the politics is so dysfunctional that there is virtually no probability of our politicians getting it right.

[C]

Well, what I hear, and I read this in the book as well, is that given the appropriate crisis, that politicians can come together. And I kind of agree, but I don't see that crisis happening. I feel like the financial crisis was a crisis kind of a lost opportunity in a certain sense.

[A]

But.

[C]

But crises that are coming on in the future will probably, at this point, the rich people have insulated themselves so much from crisis that it won't be a crisis for the ruling class. And so I can't imagine it. I agree with you that crisis creates union and bonds. But I don't see that crisis. Where is that crisis?

[A]

So first and foremost, I tell you, you cannot be a good house in a bad neighborhood. I don't care how good your kitchen is, I don't care how good your bathroom is, you cannot be a good house in a bad neighborhood. And the sense that the rich can isolate themselves from what's happening around them is just silly. They cannot. And in fact, what's happening today, what's happening today, I'd say more generally, is we're seeing enormous financial volatility. And who gets hit most by financial volatility? The rich. Right.

[C]

But they don't get hurt. They get hit. That's different.

[A]

Right. But they pay attention because they get hit. And maybe they have a lot more resilience. And it's true, the poor cannot protect themselves from economic crisis, from inflation and everything else. And that's the tragedy of the whole thing. Now, I've seen both responses and I've seen lack of responses. Very few people saw the 2008 crisis coming. Very few people. And somehow the system responded. It responded first in this country by coming together behind a very controversial stimulus. And it responded internationally at the G20 in London in April 2009, which was an amazing display of international coordination. And then it stopped because the sense of the immediate crisis was behind us. I remember when my colleagues at Pimco and I came up with the concept of the new normal, which was, be careful. This is not a cyclical shock. The economy is not going to bounce back. This is structural, this is secular. Look to emerging markets for insights. We were laughed at. I remember a policymaker calling it idiotic.

[C]

Why?

[A]

Because there wasn't a sense of immediate crisis. I think now there's more sense of immediate crisis. And here's a short term prediction for you. By the time we get to the summer, the level of financial insecurity and economic insecurity would have gone up so much that candidates will not be able to avoid talking about this. And they're going to have to talk about this in a much more sensible manner than they've done so far.

[B]

In a political campaign for president, where you can see the anger and frustration in the support for Donald Trump, what is the incentive for candidates to talk about this? In a sensible G20 in London kind of way, rather than talking about it in a. The government did a very unpopular anti democratic thing in 2009 and now look.

[A]

At where we are.

[B]

And I'm not going to listen to economists anymore.

[A]

So that is definitely a risk. And when you are one of the 10 to 15 people running, you can get away with that. You can get away with a sound bite. But when you're one of two or one of three and people are going to say, well, okay, so I understand your negative message. What is your positive message? Okay, so I'm not willing to give up on democracy yet. I may be naive, but what I worry about is if you're in Greece, there is no engineering solution. Okay? So to expect a political class to come around here, we have an engineering solution, we just need. So that's why I'm not totally, totally pessimistic.

[D]

So I kind of want to jump in here. Do you, I mean, you're kind of suggesting that not only is there an engineering solution but that deep down in their hearts, most politicians, you know, national politicians in major countries understand that. But is that really true? Do you, do you really think that China, there isn't some sense that they have a different self interest than the United States or Japan, that the Republican Party of the United States doesn't sincerely believe that is a different self interest than maybe some of the. That doesn't necessarily involve some of the solutions that you would suggest in this book.

[A]

So first and foremost, you should never underestimate domestic interest.

[D]

Yeah.

[A]

And the big problem China is having today is how do you reconcile its domestic interests of being a developing economy, not even really middle income yet, with its global responsibility because it's the second largest economy in the world. China is having a terrible time reconciling these two and they're starting to make policy mistakes. So I am completely sympathetic to the notion that it's very hard to reconcile domestic and global interests and responsibilities, especially if you're a developing country. So I agree with that.

[B]

Yeah.

[A]

And go to the US The US is so interconnected in the world today that this notion that we are an island and we don't need to care about what happens, what triggered the current disorder and volatility. It was a perfect storm. And one of the three elements of this storm was created by China. The US economy is fine. It doesn't justify the sort of volatility we've seen in the financial markets. But because the US is exposed to the rest of the world, whatever happens in the Rest of the world spills back here and spills back into the financial market. So I think at the end of the day, you need to find a way to reconcile.

[B]

Okay, so we are going to move on. Slate money is also sponsored by Carbonite, which, if you are a global technocrat like Mohammed Al Amin, you have a laptop which has all of your information on it. And if that laptop works to fall under a bus, that would be the end of your existence, unless it's all backed up. And the way you back it up is by going to carbonite.com and putting the offer code Slate in. It's free anyway. It gives you a free trial. But if you put the offer code Slate in, then you get two free bonus months if you decide to buy, which you will, because it's peace of mind, and it will help you sleep much better in your bol and branch sheets. So, once again, that's carbonite.com offer code slate. Back up your material. You know you need to. This is your annual reminder. Just do it. You will be so happy you did it. If anything happens to your computer one more time, that's carbonite.com offer code slate. So, yeah, Jordan, let's talk about this engineering solution and what the solution has been for the past eight years.

[D]

Yeah. So I actually want to start with the title of your book, which is the Only Game in Town. And your first point in this is that since the Great Recession and the financial crisis, central banks have been the only game in town. We have essentially offloaded all of our economic policy onto Ben Bernanke and Janet Yellen and Mario Draghi. My question is, why is that failing now? And why can't it keep going? Why can't we keep walking down that road?

[A]

So let me give you the way I describe it to my daughter, because it's such a powerful explanation. You're sick. You're structurally impaired. You were in the ICU. That's 2008, 2009, you ended up in the hospital. 2010, you're out of the hospital, but you're still structurally impaired. You haven't fixed some basic things. So you find out that you can walk, but you cannot run. And every once in a while, you're in pain. So you go to a doctor and the doctor says, you know what? You actually need some big structural work done on you. That's not me. It's these people up on Capitol Hill. They're the doctors over there. We all look to Capitol Hill, and they are completely dysfunctional. So I say, you know what? I'm going to give you some medication. It's called QE2. I'll give you some medication and you take some and it will buy you time. It's not going to solve your problem. But I'm pretty confident that we're going to sort out this problem on Capitol Hill. You take it for a year, you come back and say, you know what, I felt better for a while, but I'm still not. Then the pain is coming back. We both looked at Capitol Hill. They still haven't got their act together. I give you a double dose. It's called Operation Twist. That's what they did. You come back to me again and I say, you say the same thing. I say, okay, I'll give you a triple dose. QE3. 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. Ben Bernanke, when he introduced the concept of going unconventional, not to normalize markets 2008 to 2010, but to pursue economic objective, he said, it's about benefits, costs and risks. His phrase, benefit, costs and risks. And the longer we stay unconventional, the lower the benefits and the greater the costs and the risks. So now we're seeing the bad side effects of the wrong medication. We're seeing the costs and the risks start to exceed the benefits. That is what has changed.

[D]

So there are definitely sort of, there are intellectuals in the US who are convinced though, that if somehow the central banks just got exactly the right policy, if it was NGDP targeting or something along those lines, that that would be the cure, that would be the long term cure. It wouldn't just be medicine. It wouldn't be like Tylenol or something to kind of cure us or make us feel less pain until Congress got its act together. Are you saying that's just not realistic? Are you saying that they're wrong or is that, you know, because you seem in this book to say they're out of tools, that it's just not. We don't, they don't have what they need to get us back on our feet long term.

[A]

Yeah, I'm saying they don't have the right tools, period. And then I'm saying the tools that they are having to employ not by choice but by necessity. Because remember, going back to the political discussion, they are politically autonomous. They're the only policymaking entity that can move. They don't need to go to Congress for qe. They don't need to go to Congress to take interest rates Negative. Right. So they have enormous political autonomy, and so therefore they're the only ones who can move. So going back to your question, I think most economists no longer believe that the central bank can do it on its own. I think that view was a very cyclical view. In fact, it's striking to me, and this is very hard for me to do now that the New Normal has become conventional wisdom. It's called secular stagnation. Much nicer title, by the way. It's striking to me for me to be able to say, you know what? I don't think the New Normal is a good tool anymore to tell us what's ahead. It was great for 2009 up to today, but it's not that most people now are starting to believe that something structural. And the minute you say the word structural, it's the minute you say central banks can't do it all.

[D]

So one of the things that you know, and this I think actually leads to back to the political problems, because if you say central banks can't spur growth on their own, that naturally leads people to start saying, well, are you suggesting new fiscal stimulus programs? Something along those lines. Which automatically brings us back to all sorts of political debates. For we've been, you know, all sorts of really, really rancorous political debates. We've already been fighting for the last seven, eight years. I mean, is that the answer? Is it more fiscal spending? Is it what. What is this engineering solution that you're hoping results in the handoff?

[A]

So I'm going to give you a set of policies that quite a few people agree on. First, on the structural side, that we need to invest more in people and in infrastructure. Both parties agree on this. Where there's disagreement is on quite how you do it. But you will find that there's quite a bit of agreement that, for example, with interest rates so low and in Europe with interest rates negative, isn't it absurd that we're not investing in infrastructure that enables and empowers people? Most people agree that we have a problem with the education system. It's not keeping up with the realities on the ground. Most people agree that our tax system is anti growth. It has been so distorted over the years that it's anti growth. On the demand side, it gets a little bit trickier. Most people agree that having decoupled from the will, from the wallet to spend, we have a problem of demand. Now there is some agreement on little things we can do to fix it. For example, very few people disagree with the notion that carried interest, which is A hedge fund, private equity side should not be taxed properly. It's ridiculous that it's taxed at 15%. Donald Trump says it, Bernie Sanders says it. Okay, third element on debt reduction.

[D]

That.

[A]

Gets a bit trickier because there's a fairness and there's a signaling issue. Yeah, okay, but look at Greece. Look how much the thinking has evolved in Europe. And I worked on the Latin American crisis the last decade of the 80s, where it took a long time for people to realize that when you have crushing debt, it actually undermines everybody. And then the final issue, most people agree that we have a global system that's so uncoordinated that its sum is a lot less than if you just add up the parts. So one plus one is a lot less than two in that. Okay, so I don't think there is as much sort of disagreement as you pointed out. And I go back to what I said to Felix in the beginning because there's so much cash on the sideline, because there is incredible innovation going on, it doesn't take much out of Congress to get it going. Most of the people who know me will be stunned that I'm being portrayed as the optimist. Normally I'm accused of being the pessimist.

[B]

Oh, I'm definitely accusing you of being.

[D]

The pessimist, even if you don't know it.

[B]

Okay, so this is fascinating to me. Number one, what you're talking about, central bank as being the only game in town is deeply connected, as you say, to the fact that they're unelected, pretty much unaccountable, and they're these sort of anti democratic technocrats who can just go on and do the right thing and democracy be damned. And that works until it doesn't. And similarly, you know, when you say that debt is tricky, but as we saw in Latin America, eventually you realize that too much debt is bad for everyone and that we should reduce it. Yeah. The thing which finally happened in Latin America was that the banks became solvent enough to take those write downs. It wasn't that people suddenly came to this Damascene realization. It was a financial thing that happened, which is clearly not happening now. If you look at what's happened to the solvency of Deutsche Bank. So I just, I feel that like sort of reading between the lines of what you're saying, that there is just this deeply pessimistic sort of conclusion that has to be drawn. And not only that, it's pretty clear that the financial markets are drawing that conclusion as well. Normally oil at $20 a barrel would be this incredible fiscal stimulus for everyone and we'd be like dancing on the sidewalks. But that's not happening.

[C]

Can I double? I'd like to echo Felix, like when I read your four prescriptions, like four goals through my progressive lens, I read, okay, well, we need to replace all the water pipes in the country to prevent another Flint, Michigan problem. We need to tax the shit out of the rich and we need free college for everyone to get rid of college to get rid of the ruining of the younger generation under debt. Those are obviously not what Trump wants. In other words, I think in some sense you've agreed that you're right, that the problems are generically stated enough that everyone kind of agrees on them. But it comes down to details. I don't think we have anything close to agreement.

[A]

Look, I mean this is important and it's the reason why the book goes from what should happen to what's likely to happen to what you as an individual can do. Because we can't necessarily rely on our politicians. If I believed in justif I was just naively optimistic, I would have stopped into what needs to happen. I wouldn't have made the other two transitions which acknowledge that it's a bimodal distribution. Now we can disagree on the weight. And to try and convince you, I end up with a story from a sport that I don't like, but it's a story that had a real impact on me which was a bimodal distribution faced by someone where conventional wisdom was absolutely certain as to what's going to happen. And it ended up being the biggest surprise. And this is the famous heavyweight fight in the mid-70s, the rumble in the Jungle. And it speaks to the ability to think about the three things you need in a world where you have a bimodal distribution. Resilience, optionality and agility. And it speaks to how individuals can do something. Not completely. We can never compensate for a political class that doesn't step up to its responsibility. But we can do something to lessen the pain. Now, we can't all do it, unfortunately. And yes, some people do it a lot better than others. But even the so called others, which I identify with a lot, there's a lot they can do.

[B]

Okay, so before we move on to the numbers round, I'm going to say the one thing that all Americans are going to be doing this November is, or most Americans are going to be doing this November in probably record numbers is, is going to the polls and voting for President. So who should they vote for?

[A]

You Know, who am I to tell people who they should vote for? I can tell you what they should look for.

[B]

Who are you going to vote for?

[A]

Who's running?

[B]

You have the choice of everyone who's running right now.

[A]

No, no, but tell me you don't.

[B]

Have the choice of Mike Bloomberg come.

[A]

November, who's on the ballot and I'll give you an answer.

[D]

I'll say Sanders versus Trump.

[B]

No, no, no, no, no. Let's. Okay, let's. I'll give you a choice. It's Rubio versus Clinton.

[A]

Clinton.

[D]

I actually.

[C]

That's fast.

[D]

Okay, wait. So the more likely Trump. Well, I think you're going to answer Clinton versus Trump too.

[B]

Is there any Republican. Okay, solve for X. Is there any experts? X versus Clinton. You wouldn't say Clinton given what I.

[A]

Know today, there was no X.

[B]

Excellent. Okay. Slate Money is sponsored by Mileiq, which is a free app you can download for your Android phone, your iPhone. It has incredibly high ratings on the itunes store, just as we should for Slate Money come rate us. The Mileiq app is probably even more useful than Slate Money when it comes to making you money. What you do is you just install it on your phone and forget about it, and then money automatically appears. It's almost as simple as that. The trick is that you're driving, and a lot of the time you're driving, you're driving for business. And when you're driving for business, you get to reclaim those miles on your tax returns and often from your employer. And most people don't bother or it's a pain in the ass or generally they forget about it. With Miloq, you don't forget about it. It's just there. You press a button and the average MileIQ user logs $547 a month in drives. That's over $6,000 a year in miles you could be claiming. So download the Mileiq app for free, start your free trial, and if you text sleepd money to 31996 to start your fortydrive free trial, then you'll get 20% off annual plan. So that's the smart way to do it. Don't just go to the store. Text slate money to 31996. And if you sign up for an annual plan, you only pay 80% of the price that everyone else pays. That's smart. Text late money to 31996. And now, finally, we're going to end with some numbers.

[C]

I want to go first because I'm really worried.

[B]

She's worried that someone else has this.

[D]

Number I feel like Kathy and I, there's a strong chance she and I have the same.

[C]

Well, it's probably not phrased in the same way, so we can get away with it. 30%. That is the loss of value in Deutsche Bank's cocoa bonds.

[B]

Ah, the tier one capital cuckoo for cocoa bonds.

[C]

So $103 billion worth of cocoa bonds have been issued since 2013. And I guess I would call them a failed experiment in financial.

[B]

I would say they were a huge success. I think they've done exactly what they.

[A]

Were meant to do, at least up.

[D]

Until like this week when everyone freaked out.

[B]

But this is. I mean, okay, so Mohammed's here and he's really the expert on this. But my feeling is that this is the whole point of these convertible bonds, is when things become. Yeah, they're bonds which behave a little bit more like equity when bank. When people start worrying about the solvency of banks. And so when people start worrying about the solvency of Deutsche bank, they go down in value. That's exactly what they're meant to.

[C]

The only reason that it might be a little bit less perfect than that explanation is that the very fact that they're going down in value is sort of triggering fear that Deutsche bank needs a bailout. I mean, in some sense it's precipitating problems, not just responding to problems.

[B]

Mohammed.

[A]

So I think they're behaving exactly like they're supposed to behave. First, they created a buffer protecting the senior. So you can start having the signal you just talked about, which is a very important signal, without completely putting the whole capital structure in play. So they're doing that. Secondly, there was a jump condition. And everybody who looked at that said, the one problem with these instruments is the minute you get near a cliff, because they convert immediately beyond a certain cliff. The minute you get near that cliff, you get near jump conditions, and then strange things start happening. That's exactly what happened. The thing that strikes me is that it's so controversial because these issues were detailed in the prospectus and I suspect quite a few investors didn't read the perspective close enough.

[C]

What? That never happens.

[A]

I think that's what the 30% tells you, is that people were surprised that these instruments behaved the way they did. And then you got the reflexivity. Everybody then starts reacting.

[B]

Okay, so, Jordan, was your number the same as Cassidy's?

[D]

No, it wasn't the same, actually. My number is fresh off of Twitter this morning.

[B]

BNP Paribas, another perfectly healthy European price.

[D]

My number is zero. Let me start there. And that's the number of rate hikes that BNP Paribas now thinks are going to happen in 2016 and 2017.

[C]

For the Fed.

[D]

For the Fed. And I bring this up because you may recall at the end of last year, I said I did not think the Federal Reserve would do get beyond 1% on its benchmark rate, which was essentially 3. Three rate hikes that would have gotten us there.

[C]

And I think, I think I said.

[D]

Yeah, you said less. BNP Paribas had the same guess that I did. They also said it was going to probably be three hikes. They're now revising that down. So now they side with Cathie, basically. Which also tells you that BNP Paribas thinks the world economy is in a. A state. Because I think we don't have any profanity on this episode yet.

[C]

So.

[B]

No, I already said Mohammed, the next Fed action, up or down.

[A]

If it happens. Up. But that could well do nothing. But if we get an actual change, it's more likely to be up than down.

[D]

Yeah, I feel like just sitting, sitting tight is likely.

[C]

I like, I think Mohammed should be here for every episode.

[B]

So you can you just climb every week.

[A]

I have my number. I have a number.

[B]

What's your number?

[A]

So when, when Kathy's at 30%, I thought, oh, she took my number.

[C]

That would have been exciting.

[A]

So my number is 30% too. Nice. And it is the amount of global government debt trading at negative nominal interest rates. Wow. 30% of global government debt is in a situation where the lenders are paying the borrowers.

[D]

That's like.

[C]

And people thought it would never happen.

[D]

Right.

[C]

Now it's happening.

[B]

Okay. So now I'm embarrassed because that's. That was my number.

[A]

Yeah.

[D]

Can we continue?

[B]

Although I didn't have 30%, I had 6 trillion. But that's exactly the same. It's $6 trillion of debt has negative yields.

[D]

So who does? Because this is basically the list of countries that the markets think will survive if everything else goes to hell. Pretty much. These are the ultimate lifeboats. So who's made the list at this point? It's Germany. US is.

[B]

Well, the reason why it suddenly spiked from like 2 trillion to 6 trillion is Japan.

[D]

Yeah. They went to negative rates. So.

[C]

And they have just a shitload.

[B]

But no, Japan is now negative all the way out to 10 years.

[D]

Oh, wow.

[B]

Which is insane. Yeah, especially. I mean. And by the way, you know, for all of the Republicans out there who complain about how, you know, the cost of borrowing is insane when you have too much Debt. You know, no country has more debt than Japan. And they don't seem to be being punished by high interest rates. If anything, they're being punished by negative interest rates.

[D]

Yeah, seriously, that actually has implications for tax policy, too, that we'll have to get to another day. But anyway, I'll leave it at that.

[B]

Wow, that was intense and mildly depressing. But I feel like somehow we will get through this. I don't know whether I should be really scared or whether there's some kind of. Mohammed, can you just end us, please? On a sort of glimmer of optimism? What's the most hopeful thing you can say to us right now?

[A]

The thing that makes me most hopeful, and I see it every day in my daughter and her friends, is they are being enabled and empowered to do things that were unthinkable for me in terms of how they can alter their own productivity. I think we've underestimated. If I had come here six years ago and given you the following fact and made the following prediction, what would you have thought of me would have said to you, it's taken 100 years for the Hilton Corporation to make available 700,000 rooms to its clients around the world? Fact. Then I would have said, along will come a company with absolutely no co expertise in hotels, but they will be able to provide a million rooms in six years. Airbnb. This is how fast things change. This is how fast you can enable people to go for more rapid solution, give them more control over their life. And that thing excites me. It really does. So the positive thing is, don't underestimate what this combination of technological progress, people's empowerment, behavioral science is doing in terms of giving people more control over their destiny.

[B]

On which note, we will thank you very much for coming in. I co sign Kathy's request that you come back every week from here on in, even though you have a very nice life in California. And I can't quite understand why you would do that, but yes. Mohamed El Erian's new book is called the Only Game in Central Banks Instability and Avoiding the Next Collapse. It's available in all good bookstores. Thank you to Mohammed, thank you to Audrey Quinn, the producer of this week's show, and thank you to Steve Lichti and Andy Bowers, the executive producers of the Panoply Network, which can be [e-mail] Panoply we'll talk to you next week in maybe slightly less illustrious company on Slate. Hi, I'm Ezra Klein, editor in chief.

[A]

Of Vox.com and I've got a new podcast on the Panoply Network.

[B]

It is called the Ezra Klein show.

[A]

Which I'm never going to be able to say without feeling like a terrible, terrible narcissist, but it's long form, intimate, real conversations with newsmakers, with politicians, policymakers, journalists, business leaders, people who are influencing the world in fascinating and important ways. We talk about what they think, why they think it, what they believe. I've really enjoyed getting a chance to talk with these people, and I hope you enjoy it too.

[B]

You can find it wherever. Fine podcasts are given away for free over the Internet.