The US stock market has just endured its worst start to a year on record. The fear is that America may be close to recession, with baleful consequences for the global economy — and, worse, that policymakers are out of ammo with which to respond.
What better moment could there be for a book subtitled “Central Banks, Instability, and Avoiding the Next Collapse”? And who better to write it than Mohamed El-Erian — the man who captured the essence of the present era of low growth, low inflation and low investment returns better than anyone else with his memorable concept of the “new normal”?
The first striking message in The Only Game in Town will therefore cause some alarm. It is that the new normal is soon to be no more.
El-Erian, chief economic adviser at Allianz and an FT contributing editor, believes it is a mistake to see the current state of the global economy as a modestly disappointing equilibrium — “sluggish, but relatively stable”, in the version he quotes from the Economist. In reality, we have been incubating an ugly brood of existential challenges: high unemployment and rising inequality; the decay of the system of global economic governance bequeathed by Bretton Woods; the disintegration of trust in national institutions and the growth of political insurgency; and a financial system that is more prone to liquidity illusion and less well anchored to economic reality than ever.
Forget the new normal; the correct metaphor for our immediate future, El-Erian warns, is a “T junction”. The road we are on is about to come to an abrupt end. Take the right turn, and the world can be on the way to inclusive growth and peace. Take the wrong one, and things will get considerably worse.
Having held out this stark prospect, El-Erian moves on to the first of his two main themes: the appropriate future role of central banks. The response to the crash of 2008, he argues, has relied disproportionately on monetary policy. Emergency lending, zero interest rates and quantitative easing have done the heavy lifting whilst fiscal policy and structural reform have stood idly by. Central banks have been the titular “Only Game in Town”.
The trouble is that monetary policy alone cannot solve the kinds of challenges haunting the new normal. It has bought time but cannot buy reform. It is now for politicians to take the lead; the central bankers have done all they can.
That is certainly an important message, and I hope it will be heeded. Yet to my mind it somewhat skirts the question actually obsessing the markets at the moment: are the unprecedented monetary experiments under way a stroke of genius or a terrible mistake?
Few would dispute that central bankers cannot cure the world’s problems on their own. But opinions differ widely — and the recent market action shows that the differences are becoming fraught — over what they should do from now on, and whether we are going to reap a harvest or a whirlwind from what they have done so far.
Yet El-Erian is coy on the future of monetary policy itself. Given his unparalleled experience of economics and investing in both the public and the private sectors, that is the reader’s loss.
Thankfully, he shows no such reticence when it comes to his second central theme: how to make policy of any sort in an unprecedentedly complex world. Today’s policymakers, he explains, are buffeted by a bewildering maelstrom of interacting forces: the decoupling of the developed and the emerging markets, divergent monetary policy, unpredictable politics, disruptive technological innovation, and more. How to predict their effects, and strategise accordingly? It seems an impossible task.
El-Erian proposes a radical solution. We must jettison, he says, conventional modes of analysis that focus on unique central predictions and accept instead that today’s unusually uncertain world follows no single likeliest path. In the ungainly language of probability theory, we must learn to navigate bimodal distributions. The imminent approach of the T-junction calls for new tools and techniques: above all, the cardinal virtues of “optionality, resilience, and agility” — in other words, the ancient arts of keeping all your options open for as long as possible, rolling with the punches and, if necessary, changing horses midstream. In a world where all is flux, says El-Erian, flexibility is all.
There is a great deal of wisdom in this take on our current predicament. It is refreshing to read a policy book with the confidence to say that it is pointless to dispense elevator-pitch solutions to epochal economic challenges. Yet I wonder if El-Erian the investor has not unduly eclipsed El-Erian the policymaker here. Flexibility, liquidity, free hands — these are indeed the master-virtues on the financial markets. Policy, and political leadership more generally, has a rather different logic. In the fog of policymaking — let alone of war — striving constantly to keep one’s options open can be counter-productive. What is often required instead is public commitment, as the prime means of convincing others to act in the face of uncertainty.
At the start of his final chapter, El-Erian cites Churchill as an apostle of agility: “Success is not final, failure is not fatal: it is the courage to continue that counts.” Yet at the moment of utmost crisis, it was the virtue of uncompromising commitment that Churchill extolled: “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.”
If the challenges the world faces as the new normal careers towards a T-junction are as daunting as El-Erian argues in this sobering book, I suspect we will need our policymakers to show the spirit of “never surrender” too.
Felix Martin is a fund manager at Liontrust Asset Management and author of ‘Money: The Unauthorised Biography’ (Vintage)
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, by Mohamed El-Erian, Random House, RRP$28, 320 pages
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