Mohamed El Erian (2:48)

So by dispersion, it means that while it's a common shock, everybody feels it the impact is very different depending on your initial conditions. So this sort of shock hits countries and hits households and companies with existing fragilities especially hard, and it will tend to make inequality worse.

Steph McGovern (3:13)

I mean, with this, obviously the UK is particularly hit when there's energy shocks, but when you're talking about this dispersion, where are we going to see it first? Who are we going to see it first with?

Mohamed El Erian (3:25)

So what you will see is three effects. First, energy prices go up and that tends to hit poor households particularly hard. Some are hit immediately high petrol prices. Others have a bit of a lag. Heating, depending on your heating source, will be a lag, but that's the first hit. The second hit is a more generalized increase in prices because energy is an input to many things and other supply chains are being disrupted. And then the third element, if it gets bad, is we will see higher unemployment. So a lot will depend on the duration of this war. And I want to stress, this notion that you can stop the war immediately and everything goes back to normal is ludicrous. It will take time to get things going normally again.

Steph McGovern (4:19)

Yeah. Which makes it really interesting, Mohamed, that investors seem to have taken so long to kind of really react to this. You know, do you think they've underestimated the risk of this unrest?

Mohamed El Erian (4:30)

I do, and there's a good reason why, is because last year we throw virtually everything you can think of at the global economy and markets and they proved resilient. So the investor playbook right now is that this is a temporary shock, it is quickly reversible, and we haven't seen the source of reaction that I expect will play out over time.

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Robert Peston (6:46)

Before we get back to the detail, can I just ask you a slightly broader question? It's one of the things that has sort of exercised me for actually almost decades now, which is why are markets so bad at pricing potential potentially catastrophic risk?

Mohamed El Erian (7:04)

Yeah. And this is the notion of fat tails. The reason why is because low probability high impact events are very difficult to price. They're just very, very difficult to price because the probability is low. You can hedge somewhat, but hedging becomes expensive. So what markets normally do is they wait for the event to happen. And you saw this in oil prices, Robert. It's been amazing. Just to give you a notion of the moves, we were below $70 a barrel. We spiked all the way to $120. We've come back below 80. We're now almost 90. This is craziness. But it shows you exactly what you say is that people react immediately and don't plan for these shocks.

Robert Peston (7:56)

I think oil is now above 90 and we've got this interesting. I mean we'll know the outcome of this by the time this is available to listen. But We've got this G7 meeting looks as though they are going to release quite a significant amount of oil from strategic reserves. But the thing that I'm intrigued by is we've got this price of over 90 now, as you say, after extraordinary, I mean, just eye watering volatility. But the price for delivery, delivery in December is still about, I don't know, $75 or so, which, you know, essentially suggests that, you know, investors do think there would be a relatively, I mean, that's still above where we started. You know, it's still about, I don't know, 15, 20% above where we start. But, you know, the price before the war, I mean, we're seeing so much disruption to the infrastructure in the and so much damage to the infrastructure in Middle East. Do you think it's realistic that the price will recover as quickly as that or fall as quickly as that?

Mohamed El Erian (9:05)

So if you look at different market prices, including what you just mentioned, the market attributes an 80% probability to the following scenario. The US will declare victory pretty soon, as President Trump said on Monday night. And it has every reason to declare victory because it, it didn't declare its objectives. So you can declare victory quite easily on that.

Steph McGovern (9:31)

Good point.

Mohamed El Erian (9:31)

The second assumption is that the declaration by the US Will convince both Iran and Israel to also stop the war. Assumption number two, Assumption number three is that there will be an immediate restart of oil production that has been shut down and that there'll be an immediate restart of shipping through the straits. That's the 80% scenario right now in markets. I would give it a 50% scenario, not an 80. First, it's not clear that the US can impose its will on Israel and on Iran. Second, this is an asymmetrical war. And the problem with asymmetrical wars is when you no longer have the top leadership and things have been delegated to commanders on the ground, it's very difficult to stop a war like that. And then thirdly, starting oil production is not like an on off button. It takes time. So I think the market is too optimistic right now on this. But again, I stress that it is the playbook that has worked really well for the whole of last year.

Steph McGovern (10:46)

Is it partly to do Mohamed, with this sense of what is being termed the tack or Trump always chickens out. And obviously we saw that with the big Liberation Day tariffs. And then he tends to react to markets and if they're not going the way he wants, he then starts to pull back. So is it a bit of that, do you think?

Mohamed El Erian (11:04)

Yeah, I mean, that is why the string of things that lead to a better outcome start with the US Declaring victory. As you know, Steph, affordability is the number one political issue in the U.S. people are pushing back against high prices. Now it's become the Republicans that own it. Before, it was a Democrat that own it and it helped President Trump win the election. Now the Republican own the affordability issues. There are midterm elections coming in November and the last thing this administration wants to see is higher energy prices that translate into higher inflation. So, yes, that's the view is that ultimately the markets will impose outcomes simply the same as they did last year with the Liberation Day. But remember, this is a much more complicated landscape.

Robert Peston (11:56)

If you look at the uk, we have a home energy pricing regime where the price is effectively set by the regulator every three months. Are we, in your view, getting to a position where, if the current inflated gas prices are sustained, it's likely that we'll have to see some government intervention, some government subsidies, to particularly protect those on lower incomes?

Mohamed El Erian (12:28)

In theory, you should see it, and we saw it after the last energy spike, which was in 2022. But the room for maneuver, the so called headroom, how much money the government has to spend is limited. So it will involve really difficult choices for the Chancellor as to how do you support lower income households who need support, but at the same time meet all the other requirements. And you've already seen, Robert, the bond market nervous. If you look at the move in borrowing costs, the move in the UK has been 50% more than the move in Europe and the move in the us. So the bond market is already on guard, if you like, as to the fiscal dynamics and the dynamics of the uk. So should it happen? Yes. Is it easy to do? No, it's not. There are going to be some really difficult choices that the government will have

Steph McGovern (13:29)

to make on top of this. I think the thing that's kind of worrying me the most at the moment with all of this is what's happening in the jobs market, because obviously we're starting to see unemployment, unemployment rise in the UK now. It's a problem in the US as well in terms of unemployment rising. That could put a lot of pressure on things like the welfare system here, obviously how much the government are then having to pay out for benefits and things. So it could come from several angles, this pressure on the fiscal headroom and everything else.

Mohamed El Erian (13:59)

Yes. And that's a second fragility. So the problem with shocks is that if they are of such scope and duration, they can expose fragilities and you get tipping points. And that's exactly what you just mentioned, Steph. It's a tipping point in employment. So the UK has several fragilities. One, we talked about limited fiscal headroom

Robert Peston (14:23)

space, too much debt.

Mohamed El Erian (14:24)

Too much debt. The second one you just mentioned, unemployment was heading the wrong way already. So you don't want to accelerate the increase in unemployment. The third fragility is we have low productivity, so the economy isn't dynamic enough to reallocate resources quickly to compensate for that. And the concern that you would have is that you expose these fragilities and then there's one that hardly anybody is talking about except the bank of England, which is financial fragilities. And it's not in the banking system. It is in what's called the shadow banking system, particularly something called private credit, where already we're starting to see stress and the last thing you want is finance, the tail to wag the economy, the dog. So tipping points are something you have to keep an eye on here.

Steph McGovern (15:16)

So can you just explain that, Mohammed, what you mean by private credit and that fragility there, what's going on?

Mohamed El Erian (15:21)

So about 10 to 15 years ago, finance, which is very good at finding market failures, finding where the markets don't work, discovered a whole host of companies that deserve to borrow. They had good business plans, but the banks coming out of the global financial crisis were hesitant to lend. And these companies were too small to access the big capital markets, the so called public markets. So a new market emerged called private credit. And in the beginning it fulfilled a very important requirement, which is to get money to companies that deserve to borrow can pay it off. But like anything else in finance, when it's profitable, it tends to overshoot. In the last few years we've seen very poor underwriting standards. We've seen too many people in this space, we have seen fraud, we have seen valuations that don't really reflect reality. And now these things are starting to get exposed. So the latest news is that one of the banks has decided that it will not lend to the private credit companies because it's worried that their valuations and their underwriting is not good enough. So suddenly something that was small outside the banking system has grown really big and could undermine an economy at a time when we are already facing other headwinds. And I say this because there is optimism, there is the potential of AI to improve productivity and growth. But we've got to get rid of all these headwinds that keep on slowing us down.

Robert Peston (17:07)

And just on AI, I mean obviously, as you say, there is this tremendous productivity opportunity, although there's also the potential for shocks from people losing their jobs. I mean, one of the things that was striking, we had sort of back to back two market jitters recently. One was the market jitters around private credit with Blue Owl telling its investors it couldn't get their money out. But almost exactly the same time we had Anthropic announcing its new co worker service, where that led to extraordinary neurosis and anxiety that a whole bunch of very big software companies, very famous software Companies like Salesforce, their share prices plummeted because it was thought that those sorts of very big businesses would be made redundant. So we are living. One of the things that I've been sort of thinking about a lot in the context of this war and the shock that that has caused. We are living through a period where there are a whole series of fragilities in the system.

Mohamed El Erian (18:21)

You're absolutely right. And you can add to that There's a small US payments company called Block that announced a 40% layoff, 40% of its labor force because of AI. AI is an amazing technology. Not only what's called a general purpose technology, think of electricity, it changes everything you do, but it is also, to quote a Google colleague that I've worked with, James Minneaka, it's an inventor of inventions. So it's a very dynamic element. And there's two ways to think about it. One is it's labor displacing, meaning it will basically de, industrialize if you like many, many sectors. The other side is labor enhancing. That if you retrain, you retool, you can actually do more, a lot more with existing or more people. And the easy thing to do, and you've seen this whenever a business reacts, is cost minimization. Let's lay off people. The harder thing to do, which pays off for the business and the country is the labor enhancing side.

Steph McGovern (19:33)

We talk a lot about AI on this show and about the kind of the potential wins, but also the pressures it could put on IT industry. So can I just come back to in this moment then? Because we, you know, while we're waiting for AI to do its thing, we've obviously got all of this fragility, as you say. Then we've got central banks trying to work out what to do. You know, they're already, particularly in the uk, wrestling with like sticky and flesh. And even before this conflict started, you know, Robert and I have talked on this podcast about when rates might come down a bit. Now that's been pushed, you know, further down the line and possibly if inflation becomes a bigger problem, they might have to go up. But what should they do now? Because there's a double edged sword here, isn't there, of what's going on domestically and the pressure of putting rates up could mean for people here compared to the problem of inflation.

Mohamed El Erian (20:25)

Yeah, and what I'm going to say people are not going to like, there's two types of central banks. There are what's called single mandate central banks. They have one objective that is the bank of England, that is the European Central Bank. It is inflation control. This price stability, inflation control. And you've seen the markets immediately change their view on what these central banks are going to do. In the case of the bank of England, before the conflict, the market expected the next move to be a rate cut. Now the market expects the next move to be a rate hike. So for those central banks, they're going to be under enormous pressure to raise interest rates. And very recently, Christine Lagarde, the president of the European Central bank, says we will not repeat the mistake of 2021. The mistake of 2021 is the central banks took the view that inflation was transitory, meaning it's temporary, it's reversible, don't worry about it. And it proved to be a real problem. So in my mind, there's no doubt as to how those two central banks will react if the conflict continues. They will raise rates, which will make the growth side even more difficult. The Federal Reserve in the US has a dual mandate. It has maximum employment and price stability. And there the market expects them to cut rates because they're so worried about the employment side.

Robert Peston (21:54)

But can I just ask, do you think there is a risk that both the ECB and the bank of England will end up, in a sense, fighting the last war? Because if there is the kind of economic shock which leads to a significantly lower growth, that will turn out to be disinflationary and all the banks would be doing if they do put up interest rates is reinforcing a slowdown that will lead to higher unemployment. Obviously these are incredibly difficult judgments. I'm not saying essentially it's an easy job at the moment to be on the Monetary Policy Committee and decide whether to hold, raise or, or cut. But I am slightly anxious that in what Christine Lagarde said, there's just an element of, as I say, fighting the wrong war, the last war, and that this will turn out. I mean, both the European and the UK economies are pretty soft at the moment.

Mohamed El Erian (22:53)

When you have a shock like this one, and this is a stagflationary shock. Stagflation. Stag means lower growth. Inflation means higher inflation. The inflation hits you first and then the stackpot hits you second. So if you are completely rational and have perfect foresight, you would wait, you wouldn't raise interest rates because you would know that the second leg of this shock is going to be lower growth, lower activity, and therefore lower price pressure. But there's a very important behavioral aspect here, which is while you don't want to fight the last war. You certainly don't want to repeat the last mistake. The mistakes that central banks made in 2021, 2022 was a really big mistake. Therefore, from a behavioral perspective, I suspect that they will be told, you know what, maybe Robert is right, maybe ultimately it will be lower growth and the price pressures will be off. What if he's wrong? Do I really want to repeat the same mistake? And it is the same central bankers, if you look at who heads the ecb, who heads the bank of England, who heads the Federal Reserve, it's the same ones as 2021, 2022.

Steph McGovern (24:09)

So would the mistake be to not

Mohamed El Erian (24:11)

do anything the single mandate? Central banks are going to have to be dictated by the single mandate. And it's the government that's going to have to do the hard work here. And in a perfect world, the UK government would accelerate what you've heard me say over and over again, which is its growth strategy. We've had a lot of talk about growth, but the actual strategy, the implementation of the strategy has been partial and slow. And you hear the desire to do more and more quickly. But the reality is that every economic event in this country has now become simply a fiscal event. And it's all become about adding up the numbers on the fiscal side, rather than taking a much broader perspective about economic growth. Because without economic growth, fiscal issues will simply get worse over time.

Robert Peston (25:08)

For a government that is committed to growth, they put an awful lot of grit in the wheel. You know, whether it was putting up employers, national insurance, whether it was increasing, you know, obviously there are perfectly good reasons to increase workers rights, but there are quite a lot of people, you know, on every side of politics who just thought maybe that could have been delayed two or three years until the economy was growing a bit, a bit, a bit faster. So there's been a lot of grit in the wheel, but they've done all that. What can they do now to accelerate growth in a timely way that doesn't cost the kind of money which markets are currently lenders to the UK are currently saying to them, do not borrow significantly more. So what can they do to accelerate growth that is not, in the short term going to lead to higher debt?

Mohamed El Erian (26:08)

The irony for the UK is it does really well on exciting startup activities and then they all have to migrate elsewhere in order to scale up.

Steph McGovern (26:18)

Yeah,

Mohamed El Erian (26:21)

you need a holistic approach to growth. You need to have a better approach to innovation, a better approach to scaling up of activities that really move the needle, which we don't have right now. You Also need to be.

Robert Peston (26:35)

But we talk about that a lot on the podcast. Mohamed, we do talk a lot about this and we agree with you totally. But that's not going to move the growth rate up over the next six months to a year. I mean, we need to do it. But that is a two, three year project.

Mohamed El Erian (26:47)

It is, and I always hear it's a two, three year project. So let's not do it now and then in two, three years. I hear. I wish we had done it two, three years ago.

Steph McGovern (26:57)

So true.

Mohamed El Erian (26:58)

You know, it's the whole thing of you got to walk and chew gum at the same time. And that's why the word strategy is really important. You know, I'm a great believer that you have that biases in any system. The UK has a very strong treasury bias, which is make the numbers add up on the fiscal side. And you literally need structure to do a heavy lifting. You need a growth czar. You need someone there to say, but what about growth? What about growth in every economic meeting? Otherwise you will go back to your comfort zone, which is let's make the fiscal numbers add up. There's a number of other areas. Consistency is really important. Don't underestimate what inconsistency in economic policy does to foreign investment. They just wait. They just want to know what is the consistent approach that the authorities are taking. And unfortunately the UK has been forced or has decided on a number of U turns that comes across as inconsistent to the rest of the world.

Steph McGovern (27:57)

Yeah. And it's that issue of uncertainty we always talk about which just completely kills off investment. And whether it's people wanting to invest into the country or just business invest in themselves, they're just, everyone is just, just waiting to hear what happens next. Which is such a huge problem, isn't it? And you know, it's a disease in growth. There's uncertainty.

Mohamed El Erian (28:18)

It really is. I mean, you basically sideline things that can help you enormously.

Robert Peston (28:23)

Mohammed, there's a load more we need to discuss with you. But first we're gonna go to a quick break.

Steph McGovern (28:30)

This episode is brought to you by Hargreaves Lansdowne. Now, if the last four decades have shown us anything, it's that change, Kate, keeps coming. There have been so many huge economic events that have shaped our thinking today. Back in the 80s, we had Margaret Thatcher's deregulation of the stock markets. Then there was the dot com bubble of the 90s, followed by the credit crunch of the noughties and the pandemic in the decade after that. Plus lots of other significant developments too. For over 40 years, though, Hargreaves Lansdowne has helped Britain invest through it all confidently. Whatever is going on in the world, join over 2 million Brits using the UK's number one investment and savings platform. Learn more at hl.co.uk investment returns vary. For claim verification, visit hl.co.uk platform Disney

Robert Peston (29:26)

plus wants to know are you ready for Marvel Studios Thunderbolt the New Avengers, now streaming on Disney plus.

Mohamed El Erian (29:34)

Let's do this.

Robert Peston (29:35)

One of the best Marvel movies of all time is now streaming on Disney plus.

Mohamed El Erian (29:39)

Hey, you weren't listening to me.

Robert Peston (29:41)

I said Thunderbolts, the New Avengers is

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now streaming on Disney plus. Meet the new Avengers.

Steph McGovern (29:49)

That's cool, man.

Robert Peston (29:50)

Marvel Studios Thunderbolts the New Avengers, rated PG 13, now streaming on. You guessed it, Disney. I mean, the other lesson I'm afraid of this war is how weak and under resourced defense is. Our military is. I mean, we had this sort of, I mean, you know, it was almost comic, right? We have now got one destroyer sailing to the Middle East. You know, President Macron gets to Cyprus before our prime minister. You know, there's a French aircraft carrier there. There are, I think, I can't remember if it's five or six destroyers, French destroyers there. It was almost as though he wanted to sort of ridicule the UK in those circumstances. But against that, against that backdrop, there is no question that we are going to have to accelerate our defense spending. The world is just a more dangerous place. And I guess again, paying for that

Mohamed El Erian (30:55)

is

Robert Peston (30:57)

a big issue if they accelerate. Because we are talking about, you know, over the next 10 years, you know, we are talking about the requirement to find something over 40 billion additional, you know, you know, an additional 40 billion pounds, which is, I think, pretty much comparable to the entire school's budget. So it's a lot of money. I saw the other day from a bloke called Nick Lyons who used to be Lord Mayor, this idea and somebody who knows about bond markets. I just wondered if you thought this was a runner. He said that the government should fund this to an extent with additional borrowing. But the way to do it that doesn't spook investors is to raise considerably more money from the retail market, from British people. And he basically has come up with this idea of effectively war bonds. And if you bought these war bonds, they would not incur inheritance tax when you die. And he thinks that would generate really quite a lot of money. So I just wondered that sort of, sort of creates accounting. Does it make is that sort of thing a good idea?

Mohamed El Erian (32:06)

Yeah. And Gordon Brown has an even better idea, which is let's acknowledge that this is a Europe wide issue. All European countries are going to increase defense. We can have a Europe common bond. And if you look at the sources of funding, the big tragedy for Europe, including the uk, is that its funding, including its pension funds, they go invest elsewhere, they go invest in the us so it's not that there isn't the private funding, it is that something breaks down in connecting the private funding to genuine and productive uses. So there's several ways to approach this if you want to do it, but it requires again, consistencies, explanation, communication. And in a perfect world you'd say, here are all these countries facing exactly the same problem and if we solve it collectively, it's better. There's something in economics called game theory. And what game theory forces you to do is to identify strategies that work and strategies that don't work. And there are certain games, and I'm sorry for the word, but that's how it's used, certain situations where it only solves cooperatively. Defense is one of these things. If you do it cooperatively with your allies, you get a lot more bang for your buck. And what game theory tells you is if you try to solve the cooperative game uncooperatively, which is what we're trying to do now, it will fail.

Steph McGovern (33:54)

Is this one of those arguments again for us not leaving the EU and the fact we should have stuck with

Mohamed El Erian (33:59)

them from an economic and financial side, you should never eliminate something if you don't know what you're going to replace it with. Because the lesson you get is you cannot replace something with nothing. And I think the tragedy of the UK is that it was very keen to dismantle something in order to regain control. And I understand that, I really understand how powerful that notion is. But you need to know what are you going to put in place instead of it? Especially when you are dismantling a major economic and financial relationship. So where they are, Britain should have done Brexit or not? That's up to the British people. But there should have been a plan for what happens if we decide to exit the eu.

Robert Peston (34:46)

Can I just ask, politically, do you think it's actually realistic that even if we were in the EU, I wonder whether Britain, with its 100% debt to national income, debt to GDP ratio, are the Germans really going to allow us to leverage their balance sheet, basically borrow money to fund our defense?

Mohamed El Erian (35:07)

Is that really going to happen on defense? It's more likely to happen than on something else. Let me tell you my experience. I spent 15 years at the International Monetary Fund, which has 188 members, and there were a few people representative of governments that you absolutely had to get on board if you wanted anything done. Of course you would expect the us, but the UK was there. The UK has always punched above its weight internationally.

Robert Peston (35:35)

Is that still true, Mohamed? Is it still true? Do we still punch above our weight?

Mohamed El Erian (35:38)

It's less true and that's a concern. It is less true. And you just cited the latest illustration of that that the whole world got to see. Unfortunately, it is less true, but it's not permanent. It can be reversed. But the UK has to decide what world does it would like to play. When it was part of the eu, it played a very important role both within the EU and for the EU relative to the us, China and Russia.

Steph McGovern (36:07)

With inflation, I just want to throw a scenario at you. Let's say the bank of England decides to increase rates because they're worried about inflation because of everything going on with this conflict. So then mortgage costs go up, rents will probably go up because of it. You know, cost of borrowing for business is all going up and people spend less. That's the theory, but people are spending less. But at the same time, oil, energy, all of those costs are still a huge problem and our inflation doesn't come down, then what happens?

Mohamed El Erian (36:43)

And that's the risk. Right. And economists will tell you what's a counterfactual. Right? So what are you worried about? The thing you're worried about is what we saw in the 70s is that costs go up. And then, and all of us go to our employer and say, wait a minute, I want to protect my real wage. It was called real wage resistance. And not only that, but I no longer trust the bank of England. So I want my wage increase to cover not just past inflation, but future expected inflation. And then you get the opposite. So those are the judgments that the central banks have to make. But if you have a single mandate, central bank, if you have a single objective, and if you're the bank of England governor and you have to write a letter explaining why it is you don't meet that objective, you will end up raising interest rates. If you think this inflation shock is of a long duration one, but surely

Steph McGovern (37:43)

if the majority of it is made up from the cost of energy and oil and everything that is not domestic, that's controlled internationally, no matter what you do with rates, you're not going to be able to Bring down inflation. If it's a price that is being built on what's going on abroad, what

Mohamed El Erian (38:01)

you're not going to be able to bring down is the first price shock. But what you're hoping to minimize is what happens next. You don't want it to spread throughout the economy. Forget the bank of England. I'll give you a simple example. In the United States last April, when tariffs went up, businesses had to make a decision. Do they pass on the price to their consumers? So turning a tariff increase into an inflation process and risk alienating their consumers, or instead do they take it on their profit margins? And the decision of most companies initially was we're going to take it on a profit margin to see whether the shock persists. And now you're starting to see companies raise prices and pass it on to the consumer. So these effects vary over time. But I want to stress it's not as if the bank of England has much choice. It's going to be expected to raise rates and if it doesn't raise rates, the markets will punish it.

Steph McGovern (39:09)

And either way, it's going to be terrible for people like normal people. In the short term, I'm really worried,

Mohamed El Erian (39:13)

and I'm worried in particular about low income households, because this shock, the three elements of it, will hit disproportionately hard. Low income households.

Robert Peston (39:26)

Yeah, you're absolutely right. And it is a big problem. There was just one other aspect of this I wouldn't mind exploring with you. We talked a bit about the Liberation day, widespread tariff increases imposed by Trump and then the initial shock to the market. And in that initial shock to the market, one of the things that was striking was despite the global uncertainty, the dollar and dollar assets actually fell. Normally, at a time of global uncertainty, investors buy dollars. It's part of this privilege, the exorbitant privilege of the US that investors in both sunshine and rain tend to favor the dollar and dollar assets. So it was quite striking that against almost all recent precedent, the dollar fell and dollar assets fell. Now, in this crisis, it's been quite interesting to see the dollar strengthening quite significantly at a time when other assets are falling. Is that simply because it is basically oil and gas self sufficient, or was that idea that Trump is undermining confidence in America and the dollar, has that gone away?

Mohamed El Erian (40:52)

So I don't think the concern is gone. And what I point to is the move in the dollar was much less than what you would have expected otherwise. There's a dollar index that captures its value relative to many other currencies. It's called the DXY. It moved from just under 97 to 99. That's not a big move at all. What's different this time around is that the bond market has behaved better in the US Than it has in the UK for example. And that reflects what you were saying, Robert, which is the notion that the US Is the cleanest dirty shirt. It is impacted, but you know what, what a phrase.

Steph McGovern (41:35)

I like that.

Mohamed El Erian (41:37)

And it comes from this notion that a lot of the time markets solve in relative space, not absolute space. So they compare different jurisdictions. And the US Is self sufficient in energy, has a more dynamic economy. And therefore, while it's going to get dirty, to be clear, it's going to get dirty from this higher inflation, it will be the cleanest dirty shirt compared to other countries.

Steph McGovern (42:03)

We've talked on this podcast before about the fact that a lot of the safe assets are dollar backed. And that's part of the reason why the dollar manages to stay strong in all of this. But we were talking, I think it was about this time last year about how is that going to change? Because people are. Because at the minute it feels like Trump can do anything and he'll kind of be all right. I know, okay, we' midterms coming up and he might lose them. If people feel like their lives are a lot worse. But from a dollar perspective, because of the fact, as you say, it's the cleanest dirty shirt, that kind of saves him a bit. But could we see that change? Like, does there need to be it not be all about the dollar anymore? And are we seeing any more signs of that? Because it felt like last year we were a little bit.

Mohamed El Erian (42:51)

So in my conversations with a lot of people around the world, there is still the recognition, as in last year, that they are, quote, overweight the dollar. There's still the recognition that they would like to reduce it. And there's still the dilemma of there is no single currency that can replace the dollar. So it's a very gradual process. You go into many things, including gold, but then when the gold price goes zooming up to 5,000, you slow it down a bit. So the US has a much longer Runway to misbehave than other countries because there's no other Runway. There's because countries can't go elsewhere immediately. It's very dissimilar to what happened to the UK when it lost its status as a reserve currency. The US Was ready to step in here. There was nobody ready to step in. So it takes time, Steph. It takes time. For all this diversification to take hold,

Robert Peston (43:51)

I'm struck that although we had this huge surge in the price of gold before the war. War, actually the price of gold has gone almost nowhere since the war started. It rose a bit and then fell. And the other bit of it that I think is quite interesting, the sort of bulls, the fans of crypto kept saying, it's a store of value. Well, quite interesting that actually, again, there was actually quite a sharp seller right at the start of the war, the price of bitcoin fell very sharply. So the idea that it's a store of value in uncertain times is just rubbish, isn't it?

Mohamed El Erian (44:26)

Yeah, I mean, bitco a lot to prove to become a safe haven asset, because it hasn't behaved like one, as you said. And bitcoin had a lot of speculators, so when you start shaking speculators out, they shake each other out as well. Gold is an interesting one. It had moved a lot, so we got to 5,000 really quickly and we've stuck around 5,000. We haven't sold off in a meaningful way. So relative to other safe haven assets, it has behaved better than other safe haven assets. But like you, I would have thought it would have gone higher.

Robert Peston (45:06)

I mean, so the other. I think if you just look at the big economies in the world, China, you know, before the outbreak of war, downgraded its growth prospects. There's still quite a lot of debt overhang in China. They are massively dependent on oil and gas coming out of the Straits of Hormuz, which obviously that tap has been turned off. Two questions, really. Is this going to be very damaging for the Chinese economy? And how will China attempt to influence events in your view?

Mohamed El Erian (45:39)

So, first, China is losing its second supplier of discounted oil. It lost Venezuela, and now it's losing Iran. And. And it only has one source of discounted oil left, which is Russia. So it's now lost two out of three sources. And that's not good news because, as you say, they're highly dependent. Now. They had built up a lot of strategic reserves, so it's not an immediate shock, but it is in the context of lower growth. The only thing going well for China, which is a problem mainly for Europe, is its exports. We just got the numbers for January, February and yet another record surplus. And just to show you how much they're doing, the market expectation was that their exports would grow by 7%, the export grew by over 20%, and that's at a when the exports to the US are falling. And at some point Europe is going to say, enough. We can't absorb all that. As to what is its role in this, it has been surprisingly quiet. People expected it to say something. After all, it is a major. Iran was a major Chinese ally. It's been extremely quiet and there's a lot of speculation as why it has been so quiet. I'm not a specialist to say it, but I can tell you on the economic front, they're not going to be able to repeat, month after month, grow by dumping the exports into Europe. At some point, Europe is going to say, enough. We can't take this anymore.

Robert Peston (47:18)

And I suppose some of it may be related to the relationship that it wants to maintain with other Gulf and Middle Eastern countries, but just on them, how much damage has been done to their attempt to diversify away from total reliance on energy. Obviously, they're going to struggle to get the taps back on, but they were supposed to be basically a safe haven for tax exercises. They were trying to basically attract both talent and capital. They've been hugely damaged by this, haven't they?

Mohamed El Erian (47:51)

Yeah, a lot depends what happens to Iran. I mean, there's two scenarios. One is that Iran was a threat and Iran will come out of this weakened and will no longer be a threat. And therefore those countries, especially the uae, Bahrain, can really position themselves even more as what they've positioned. And I think that's the central view and that's the most likely view. The other view is Iran fragments. People forget that the Persians are only 60% of the Iranian population. And if you're not careful, you could have domestic fragmentation of Iran that is problematic for the neighborhood. Again, these are issues that we're gonna see play out out. It's a very uncertain time for the whole neighborhood right now, and we're going

Steph McGovern (48:44)

to need you to come back quite regularly just to talk us through it. Or Mohammed, if you don't mind.

Mohamed El Erian (48:49)

I love the conversation with you. Thank you for having me. Always.

Robert Peston (48:52)

Before we go, I just need to say one thing. You raised the need for the prime minister to appoint a growth czar. I'm sure he's listening to this podcast. So if you're listening, I vote for Mohammed as your growth star Prime Minister.

Steph McGovern (49:09)

Seconded.

Mohamed El Erian (49:10)

You're very kind. I just think it's really important to let structure do the heavy lifting. This issue has came up with employment a long time ago. The biases in a system are so deep that unless you look for a way structurally to fight it, you will go back to doing exactly what you've been doing. And you will not evolve. And that's true for businesses as well.

Steph McGovern (49:33)

Yeah, it's so true. We need growth and that needs to be the priority. Mohamed, thank you very much for your time as ever. We will see you again soon when we can collar you. But thank you very much. And that's it from us on the rest is money. Bye bye.

Robert Peston (49:45)

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