Call Me Back - with Dan Senor - The Economy in 2023 -- with Mohamed El-Erian

Episode Date: January 16, 2023

Is there any precedent for combating inflation that doesn’t end in recession or depression? This is one of many questions we have for Dr. Mohamed El-Erian as we look ahead to 2023. What should we expect this year in the markets and the economy? Mohamed El-Erian is President of Queens' College at Cambridge University. He serves as part-time Chief Economic Advisor at Allianz and Chair of Gramercy Fund Management. He’s a Professor at The Wharton School, he is a Financial Times contributing editor, Bloomberg Opinion columnist, and the author of two New York Times best sellers. He serves on the board of the National Bureau of Economic Research, and of Barclays and Under Armour. From 2007-2014, Mohammed was CEO/co-CIO of PIMCO and was chair of President Obama's Global Development Council. He also served two years as president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment. He has been chair of the Microsoft Investment Advisory Board since 2007. Essay discussed in this episode: "Not Just Another Recession: Why the Global Economy May Never Be the Same" https://www.foreignaffairs.com/world/not-just-another-recession-global-economy

We should always focus on any financial accident to make sure it's not systemic. We cannot dismiss financial accidents. We made the mistake of dismissing certain mortgages as being very small in 2005, 2006, and 2007, and they ended up being systemic. So we can't simply dismiss a financial accident. If a financial accident happens, we've got to understand what the consequences are. Think of it, if you're on a freeway and the first part of the financial accident is simply two cars in a fender bender,

but they stay in the middle of the road, you can't just dismiss this. You've got to get them off the road quickly because then you're going to have a pileup if you're not careful. But I do think the focus on crypto is important beyond that. Is there any precedent for combating inflation that doesn't end in recession or depression? That's one of the many questions we have for Dr. Mohamed El-Aryan as we look ahead to 2023 in markets and the economy. We're already off to somewhat of a roaring start. Mohamed is president of Queens College at Cambridge University. He serves as part-time chief economic advisor at Allianz and chair of Gramercy Fund Management.

He's a professor at the Wharton School. He's a Financial Times contributing editor, a Bloomberg Opinion columnist, and the author of two New York Times bestsellers. He serves on the boards of the National Bureau of Economic Research and Barclays and Under Armour. From 2007 to 2014, Muhammad was CEO and co-CIO of PIMCO. And around that time, he was also chair of President Obama's Global Development Council.

He also served for two years as president and CEO of the Harvard Management Company. That's the entity that manages Harvard's massive endowment. And he's been chair of the Microsoft Investment Advisory Board since 2007. Also, one show note, we have a question today. We had to select one from a few for Mohamed Al-Aryan that folks called in. Next guest for the next episode will be Mike Gallagher, Congressman Mike Gallagher from Wisconsin. If you have questions for Mike Gallagher, Congressman Mike Gallagher from Wisconsin. If you have questions for Congressman Gallagher, please record the question and send it as a voice memo to dan at unlocked.fm. That's dan at unlocked.fm.

And we just ask that you keep your question to under 30 seconds. But now on to today's guest, Mohamed Al-Aryan, on what to expect in 2023. This is Call Me Back. And I'm pleased to welcome back to this podcast my longtime friend, Mohamed Al-Aryan. Mohamed, thanks for joining us. Thanks for having me. It's good to be with you talking about the macro economy rather than to be with you at a New York Jets game as I was a few weeks ago, which was really at the peak moment of Jets disillusionment soon after everything went to hell. But we'll talk about that at the end. All right. Okay. Although just the memory of that game is devastating me already don't don't

don't don't don't i'm sorry i didn't mean to i didn't mean to to get us off onto a down note i wanted to get onto an up note i mean the economy is the markets are booming we're headed into 2023 with tremendous excitement uh maybe maybe maybe things aren't going to be so bad in 2023, so you're going to give us some badly needed perspective. And so I'll start with the Labor Department's recent report that inflation fell in December for the sixth consecutive month at an annual rate. If the Federal Reserve keeps this up, we might be on a path to escaping the worst inflation in four decades. How do you feel? Do you feel like the Fed strategy is working? Is it not enough? What's going on? I've been a big critic of the Fed because they

mischaracterized inflation to begin with. I'm calling it transitory. It turns out that it stayed high and persistent. And then they didn't move fast enough. But somehow they got religion and delivered a series of 75 basis points, 0.75% hikes that were historic in how quickly they moved. And I think that they are catching up. Having said that, it's going to come at a cost. So we will see inflation continue to come down. The last reading was 6.5%. I suspect we're going down to about 4%.

And then a couple of things are likely to happen. And when you say that, Mohamed, when you say we'll go down from 6% to about 4%, and I know it's hard to be precise in these time projections, timing is always difficult, but in what time horizon are you imagining? By the second half of this year. And then we got to keep an eye on two things. One is, is the 4% part of the journey or is it a destination? Is it part of a journey to 2% where the Fed says it wants to go? Or is it a destination, which is a sticky 4%. And then the second issue is going to be what is the cost in terms of growth and in terms of unemployment. So these are the two things we've got to keep an eye on. But inflation is coming down mainly because energy prices have come down, food prices have come down, and the supply chains have been re-established. That's the good news. The less good news is that inflation has migrated to the service sector,

which is less sensitive to Fed policy actions. So just to put this in context for our listeners, the pace of growth in the money supply has fallen sharply. The Fed funds rate target rate has risen from near zero, which it basically was more or less since the global financial crisis minus some modest experimentation at raising the rate twice by Bernanke and Powell. But both of those were dialed back. So we've gone from near zero to 4.25 to 4.5 percent, and the Fed continues to shrink the size of the balance sheet. You mentioned energy prices. So the monthly price decline, according to experts, was driven by falling energy prices, some owing to slow demand in oil and natural gas from a surprisingly warm winter in Europe and China's slow emergence from COVID lockdowns. And I guess what I'm wondering, Mohamed, is could energy prices rise again and throw this whole, you know, march back from high inflation, as I said, the highest inflation for decades, and throw this early

seeming success off course? Yeah. So if you look at what are the threats to inflation coming back and not going down all the way to 4% and staying there, one is clearly energy. And the biggest risk to energy is not just the supply side issues, but the demand side, that the China reopening proves less chaotic. I don't think it will. I think the China reopening from zero COVID will continue to prove chaotic, but that's a risk. The second risk to low inflation is wages. We have different indicators of what's happening on the wage front. Some indicators suggest that wages are continuing to go up. Some indicators suggest that wages are moderating. We will get a better feel in the next two weeks when we get the employment cost index, which most economists

regard as the most comprehensive. But keep an eye on wages, because if inflation has migrated to the wage sector, it makes it even harder for the Fed to bring it down to 2%. And do you, I mean, this is on the one hand like an obvious question, but it's not. Is there any precedent for successfully combating inflation by the Fed in any of the Western democracies that doesn't end in a serious recession or even a depression? Not when you start with inflation so high and the unemployment rate so low. If you look at our history, whenever we've had the combination that we had at the beginning of this year, we end up in a recession. Can we avoid it? I like the sort of more positive side to that question.

Can we avoid it? Yes. It takes one thing, higher labor force participation. It takes more people coming back into the labor force. Notice I said coming back, not just coming into, but coming back into the labor force. Notice I said coming back, not just coming into, but coming back into the labor force. We need to get back to the labor force participations we had a few years ago.

If that were to happen, then we could avoid a recession. But most economists expect that a recession is likely, and then they also immediately add that we shouldn't worry because it will be, quote, short and shallow. I worry that if we do end up in a recession, we don't have enough evidence to suggest it will be short and shallow. We should have an open mind. But that's the consensus, that we will fall into recession and it will prove short and shallow. But you had this piece in Foreign Affairs magazine late last year where, among other things, you talked about this structural change we're living through right now as it relates to labor force participation, that basically the supply side, and I guess the demand side too, for labor

force participation, for workers choosing to participate in the labor force, is going down. And that may be a long-term trend, not just something that we experienced as a result of the pandemic, the pandemic's over, and now we're going to go to pre-pandemic labor force participation levels, that it's on the decline. It's going to be on the decline for as far as the eye can see. And that's the new reality. And we don't have real policies to deal with that. So it's broader than that. The new reality is that we are in a world where the supply side is the problem, not the demand side. Coming out of the global financial crisis, it was all about the demand side.

The economists have this awful phrase, insufficient aggregate demand. There simply isn't enough demand in the system. We've now shifted to a world where there isn't enough supply. One is labor supply. And we've talked about labor force participation and skill mismatch. We still have vacancies that are 1.7 times the unemployment rate. Historically, that number's 1.2. So there's something on the supply side that is not responding in the labor market. But there are three other areas. Energy. We are in the midst of an

energy transition. We're moving away from fossil fuel, but we're not sure what the new energy configuration is going to look like. So most people expect that that energy transition will be inflationary from the supply side. We have companies who have learned the lesson of the pandemic, which is that you should never sacrifice resilience for efficiency, and that are looking for more resilient supply chains. They are rewiring their supply chains. That is also problematic for the supply side. It's good at long term, but over the next four or five years, it means that supply will be more of a binding constraint. And finally, you have geopolitics. When you hear phrases like nearshore, friendshore, because we've recognized that our relationships

with some key suppliers are likely to stay tense for a while, that also means that the supply side is going to go through a significant transformation. So put all these things together, labor, energy, companies, and geopolitics, and what you get for the next few years is a global economy that is constrained by the supply side. And that's a fundamental issue that I don't think we're paying enough attention to, especially on the policy side. So if you're projecting that we're going through a long-term restructuring, again, not just in the labor side,

as you point out all the, and you did in your foreign affairs piece as well, and all the restructuring of supply chains and how we think about supply chains and onshoring and friendshoring, that that has this semi-permanent, as long as we can project permanence, semi-permanent inflationary pressure. So why, if you're right, why are the markets reacting the way they're reacting to the onset of this new year? Because there's tremendous exuberance as we've seen and everything from equities

to crypto to everything, it's jarring. What are the markets seeing that you're not or vice versa? So I think the markets are embracing recent data, which they feel is not only favorable, which it has been, but they also can extrapolate it. And there's three elements to that. And then there's a seasonality element. Element number one is the growth side. The excitement about China reopening at a much faster rate than anybody expected. The excitement that the summer in Europe has been warmer, and therefore the energy

constraint to growth in Europe is less binding. And in the US, the service sector and the labor market have proven to be incredibly resilient. So first, the markets are embracing a better growth outcome and translating it into a better growth outlook. Then there's the inflation side. Inflation is coming down and the marketplace sees inflation continuing to go to the Fed's 2% target, which leads to the third thing that the market is excited about, which is that the Fed will not be as hawkish as it says. The Fed has been crystal clear, one speaker after the other has said interest rates are going to 5% or above, and they're going to stay there all year. Look at the market pricing, and the market says, hell no, the Fed're going to stay there all year. Look at the market pricing and the market says, hell no.

The Fed is going to be lowering interest rates in the second half of the year. So it's a growth, inflation and policy development that the market is extrapolating forward in a very favorable manner. And then, as you know, but before, before you get, can I just, so, but so you're, you're basically saying Powell is saying X and the markets are saying, no, no, no, no, it's going to be X minus. Like it'll, it'll be some version of X. It just won't be as severe as Powell is signaling. And by the way, Powell isn't exactly signaling. I mean, he's being pretty explicit. Oh, not only is he being explicit, but for the first time in a long time, every single Fed official speaking is using the same text. So the Fed is crystal clear on this. And that's

because they do not want to see financial conditions loosen too early. They are not welcoming this rally in markets. They're worried about this rally in markets. It's for them. It undoes some of the work they've done. So they've been crystal clear saying to the marketplace, we're going to five or above and we're going to stay there. The market says, no, you're wrong. And you're going to have to swallow your words just like you did when you said inflation was transitory and it did not prove to be transitory.

And there was another factor you were mentioning? Then there's seasonality. You know very well what happens at the beginning of the year. There's typically a rally at the beginning of the year. First, institutional risk limits are reset. So people have more risk appetite than they had going into the end of the year. And secondly, new money is put to work. So we typically have a rally, not of this magnitude, to see the NASDAQ up 5% in two weeks, to see Bitcoin up 25% in two weeks. That's not normal.

Normally, the rally is a lot less than that. But it is normal to have a favorable seasonal effect. I read a piece recently in Medium by Neil Kashkari, who's the head of the Fed in Minneapolis. He's the president of the Minneapolis Federal Reserve Bank. He used to be, I think you know him, he used to work at the Fed, Federal Reserve with Bernanke. He was at the Treasury Department. He worked on TARP issues and the bailouts after the global financial crisis. He also ran for governor of California, which most people don't realize at one point. He wrote this piece in Medium that basically argues subtly that central bankers need an alternative economic model that, on the one hand, doesn't solely

blame inflation on wars and viruses and pandemics, but also doesn't address inflation with a recession or a depression or any kind of economic downturn and joblessness. I mean, it's like he's rejecting the—he's like economists and central bankers need a new model other than the Phillips curve, which, you know, accepts higher inflation as the price you pay for a hot job market. And if you want to clamp down on inflation, you need a softer job market. He's basically, he's hinting at that that can't be the only set of trade-offs. There's got to be a new approach. Is that just like wishful thinking or do you think he's onto something? So I think what he's trying to say is that if you want to manage the inflation cycle well, the Fed has to be supported by other policymakers. So right now, for example, what we need is supply enhancing policies.

We need things to improve the functioning of the labor market. We need to have a better energy transition. We need to facilitate the rewiring of global supply chains. That is not something the Fed can do. The Fed has absolutely no instrument that addresses any of these issues. But governments do. So you'd like coordination between the Fed and between other policymakers who have better tools. That is absolutely right. The concern that people have is that it took us a long time to take the Fed out of the political system. We made the Fed and we made most central banks

independent, meaning that once you set their objectives, it's up to them how they achieve it. And that's good, because you don't want the Fed subject to the political whims, because that would make the Fed very short term in this reaction function. However, that also translated into this view that inflation is all about the Fed. And I do think Neil is right in saying it's well beyond the Fed. I wouldn't say we need a new economic model. I just think we need better policy coordination. And I was thinking about what he wrote, because there are precedents for the Phillips curve not being an explanation for what's going on. Certainly the stagflation we experienced in the 70s, it wasn't like high unemployment brought down inflation or that inflation was successfully beat back with high unemployment. Yeah. So the shape of the Phillips curve is not stable. As you said, this Phillips curve is a relationship between inflation and unemployment. If the shock to inflation comes from the demand side, then the Phillips curve will help you in terms of what are the consequences of reducing inflation.

If, however, the shock comes from the supply side, it gets a lot more complicated and you need also supply side measures that go beyond what the Fed can do. Ultimately, what we all want is not to sacrifice unduly economic growth and employment for stable inflation. We should be able to do that without a massive cost. You wrote in your foreign affairs piece, and you've spoken elsewhere, about how we have to completely change. I know you talked about this earlier with regard to how we think the changing trends in geopolitics, but it's more than just new developments in geopolitics.

Our whole approach to China and how we thought about China is such a massive – I mean it's sort of now baked into all our conversations that we're in this Cold War II, if you will, to borrow our friend Neil Ferguson's term to describe the West's relationship with China, even if one doesn't subscribe to that very stark explanation of what's going on. the changing market structures and macroeconomic structures inside China are upending our economy and our markets in ways that we haven't really even really considered the long-term implications for. So can you talk a little bit about that? Yes. I mean, China plays a very important role in the global economy. It is a major supplier of goods that we buy and that other countries buy. And it has developed so rapidly that it also plays a very important role on the demand side. So China is systemically important. It's the second largest economy in the world, and it has an even bigger influence on global supply and global demand than simply its size would suggest. We feel that in the commodities market, in terms of Chinese demand being so

important. Look at what it does to copper, what it does to oil. And of course, we feel it on the supply side. So there is no denying China's role. China got there through good economic policy making domestically, and also other countries embracing China as part of globalization with the understanding that China will play consistent with the rules of globalization. Two things have changed in recent years. One is the recognition that China did not step up to its responsibilities on the global stage, that China has continued to behave in a way that is more reflective of China being a small economy, not China being such a systemically important economy. The other thing that has happened more recently is- What would be an example of that in terms of how China has viewed itself just looking after its own business, its own backyard, rather than having rather than think of itself as an economy that's so globally integrated?

The way it subsidizes industry in an unfairTO, but China has continued to do so. And I think for a long time, people were tolerating this. And in 2017, President Trump said in a very explicit and very unusual manner, no more. And the Biden administration has maintained, if anything, it has actually tightened the restrictions on China with a major, major set of actions on the tech side in the last few months. I also want to stress that the domestic management in China has changed. This exit from COVID zero is very inconsistent with the past behavior of Chinese policymakers. It was not well planned. It is totally chaotic. It is being done without the necessary condition of some form of mass immunity being in place, even though effective vaccines are available. And China is hiding from the rest of the world the outbreaks that it's having right now in COVID.

They have stopped publishing numbers. There is no clarity on whether there are new mutations going on or not. What we do know from anecdotal evidence is that there's a massive outbreak and it's having a considerable death toll. But China is not sharing information with the World Health Organization, which again is a problem for the rest of the world. But that's not new. I mean, the world, the public health community, the global public health community was dealing with this in the throes of COVID. So this has been now going on

for over three years. Yeah, but once you make a big mistake, which China made at the outbreak, you hope that it doesn't repeat the mistake. We are all at risk of a new variant of COVID given what is happening in China today. So far, and that's why Western countries are testing visitors from China, so far, we know that quite a few visitors come with COVID. And so far, we haven't discovered a new variant. But let's not forget what happened in India. And that's how we got the second phase of disruptive COVID. So China has an obligation to share data, and it's not fulfilling that obligation. When you were last on this podcast, Mohamed, you were positively inclined towards the UK central bankers and how they've been navigating this period and thought they were more straightforward. They were acknowledged past mistakes made more than our own central bank has.

How do you feel about how the UK is doing where you are right now, as well as the EU more broadly? Just that sort of go across the Atlantic. How's that continent doing? So I want to distinguish the UK from the Bank of England. The Bank of England continues to do well. It faced the consequences of a political crisis, as you know, a crisis that resulted in a government serving only 44 days. Because of the actions of the government pursuing unfunded tax cuts and disrupting markets, we almost had a meltdown in the domestic pension system. And once again, the Bank of England not only reacted, but did two things that I think are going to go down in history as an important case study.

One is it resisted fiscal dominance. It said no to a government looking for the Bank of England to continue to essentially subsidize what the government was trying to do. And two, it said no to moral hazard. It made it very clear to the marketplace that their support was temporary,

that their support would stop on a specific date and told the marketplace that their support was temporary, that their support would stop on a specific date, and told the marketplace, if you don't get your act together by then, that's your issue. So we're going to look back and say the Bank of England managed to intervene, but did not become an arm of the government, nor did it become hijacked by the marketplace. For the UK as a whole, this is a really difficult time. We have industrial action. I cannot give you the list of people who have gone on strikes because it will take up our whole podcast. But it's the National Health Service, it's the ambulance,

it's the nurses, it's the railroads. Society is pushing back against the cost of living crisis. Growth is slightly positive, but most people expect a prolonged recession. And it's not clear how the government should respond. So the UK situation as a whole is significantly worse than the US. Europe is navigating rather well its energy situation. Part of it has been a warm winter. Right. I mean, part of it is luck, seasonal luck. Yeah, seasonal luck.

But part of it is also they did a lot to increase inventory. So if you look at the world, you'd put the US on top, you'd put China in the bottom, believe it or not, and then you would have Europe second, the UK third in terms of economic performance. I want to switch to the FTX meltdown. As you mentioned, Bitcoin is up. Since we last got together, we've had the whole FTX meltdown. As you mentioned, Bitcoin is out. Since we last got together, we've had the whole FTX meltdown. And I, you know, on the one hand,

I sort of wonder, hmm, when a company registers in the Bahamas, refuses to have audited financials, refuses to produce audited financials, refuses to have a board,

you should start asking serious questions like what can go wrong? A lot can go wrong. That said, the FTX meltdown is now used as like a proxy for this view that there's a broader crypto market meltdown. It's not just an FTX meltdown. What is your view on the crypto meltdown specifically? And then more broadly, I cited all these problems, loose controls, virtually no governance, there's all sorts of red flags. But did the Fed have a role here too in this bubble that was and seems to be at least enduring in the crypto space? Yeah, so it raises two issues. One that you've talked about and a second one that we've talked about in our previous podcast. The one you've talked about is just significant lapses in governance, in regulation, and in risk management.

Terrible risk management. Terrible. And no one paid attention to that. And that is focused really on FTX and certain other segments of that space. But there's a much bigger issue, and we've spoken about it. Risk has migrated and morphed. A lot of this risk used to reside in the banking system. And then the banking system was seen rightly as having acted irresponsibly in the run-up to the global financial crisis of 2008.

And there was much better regulatory and supervisory focus on the banking system. But part of the risk that used to reside in the banking system migrated to the non-banks. And when it migrated to the non-banks, it migrated from a highly regulated space to a space that's hardly regulated at all. And that's much less transparent. The regulatory system was supposed to follow the risk. You know, it's a little bit like the Wayne Gretzky, you know, don't look at where the puck is going.

Right, not where the puck is going and try to get there. Right? Instead, it didn't. So now we have a massive catch-up process that needs to take place. Now, the Fed is part of this, but it's not alone. We have a body. We have a body.

Well, the Fed is part of it in that because interest rates were zero or near zero, people were taking – and there was inflation. People were just taking – they were taking more risk in this bubbly environment to just manage their money and get return. They were just taking – people were willing to take more risk than they otherwise would have because particularly folks on fixed income, retail investors, right? I mean, so that, does that mean when you say the Fed has some responsibility here? Yeah. I mean, look, the Fed was very explicit on what it was trying to do when it used unconventional policy to pursue not market normalization, but to pursue macroeconomic objectives. Now, what is unconventional policy? It's artificially low interest rates, and it is massive and

predictable injections of liquidity. Why do they do that? In order to push up asset prices. Why do they want to push up asset prices? So that you and I open up our 401k, we see that the balance has gone up, we feel wealthier, and we go out and spend that wealth on goods and services, which encourages companies to invest. And next thing you know, you've promoted economic growth through higher spending and higher investment. That's the theory. It doesn't work very well, but that's the theory. So central to what the Fed was trying to do was more risk taking. And you encourage people to take risk by making money very, very cheap to borrow and by making sure there's lots of liquidity sloshing around. So what are the consequences of that?

Which by the way, wasn't just a Fed issue because you look at the fiscal policies during COVID, there was just talk about liquidity being pumped into the economy. I mean, it was coming from monetary, it was coming from fiscal, it was coming from everywhere. It was coming from everywhere, absolutely. But even before COVID, we had expanded the balance sheet tremendously. Then we blew it up completely to $9 trillion under COVID. Now, you and I know that the financial sector optimizes whatever conditions it's given. So if it's given zero interest rates and massive liquidity injection, it will take risks all over the place. And if it believes, as the Fed helped the markets believe, that these conditions are going to last for a long time, it will take excessive risk. And that's exactly what happened until inflation turned up,

and inflation has turned around completely these conditions of low interest rates and abundant injections of liquidity. So the Fed should have asked, what are the consequences of what we are doing for financial sector behavior? How are we conditioning people? And what risk is involved in this? Now we're figuring out that there's all sorts of risk. And to be fair, the Fed has recognized this now.

It just needs the help of other regulators to be able to catch up with the game, let alone get ahead of the game. The ups and downs and maybe ups of the crypto market are endlessly fascinating. And we cover it almost like we covered the global financial crisis post 2008. But the reality is when you actually add it all up, the crypto market is well under a trillion dollars all in. I mean, maybe seven700, $800 billion. Are we making too big a deal of

our obsessive coverage and following and analyzing and reanalyzing and interpreting and reinterpreting the implications of specifically the FTX meltdown, but more generally speaking, crypto? crypto and DeFi? First, we should always focus on any financial accident to make sure it's not systemic. We cannot dismiss financial accidents. We made the mistake of dismissing certain mortgages as being very small in 2005, 2006, and 7, and they ended up being systemic. So we can't simply dismiss a financial accident. If a financial accident happens, we've got to understand what the consequences are. Think of it, if you're on a freeway

and the first part of the financial accident is simply two cars in a fender bender, but they stay in the middle of the road, you can't just dismiss this. You've got to get them off the road quickly, because then you're going to have a pileup if you're not careful. But I do think the focus on crypto is important beyond that. Crypto has the ability, if it's well managed, and if there's much better dialogue between the industry and the regulators, which there isn't, has the potential of revolutionizing the payment system. Our payment system is very inefficient right now. And we can use the innovations that come with crypto to make significant gains in efficiency

and cost reduction for the payment system. So, you know, I do believe you have to pay attention to crypto. It's way beyond Bitcoin. It's way beyond FDX because the underlying technology can improve things in a way that we would all feel. Right. So, and that's how I actually, Mohamed, that's how I feel about blockchain. I feel like blockchain generally even goes beyond just payments. I mean, just the implications of blockchain. When you really start to sit back and think about it, it's quite extraordinary and encouraging.

But that, to me, I almost put that in a separate category from specifically crypto no you're absolutely right absolutely right all right so two last uh topics before we move on before we let you go one is we we um advertised in our in our last episode that we'd be having you on and we let people send in questions we got a bunch we're gonna we're just we're experimenting with this, having callers call in with a question. So we're going to play one question now, and then I want to ask you before we wrap our favorite topic. But let's play our first question. My name is Tony DeVito. I'm from Woodcliffe Lake, New Jersey. Hello, Mr. Lillarian. Thank you for taking my question. After hearing the

ongoing discussions among financial analysts attempting to forecast which way the Federal Reserve will go on increasing or decreasing interest rates, employment levels, and so on, can you describe how our economy would operate if these factors of economic production were essentially left to reach their own levels of equilibrium without government intervention? And of course, this scenario would require a controlled money supply. Thank you very much. Hello, Tony, and thank you for your question. It's a great question. Look, if governments simply step back and say, we're not going to try to influence the direction of the economy. And we're going to let the marketplace sort things out. And by doing so, we eliminate the possibility of government failure, of policy mistakes.

That's the attractiveness of this issue. You expose yourself to the possibility of market accidents. Typically, there are three types of market accidents. One is that the market overdoes it on the way up and overdoes it on the way down, and that the consequences of the overshoots are damaging to society as a whole. The second type of mistake comes from asymmetrical information, that not all market participants have the same information. So you end up by having concentration, monopolies, and bad for competition and bad for the marketplace itself. And then the third failures that can happen is that the marketplace doesn't think about fairness, doesn't think about protecting

the most vulnerable segments of the population, those who are born at a disadvantage relative to others. So you would have the social side that you would need to take care of. That's why I think that most people, Tony, would say we should be a market-based system in which markets determine most of the outcomes. However, governments and central banks should be there to ensure that the failures that typically come with unfettered markets are minimized. And that's what governments tend to do. The failure in government is when they think they can go too far and start replacing the roles of market. And that's, you know, we have many phases in history where that was the case. I mean, I remember very clearly when Ronald Reagan came in and his famous word was, you know, government cannot solve the problem. Government

is the problem. Right. Right. And that came on the back of when governments were trying to control prices and wages. I mean, government had gotten way too involved in the situation where obviously we want the Fed to take action, but also when we get to a highly inflationary environment, the other way the government tends to want to get involved is to start imposing all sorts of controls, right? Rent controls and controls on fuel prices and so so to tony's point um there is a world in which one could say government is is getting out of control and dealing with these um situations we just want we want the uh we want the fed to do it um okay muhammad let's talk about december 18th. December 18th, 2022. You and I, Campbell and my kids, were at MetLife Stadium for the Jets game against the Detroit Lions. There was talk about a jubilant time.

There was a spring in our step. Keep in mind, the Jets, this started off the season seven and four. Who would have thought they would have had seven wins? They were seven and four. Just the fact that they had crossed the seven number was extraordinary. When I think about last season, which was more typical for the Jets, the Jets only won four games.

Now they've won seven games, seven, four. And then they went on this string of losses that included the game we were at and included two games before that, included three games after that. And the Jets ended seven and ten. So they went from seven and four to seven and ten. And you were crushed. You were like, as you and I spoke weeks, you know, weeks during that time we were together

or after that time we were together at that jets lines game you were like you same old jets same old jets i have a completely different view muhammad a completely different view which is normally by thanksgiving of every season as my son told me this morning not just thanksgiving it's usually by the beginning of november normally by the beginning of november summer thanksgiving our season is over we just assume it's done there's no point even if we win every other game it's done the season's done and the fact that there we were at december 18th and we still had hope and we went into the christmas holidays still had hope even that last game against game against Miami, there was still a scenario. It's like an unbelievably positive change of events for Jets fans.

Why are you so, why are you Debbie Downer? Why are you so dark, Muhammad? Why are you so pessimistic? Well, one of it is I'm much older than you. So, you know, since 1969, I've been living nothing but disappointment, but I'm still incredibly loyal. Let me just say two things. One, it was wonderful to be at a game with you, with Campbell, with the kids. It was just, it was absolutely wonderful. And it was a very, with the kids. It was absolutely wonderful. And it was a very, very special time.

Thank you very much for that. It was great. Two, it's not that we were hopeful. You were hopeful. I know lots of Jets fans, and they had given up on any possibility of making it to the playoffs. You held on to that till the very end. And we exchanged texts when

you were showing me what possible combination would allow the Jets back in. And I kept on telling you, you're wasting your time. It's not going to happen. Look, I watched last night, the Jacksonville Jaguars. Unbelievable game. And I wondered, why is it that it can't be the Jets? You know, last year they were worse than us. Right. Okay? And instead of them doing the, I'm going to get to 7-4, and then I'm going to completely collapse.

I'm going to be ahead in a game, and then I'm going to completely collapse. They show what it's like to come back. They show what it's like to come back. They show what it's like to have character. They show what it's like to be well coached, to want to win. For them to come back from 27 points behind in the wildcard game was incredible. So I look at that and all I could think of is the comparison with the Jets. Yeah, except it's not fair because Trevor Lawrence is an extraordinary quarterback. We have had a quarterback bust.

We have Zach Wilson, who even if you think he, even if we thought he had promised, he missed the first four games because of an injury in the preseason. And then when he came back, he was not all that. We've since learned. Mike White, who's interesting, backup quarterback, but got banged up. And then obviously we have Joe Flacco, who's just a backup, a real backup backup.

So we don't have a quarterback. We have all these other pieces. We have a cornerback, who's very exciting, and Sauce Gardner. We have this really incredible receiver in Garrett Wilson. These are all our recent draft picks. Brees Hall, this running back who got injured but is, you know, assuming he comes back healthy next season and starts. Our offensive line kind of got banged up, but we have some very impressive players.

Our defense is ranked third in the league, Muhammad. So we have all the pieces. We don't have a Trevor Lawrence. The Jaguars have a Trevor Lawrence. So this, the job number one for Joe Douglas this offseason is to get us a great quarterback. It could be Derek Carr. It could be someone else I'm not thinking of. If we get that quarterback for the first time, we have a base upon which to build.

I totally agree with you, but let's go out. Shall I go through the list of quarterbacks that we went out and acquired and how excited we were about every single one of them. And we've ended up in the same place. Look, I love our defense. Our defense is absolutely superb. We have some incredible players, as long as they can stay healthy. You have a fan base that is as loyal as can be.

So there's a lot of positive things. We even have a season, and I want to say it, where the Patriots didn't make it to the playoffs. Which is a win. I get a lot of... Which is a win. Which is a win for us. Yeah, it's a total win.

I mean, like psychologically. Right. Yeah, we almost let them in, you know, in the last game. Had we beaten Miami... Yeah, I will say one other thing that struck me, Mohamed, being at that game with you. I know you're a celebrity in the macroeconomic world, in the central banking world, in the financial markets world. I did not expect you to be a celebrity at a Jets game.

There you were. You can look at Campbell's Instagram account. There's a photo of us at the game. You're there with your hat on. We were all bundled up. It was a cold, cold day. I did not think you were easily recognizable. Even if I thought you were easily recognizable,

I didn't think you'd be so recognizable at a Jets game. And there you were with all these Jets fans stopping you to take selfies. I had no idea that you had a following in Jets world. Well, I tell you, these are wonderful people. And it was really lovely being there I enjoyed myself and even though we lost in the usual devastating manner

that we tend to the mistakes of the mistakes I know I know you know I like biting our nails in those last two minutes it was such a I know I know mistakes I know next season know. The mistakes. I know.

Next season. Next season. As we always say, next season. Right. All right, Mohamed. We will leave it there. I have to ask you, what's your pick for the Super Bowl?

My prediction is 49ers versus Bengals. Interesting. I'm 49ers versus Bills. Okay. Yeah, I think the 49ers, with this Brock Purdy, this quarterback, talk about another quarterback. It reminds me of the Eagles a few years ago where Carson Wentz carries them through the season, then gets injured,

and then Nick Foles comes in for the last two games, I think. The last two games? Maybe the last game of the season, regular season. And then carries him to the Super Bowl and they beat the Patriots. The 49ers with Brock Purdy have that feel to me. So I think it's 49ers, Bengals into the Super Bowl. And who wins? Who knows?

Who do you think wins the whole thing? I think probably the Bills. I think this is the Bills here. Yeah. Yeah. I think probably the Bills I think this is the Bills of the year yeah that would certainly be a powerful end to a up and down ride for them this season

Mohammed we will leave it there as always thanks for your insight and your illumination and your patience with my misguided for your insight and your illumination and your patience with my misguided optimism.

It's for me to thank you and our listeners should know that you're wearing a New York Jets cap. As we speak, always. By the way, Mohammed also, not just the hat, but Oh, the t-shirt as well. Exactly. I'm full body.

All right. Talk to you soon. Thanks, Muhammad. Thank you. That's our show for today. To keep up with Muhammad Al-Aryan, you can follow him at Bloomberg Opinion and you can follow him at the Financial Times.

And of course, you can follow him on Twitter at El-Erian M, at E-L-E-R-I-A-N M. And I also posted in the show notes the essay we discussed in this episode that he recently penned for Foreign Affairs. Call Me Back is produced by Alain Benatar. Until next time, I'm your host, Dan Senor.