The Munk Debates Podcast - Mohammed El-Erian on future of global economy after COVID-19

Episode Date: April 28, 2020

On this episode of the Munk Debates Podcast, famed economist Mohamed El-Erian joins us for an in-depth discussion about how COVID-19 will reshape the global economy.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

Welcome to the Monk Debates podcast. Every episode, we normally provide you with a civil and substantive debate on the big issues of the day. But our world as we know it has changed. And so has our format for the next few weeks. We're bringing you a special series called The Monk Dialogues. We invite the sharpest minds and brightest thinkers for one-on-one conversations live on Facebook to reflect on what our world will look like after the COVID-Dilocks. 19 pandemic. These dialogues aim to provide you, the listener, with original insights into the pandemic's impact on everything from our shared values to the economy to international affairs. This week, we bring you notable economist Mohamed L. Arian in conversation with Rudyard Griffiths. This is an edited version of the live event recorded Thursday, April 23rd. Hello and welcome to the monk dialogues. My name is Reddier Griffith.

I'm going to be your host and moderator for the next hour of our programming. What is the purpose of these dialogues? Well, for the last number of weeks, we've been gathering here once a week in the evenings to have a discussion about the world after COVID-19. This we know. It may take months. It may not be until 2021 or beyond, but we will come to the end of this pandemic. There will be effective therapies.

Let's hope there will be an effective vaccine. At that point, we're all going to live in a different world. We're going to live in the world after COVID-19, a world that will have fundamentally changed in many, many ways, from how we live and work together to our collective values and the objectives that we put for ourselves and for our society in terms of our economy and international relations and international affairs. So what we're going to do for you over the next number of weeks is convene people who we believe are some of the world's sharpest minds and brightest thinkers to weigh in on the next number of weeks. is convene people who we believe are some of the world's sharpest minds and brightest thinkers to weigh in on the big issues that will shape and define that post-COVID-19 world. This week, we are extremely fortunate to have, I believe, one of the world's most thoughtful and really nuanced thinkers about the global economy.

His name is Mohamed Alarion. He's the chief economic advisor at Alianz, which is one of the world's largest wealth management and insurance companies headquartered out of Europe. He's the former CEO and chief investment officer of PIMCO, the world's largest bond fund. He's the author of a great book, a book that certainly has motivated me and my thinking about the global economy and where it's headed. It's called The Only Game in Town. And there's a new edition of this book out right now that captures, I think, many of the key themes

and issues that we're going to discuss together in the next hour. So let's bring up Muhammad Arlarian, our guest, tonight and welcome him to the Monk Dialogues. Muhammad, great to have you on the program. Thank you so much for having me. Well, let's jump right in here with a question for you that frames this debate and this conversation in the context of these dialogues. I want to ask you to kind of look forward, look beyond the next days and weeks, to give us

your thoughts on what will be the lasting legacy, the lasting marks that this epidemic will have imprinted on the global economy in the years. to come? What do you think its true impact will be and how will that impact be felt? So let me just say that this is a really important question because when you're in the midst of crisis management, you don't often think of what's on the other side of the crisis. And the big lesson we learned in 2008-9 is that you can win war against a global depression, which we did. But you've got to also secure the peace. You've got to win the peace, which we we didn't. The global economy did not come back in the way it could have come back in terms of

high, sustainable, inclusive growth. So it's very important to ask the question during the crisis, what world should we be thinking about and what are the short-term measures that are consistent with the long term? So first of all, I commend you for asking that question because it's not being asked enough, whether at government level, household level, or even at the corporate level, it would look different. How different it looks is a function of how long we are in this crisis management mode. The longer we are in this journey, the more different the destination. A few things are already obvious. On the corporate side, we are seeing a massive entanglement of governments in the private sector, well-intentioned to save companies from bankruptcies, to save jobs, but not being implemented according to any principles.

So we are going to come out with a spaghetti ball, literally a spaghetti ball of public sector entanglement in the private sector. Second, companies are going to swing from stressing efficiency to resilience. The biggest outcome of that is bringing back your supply chain, is being much more careful about how you globalize. So we will have a third impetus to de-globalization. Consumers, all of us, may come out differently. We may come out more risk-reverse.

In fact, if the shock lasts a long time, we may be a repeat of the Great Depression frugal society. Workplaces are going to look different. The system will have more debt. And hopefully, and this is where I'll end, the good things will also be extrapolated. And we're seeing some good things that we must not lose sight of. First, awareness of what are called tail risk, small probability events that have huge consequences. We're more aware of that, so this may be a good time to deal with climate change, which is not a tail event anymore. Actually, the probability of damage is high.

We've also seen what happens when we don't have global coordination. Maybe we'll emphasize that. We have seen the private sector do amazing things individually and collectively. We've also seen better private public partnership. And finally, we've seen great acts of kindness and recognition for the people at the front line, the nurses, the doctors. the teachers who have had to shift to virtual teaching. So there's lots of good things as well, but the important thing is to understand it will be different,

and you've got to have an open mind as how you navigate that difference. So, Mohamed, let's dive into this question of intervention, because it's what you started with, this entanglement of the state into the economy. One of the key pieces where that entanglement is happening right now is the focus of your book, the only game in town. That was about how central banks were really, reworking the rules of finance. We're taking a level of prominence in the direction of the

economy, and by virtue of that, an impact on each of our own day-to-day lives in a way that we had never seen before. And that didn't simply end with the financial crisis. By 2016, when you wrote that book, it was in full force with quantitative easing and all kinds of actions and steps. We're now taking this to an entirely different level with this crisis, an entirely different higher level even of central bank intervention. Talk to us about that and where you think that's going to go. Again, not today, not next week, but what is the effect and what are the risks of that intervention a year, three years from now, a decade on? So initial conditions matter. If you want to know what's going to happen a year, two years, you better know where you came from. And we've come from

a situation where central banks, not by choice, but by necessity, took on responsibilities. They they could not meet efficiently. So let's go back to the concept of winning the war against a global depression in 2008 and 2009. Central banks played a major role in winning that war. And they did so by intervening in ways that were unimaginable, the so-called whatever it takes. We come out of that, and at that point, there should have been a policy handoff. There should have been the recognition that this wasn't a cyclical shock, that this was a structural shock to the global economy. We had the wrong growth model. We had fallen in love with a growth model that relied on finance, and we needed to go back to a growth model that relies on productivity of people, of capital.

But that handoff never really occurred. So when it came to exiting, central banks really couldn't exit. Instead, they got dragged in more and more. So think of a doctor that you go to. You have a structural impediment. You can't run because you've got something wrong with your leg, The doctor says, yes, you need the surgeons. You need the people who are going to talk about infrastructure. You're going to need people who can help you on labor retuning. But right now, they're not focusing. So I'm going to give you a medication to just ease the pain.

You go back a year later, the pain is still there. I double you medication. You go back a year later, I triple you medication. Now, that's not what I want to do, but like any doctor, central banks will not walk away from their economic responsibilities because they have more. flexibility. They're politically autonomous. They don't need to go back to Parliament for every action, unlike the Treasury side, the finance side. So by the time I wrote my book in 2016, it was clear to me that that path was unsustainable, that it had created the seeds of its own destruction,

from income inequality to insufficient growth, to encouraging excessive risk-taking. And I had this notion that we were on an unsustainable path, and within five years, it would tip the so-called T-drunker. The road you're on ends, and you have a choice. Go to something bad, the left tail of a distribution, or go to something good. And my argument at the time was that if we're not careful, we're going to be forced into a bad crisis, not by choice, but because we no longer have the ability to respond quickly, because our growth is not keeping up. Little did I imagine that the shock, the vulnerability to shock would come from such a major shock. So we have now hit the that, and we are now looking at the deepest recession since the global depression. I can take

you through numbers, but trust me, it's awful. Central banks responded but had to do a lot more than they did last time, even though this was not a global financial crisis. So they are now involved in literally every market you can think of, except one, stocks. The Fed is involved from the very highest market, the Treasury, all the way down to high yield, where there is high default. That was unimaginable. But they feel that they had no choice but to step in in order to maintain the good functioning of markets. Unfortunately, that's going to have a whole host of new unintended consequences that we're

going to have to live through. And it's one of these things that when you react in an emergency in a fog of war, you tend to do things that are not perfect because the best can be the enemy of the good. But then you need a second stage where you, with the help of others, need to make sure to reduce to collateral damage. And that's why it's very important to start thinking now and not repeat the mistake of 2008 and 2009. We're going to get to audience questions in a moment. But, Mohamed, I want your view on one other issue. You know, right now you look at stock markets in the United States. You're coming to us from Orange County, California. The S&P is back within

its 12-month highs, yet millions, upwards of 24 million Americans now, and a million-plus Canadians are out of work. It looks like the investor class, the proverbial 1% are having a pretty good pandemic in terms of asset prices. And what's happened to them as a result of government and central bank intervention versus average people who are facing job losses, acute economic insecurity, and who are bearing the economic burden of this pandemic seemingly disproportionately. What do you think the implications of that are for our economy and for institutions like central banks, again, in the aftermath of this crisis? Is there political independence at risk here? Yes. It worries me tremendously that we now have yet another round of interventions that while well-intentioned and by aggravating not just the inequality of wealth, but also the inequality of opportunities. because the big companies have access to the financial markets that the Fed is supporting, the small companies do not. So there's a perception that the way in which the Federal Reserve is

intervening favors, not just holders of financial assets, which tend to be the rich, but also large companies because they have privileged access to financing. Look, I feel sorry for central banks because they have no way to get directly to the economy. The only way they can do so is to change what's called financial conditions, lower interest rates so we can refinance our mortgages at a lower rate. Encourage risk-taking so that makes us feel wealthier. And if we feel wealthier, we'll go out and spend more so we raise demand. But ultimately, that's not a sustainable strategy. And I think it's important to understand that. In the specific case of the stock market, it has been conditioned to believe that the Federal Reserve will always be your best friend.

I call it the BFF syndrome, your best friend forever. Because repeatedly, central banks and the Fed in particular has come in to stabilize markets, to reduce volatility. And the investor has been conditioned to bet on the Fed. It doesn't matter what fundamentals look like. So right now, we are back to these elevated levels that are completely decouple. from the economic fundamentals, both present and future, because investors believed in a win-win situation. Either they bet on a recovery that surprises everybody, and they are forward-looking, they basically

can, quote, look through the crisis and they get it right, or alternatively, they get it wrong, but the Fed comes in and bails them out. Great insights. Well, look, I've been greedy with my time with you. So let's get some audience questions here. So let's go to that first question. This is an email question from DeWitt, who is asking, with so many governments printing so much money, what are your inflation expectations for the next year and beyond for the G7 economy?

So this is, you know, an interesting line to probe with you, Mohammed. So some people are saying, no, there's not going to be inflation because we're in this massively deflationary moment with supply and demand collapsing. others, though, I guess, are concerned, and you're seeing this in the context of possibly rising gold prices and what that's a reflection of, that countries are monetizing their debts. They're printing money at a record pace and could this lead to inflation? Because we don't fully understand how inflation happens. We still don't have a good grasp of that in terms of the economic fundamentals.

Yeah, and that is one of the toughest questions in economics. And we haven't been very good at explaining inflation before. this, so this notion that we can be precise, and I want to warn against false precision. You know, I got into a rather difficult discussion once on TV that right at the beginning of this, I was asked to comment on a projection for U.S. growth that had one decimal point to it. And I said, you know what? I don't know what zip code we were in. You're asking me whether the identification of a certain apartment in a certain building on a certain street in a certain zip code is correct, we don't know what zip code we were in. So we have to be

really careful about false precision. And I think anybody who tells you with confidence, they know where inflation is going to be is false precisions, because you have two very strong competing influences that have to do with the answer about where do we come out post-crisis. The liquidity side and the debt side plus the lower productivity side, the supply side, suggests that, yes, we will be more inflation pro. The other side, which has to do with whether consumers are more frugal, suggests that we may also have a deficiency of demand. So rather than have supply being less responsive and demand coming back up causing inflation, we may have sluggishness on both sides. And it's not clear to me where this will go. So I think it's a genuinely difficult question to answer.

what's not difficult is to answer what will happen for particular sectors. I think, you know, certain sectors, hospitality, airlines, transportation, sporting events are going to be very disinflationary. You're going to have to convince people in every way to go back and engage in this. The price mechanism is one mechanism. It's not going to be a very strong one, but it will be in play. There are other things that are going to be inflationary. So this is the irony that, it's easier to talk about individual products because the supply and demand response is going to be very different than it is when you aggregate it all to the economy. And this problem of aggregation is one that fascinates me. For those of you who are interested in what's happening in the capital markets, reconcile this for me. The top-down people take very strong views as to what is where the S&P is going to be by year-end. They have visibility.

From a bottom-up perspective, the most common thing for companies to do is to suspend guidance. They no longer have expectations that they want to share as to where they're going, because they can't see it. They don't have enough clarity on where they're going. So the top-down people are very comfortable predicting something that is an aggregation of the bottom-up, and the bottom-up don't know how to predict for themselves. And I think that contrast is going to be with us in many, many different areas. Well, thank you, Bahad. What I always enjoy talking with you is your humility and your willingness to answer a question honestly and not just pull the number out of your hat

and say inflation is going to be this or that. What we've been doing, Muhammad, through these dialogues, which is, I think, been very helpful to our audience is getting your recommendations, our dialogue participants' recommendations, for books to read, to try to understand this moment and more importantly, what might come after. So I'm wondering if you give us a couple of reading suggestions

of yours, books that you've turned, to try to understand this moment? So I didn't turn it to understand this moment. I turned to it before this moment. And not by choice, but by obligation. For the last six years, I have been privileged to serve on the financial time business book of the year. Okay. So we get sent 15 books and we go through them and I end up reading books that I would not have read. And this book really struck me. And I read it a second time, believe it or not, when we got one from the long list to the short list. And it's called The Age of Surveillance Capitalism. And what it looks at, it asked not just a question about how this shift to virtual is allowing us to give out information,

and that information is used for commercial purposes, and there's whole issues of privacy. But it takes you a step further, how then our behaviors are modified by what we signal. And it goes through a very detailed research on behavior modification that takes place through our engagement online. When I read it, I thought this is fascinating, a little bit alarmist, but I found it incredibly important in understanding the new world that we're living in. It's a Shajana Zubov's book, Surveillance Capitalism, I think is a great recommendation for this moment because we are all immersing ourselves in this technology. I mean, we're spending time on these platforms, consuming electronic media, sharing our data in ways that we don't

necessarily fully understand or appreciate it. So thank you for that recommendation. And for those of us, those of you watching online, you can find in the show notes for this dialogue with Mohamed Alarion links to that book tomorrow. You're listening to The Monk Dialogues, a special edition of the Monk Debates podcast, where we invite guests to reflect on what our world will look like after COVID-19. This week, Economic Thinker, Mohamed L. Arian, on the future of the global economy post-pandemic. So let's go on to some more questions, Mohamed, because we've got a lot of them, and they're good ones. So the next one up from Mark Andrew, James. As lockdowns taper around the world, do you foresee shift towards nationalism. So we've seen this big assertion of the state. We've seen seemingly

populist leaders seize on this, maybe with differing degrees of success. But do you see nationalism as being a feature coming out of this? And maybe talk to us a little bit about how that colors your economic view and analysis of the years to come in globalization. How does a globalized world and a globalized economy worked if you have more nationalism, more populism in the body politic. So let's start with the globalization. This will be the third major blow to globalization. The first blow came when there was the correct recognition that globalization was leaving too many people behind. And you had a nationalistic response to that. The second blow came when the United States embarked for good reasons on the tariff war, the good reasons being long-standing

grievances against intellectual property theft, against unequal access to markets. But the U.S. did it without consulting with allies that also shared the same grievance against China and decided to completely ignore the mechanisms in place to deal with these issues. And what that did is it unleashed protectionism. And once that gene is out of the bottle, the weaponization of economic tools can be used for many reasons. So the second blow was that the champion of free trade became the most protectionist economy in the advanced world. The third blows today, as I mentioned, one of the reactions to this crisis will be that companies

will focus more on resilience than efficiency. They'll forget about just in time inventory management. They'll put less emphasis on cost-effective global chains, supply chains, and they'll want to bring back activities that are closer to them. That in fact may benefit Canada and Mexico to the expense of other countries. But this is the third blow to globalization. It is hard for me to imagine that we haven't entered a period of de-globalization. Add to that, that we're also going to end up in a blame game. There's going to be a massive blame game once we deal with the lockdown, once we open, that will make us more nationalistic.

And then finally, there's going to be a tendency, just like the question asked before, in a world where we have more debt, in a world in which jobs aren't going to come back quickly, and the extent of the hit that we're taking in the United States to unemployment is unimaginable, unimaginable. 26 million people have lost their jobs in five weeks. That has erased the job creation of more than 10 years. It is 16% of the labor force. These jobs aren't going to come back quickly.

It's going to take time. So there's going to be a tendency also to want to protect the so-called home bias will become stronger. So I do think that this is going to fuel nationalism. I do believe that we're going to enter into a prolonged period of de-globalization. And we're just going to have to navigate through this. Mohamed, we'll go to an audience question, but let me ask a quick follow-up, which is going into this crisis, the United States and China were locked in an increasingly tense geopolitical rivalry that had significant economic dimension to it. Who do you think comes out

ahead after this pandemic? China or the United States, or is it a kind of pox on both their houses? So certainly it's the latter. In absolute sense, China and the United States will be worse of post-pendemic than they were beforehand. In relative terms, it's hard to call. I think China has seen an opportunity through what is called face-mass diplomacy to come across as the more reliable partner. But ultimately, you shouldn't bet against the inherent strength of the US. The US has both resilience and agility that allows it to navigate well most scenarios, or at least better, I should say better than most other countries, including China. So there certainly is going to be greater competition, but I don't think that the U.S. will lose its dominant role. I don't think

that the dollar will stop being a reserve of currency. I don't think the U.S. system will be used less by people who outsource their savings. I do worry that certain countries that have taken an option on both, think of Australia, think of Singapore. Okay, they have. They have taken an option on U.S. security umbrella. They have also taken the option on China being their biggest trading partner. And the one thing that those countries don't want to be asked post-pandemic is make a choice. They don't want to make a choice. They want to retain optionality on both. And certain countries, I suspect, have to think very seriously as to what happens if we ask to make a choice between the security umbrella that's provided to us by the U.S.,

which is unmatched versus the economic interaction. that we have with China. Critical point. That's a challenge in a sense that Canada will face also, in fact, it's one that we're in the middle of. Let's go to some more questions for you, Muhammad. How should economies prepare for a resurgence of COVID-19 or for the next pandemic, heaven forbid, you know, COVID-20? Are you seeing a conversation or an awareness? I mean, you've talked about resiliency, maybe go a bit deeper there and say, what do you think are the more fundamental economic shifts that will have to occur in order to create some robustness within our economy, within our society, to deal with these types of shocks?

So the good news is that having been called by surprise, there has been a major response. I participate in a conference call twice a week with experts. And it's really encouraging to hear what people are doing, how scientists have come together, how the pharmaceutical sector has come together. And, you know, you work on the three stages, which involve lots of private public partnership. Stage one is just the ability to identify and contain a virus. That is absolutely fundamental to the ability to open safely quickly. Stage number two, equally fundamental. the ability of the healthcare system to deal with surges.

It's the surges that kill you and literally kill you. And we are seeing much more focus on this. And we've seen amazing efforts in terms of how quickly you can build additional capacity. And as I said earlier, we're having much greater appreciation for people who deserve our appreciation and our admiration, which are the nurses or doctors and other medical professionals. Those two things, to the extent that we make success on them, which I think we will, will build our resilience to deal with a future pandemic, which I hope we don't get. But it will help. And then the third issue, of course, which is critical, is immunity, developing either a vaccine or developing some sort of community immunity.

And that's critical. That's a long-term answer. In terms of what we do to make sure that we don't rebuild this conflict between. what the health response calls for and what the economy is wired for. That's a fundamental conflict right now. Lives versus livelihood. Building economic resilience is key. And what we are doing now is understanding that we don't have the pipes to use if you have to bring an economy to a standstill. We're building them. And part of the reason why the relief effort hasn't been as effective as the desire, the willingness to help, the willingness to help has been enormous.

the effectiveness has been less is because you're building pipes. We don't have the pipes. We don't have a system that delivers what we need when you bring a whole economy to a standstill. So these pipes are being built and that again will help us long term. And then finally, I think individual and companies are going to build their own self insurance. It is not efficient. Let me be clear. Self insurance is not as efficient as pool insurance. You know, if you are ensuring for medical purposes, it's much better to be part. of the Canadian system statewide or some sort of health insurance in the other states than to self-insure yourself against every disease. But the reality is that we had taken our level of self-insurance economically to very low levels. And I think we will come out with better appreciation that we need to increase our self-insurance. So I'm pretty confident that when we come out of this, we will be more resilient. And my hope, as I said earlier, that it also allows us to preempt problems in the future. Climate change being something that is actually not so much in the future. It is a present danger right now. So hopefully we'll be better able to address it coming out of this.

Yeah, that was a message that freed Zakaria on our dialogue last week reiterated. So we're hearing that from you too, which is an important takeaway. Let's go to our next question. Here's Pam. Can we rebuild the economy through advancing sustainable energy and other green industries, rather than going back to the same old. And I guess that gets in some ways to a larger question, Muhammad, which is the extent to which we've created a system of economic prosperity, which is based on kind of hyper-efficiency, and that we've in a sense chosen often the straightest line from A to B

to try to juice growth and juice what little productivity gains we have enjoyed into something that feels like rising living standards. and general prosperity. So what is our tolerance coming out of this crisis to, let's say, engage in the more expensive structural changes and costs that would be required to address the threat of climate change? Could we have an opposite reaction which says, look, all that's got to be delayed because all that's important right now is growth and getting this economy moving forward and returning prosperity to societies as a whole? We could have that. It's a risk. worry about, and it would be very upsetting if that risk were to materialize.

We have a golden opportunity at the level of both companies and governments to use this awful window, this tragic, this tragedy, to do things that are consistent with where we need to be over the longer term. I go back to this notion of you're managing not just a journey, but you're also managing for a destination. And there's nothing predestined about that destination. is going to be a reflection of our choices. So to go back to Pam's question, we can, we should, but I can tell you in the case of the United States, we're not. We're not yet because in crisis management,

you get stuck in what's called active inertia. You know, if I may, just a quick diversion to behavioral science. When you get taken out of your comfort zone, you tend to have three reactions. One is denial. You don't want to be taken out of a comfort zone. you absolutely deny that you're being taken out of your comfort zone. We are not able to do that when you can't even go outside your house.

The other one is something that married couple do very well. You reframe the issue. You hear something uncomfortable. You reframe it to something comfortable. Someone complains that you're messy. Oh, yes, I'm messy because I don't have time to do so. I work so hard and look at the benefits of how I work hard. We can't do that either because the reality is on us.

So the third risk is what's called active inertia. We realize we have to do something different. but we end up doing the same thing. If you take a Canadian or an American, just an English speaker, put them in France, had them ask a question to someone French who either doesn't understand English or doesn't want to understand English. The French person does like this, the most likely reaction of the Canadian or American tourists, in fact, of any tourist, is to say the same thing in English, but slower and louder.

And that's called active inertia. Your brain tells you you have to do something different, but you end up doing the same thing. Right now in the United States, our crisis management has been active inertia. We have reacted very quickly and with a major, major effort, but we are doing things that work for the world of old, not the world of new. Let me take the example. Airlines, and now soon the oil sector. Our approach has been, these are the exceptions.

They're a particularly hard hit. And we're bailing them out. Certainly, we've done so with the airlines. Let's talk about doing that for the energy sector without any questions about why are we bailing them out on what terms, what is their role in the future economy, and what does the agist strategy look like? And it's understandable in crisis management, you don't want to make the best the enemy of the good.

But if it turns out that this crisis management state is not what the game theory is called a one-round game. If it ends up that we are in this, unfortunately, for a while, we need to make sure that we are both looking at what's urgent for the short term or what's important over the long term. And that is true, not just for governments, but for business as well. This is a golden opportunity for business to look at how it's doing things and ask itself, should I be doing things differently?

You're listening to the Monk Dialogues, a special series of the Monk Debates podcast. Each week, for the next few weeks, we'll bring you one-on-one conversations with the sharpest minds and the brightest thinkers, reflecting on how COVID-19 will change the world as we know it. If you're enjoying this podcast, write a review on iTunes. Check us out on Twitter or Facebook for the date of our next live monk dialogues. And send us your questions for our guests in advance at Dialogues at monkdebates.com. Now, back to the episode. Let's go to another question for you, Muhammad.

Assuming the U.S. China supply chain is uncoupled, which country region do you think will benefit most of the next three to five years? North America, India, Asia Pacific, other than China, or the European community, the EU. Where, Muhammad, if you've talked about this already, this idea of insourcing and the need for resiliency, on the part of businesses which have been shown by virtue of this crisis, the fragility of some of these global supply change. What part of the world benefits the most from that shift? So here's a prediction that this will be the waterfall of decision making for companies looking to rewire their supply chains. Can we bring it home and how much will it cost?

If we come bring it home, can we do it within the USMCA, can we do it in Mexico and Canada, where we have more certainty, more legal certainty, more institutional certainty. How much would it cost us and can we do it? If we can't do it in Europe, if we can't do it in Europe, other emerging economies, particularly the Vietnam, Indonesia, Philippines. But I suspect businesses will go through this waterfall. And the first time they'll hear, yes, from the CFO and the technical people, that's what are going to stop. And that will be predominantly in the first two, maybe three levels. Before this crisis, I would have told you that it is countries like Vietnam, Indonesia,

Philippines that are benefiting from the impact of the trade war and people revisiting their supply chains because of the trade war. Now I think it's going to come closer to home. And closer to home starts with being at home or being close to home or being close to something that looks like home. Could be bullish or could be an opportunity for Canada in that view, which is interesting. thought about that. So Peter is emailing us saying, how will the economic shutdown affect the housing market? And if you have some views in Canada in this regard, I mean, housing here in Canada, Mohammed, a bit like the United States, but even more so, has just become a hugely significant piece of our GDP, I think almost 8, 9 percent of total GDP tied up in housing. Do you see a long-term

correction? I guess that's in some ways related to borrowing costs. and the credit worthiness. What's your outlook on housing? Canada has been amazing to look at because you've tried everything, you know, to try and control housing markets in Vancouver, in Toronto. And it's been fascinating to look at this.

So, you know, I tend to try to reduce things to just the fundamentals. I can't explain 100%, but let's try to explain 70 to 80%. So housing is about affordability. On the positive side is interest rates are low, they will remain low. So mortgages will cost you a lot less. On the negative side, incomes are going to get hit and they're not going to recover as quickly as would like it to be. I think we are going to be

shocked by the second quarter numbers. We're going to be shocked by the numbers for the years of whole. This is a major recession. And if we're not careful, or if the lockdown for health reasons last a lot longer, we're looking at a high risk of a depression because we will cause structural damage to the economy. We will have bankruptcies all over the place if we stayed like this for a long time. So the affordability side, on the one hand, you can fund it cheaper. On the other hand, you're a bigger credit risk. Your income is less, you know, and the banks will look at you as a bigger credit risk. I think this thing in the short term solves in favor of pressure on pricing. I think this will be a buyer's market because they're going to be fewer buyers. And then on the

supply side, you also have to deal with the issue that part of the reason why housing has done so well is people have both second and third homes. Those second and third homes become more expensive to carry, especially if you can't visit them in an environment like that. So the equation that you apply to second and third homes also changes. So that means you may have problem on both the supply side and my gut feeding says that we have to be careful about the housing market. And Mohamed, what's your outlook on Canada as a whole. Because, I mean, there could be some reasons to be optimistic about Canada. Thankfully, we've had an effective public health response to this crisis, the total number of cases and deaths while serious and regrettable, tragic. We have not seen the numbers which

were initially anticipated. At the same time, Canada is not a reserve currency. No one necessarily needs to hold debt or other financial instruments denominated in Canadian dollars. We are not part of a federation. We don't have the advantage of a European Central Bank, you know, backed by the faith and credit of the German people and the Bundesbank. So what is your view and your advice for a small country like Canada, 35 million people, with high levels of indebtedness going into this crisis at the subnational level, the corporate level, the individual level, better national debt, but still not insignificant. What's your outlook on Canada? So I think you have the advantage of very strong safety nets. So you can manage the crisis phase a lot better than others. And you have

done so. Your health response, the extent to which your safety nets have caught people that have been hit hard. It's night and day compared to some other countries. So you have very, very, relatively strong safety nets that are serving you extremely well. And that's important because you don't want short-term damage to become structural impediments for growth. in the long term. So to the extent that you can hold it together, which you can do much better than others, you already are starting the post-crisis competition way ahead of others. I think that is very, very positive. But you also don't have some of the inherent edge, if you like, that certainly your southern neighbor has. I don't think it matters that much in Canada's case,

but it also makes it even more important to start making the difficult choices now. We are all going to have difficult choices to make in the post-crisis landscape. It's a different world. It requires major reallocation of resources. And the earlier, Canada being in a good position during the journey makes it able to discuss the destination much more than others that are in full crisis management mode. I remember the first stages of the crisis manager, when I was at PIMCO, it was about safeguarding our client's assets. Someone comes into your room to your desk and says, hey, I have an idea for how we should be positioned. You'll say, fine, keep that idea for now. I'm doing something else. The sooner you can finish doing something else

and start thinking about what you're going to do next, the better your place. And I think Canada is uniquely placed in this regard, but needs to do it. There's nothing automatic about implementation. It takes people, it takes systems, and it takes dedication. Great. Let's just squeeze in a couple more questions. On a scale of one to ten, what are the chances do you think of a recession tipping into something worse, something that has the characteristics of a depression? This is from Tristan. And she adds, I think, in an interesting codicil to that, and what would have to go wrong for this to happen? In other words, what should we be on the alert for in the coming weeks and months to understand that there could be a bigger risk than simply

a bad recession? So let me start with the second part of the question, because it forms the first part. There's three major risks. One is on the health side, that we're simply not able to contain it and we get a stop, go, stop, go process. At that point, you have a host of problems. If you do a W, so you come down, you give everybody a hope that you're starting and you come down again, that is much more costly than just doing a you. You get adjustment fatigue. You get people losing trust in our ability to address that crisis. So the first thing to make sure is that we don't end up with the Singapore experience, which has surprised everybody. Singapore dealt with it very well. We started and now it's had to shut down again. But, Mohamed, doesn't that worry you though?

Because, I mean, Singapore, you know, state-of-the-art case tracing, high volume testing, small geography, a lot of social cohesion. Wow. I mean, if Singapore can't get a nice, steady you going and instead is experiencing, as we've seen in the last week, this kind of W phenomenon. Isn't that real pause for concern? It's sobering, but remember that part of the W came from very congested migrant populations. Okay. So, you know, they had a vulnerability that they knew about, but they thought they could control. Look, the problem internationally is, you give me Singapore, I'll give you Germany. Right. You give me Japan. I'll give you Sweden. Right. And soon in the United States, the States, we are reopening in a completely unsynchronized fashion. So we're going to have a

nationally experiment in the U.S. of different states doing different things. So the first thing is the health side that we end up having another lockdown forced on us or we have another round of the pandemic. The second concern is a market accident. We came this close, this close on the Tuesday, three weeks ago, this close to having a combination of a global depression and a global financial crisis. And had the Fed not acted, the way it acted, we would have had that. So we have to be careful. We don't get a policy mistake. Sorry, a market accident. And the easiest way of getting a market accident is a policy mistake. So if we add these three things up on your scale, where one, two, ten, let's call one, what a ridiculous question. Of course, we're not going to get

depression, a great depression. And ten is, of course we're going to get a great depression. I would put us at five right now. It's a wishy-washy answer. No, no, but I know that. It's far along the scale. But that's the uncertainty. Yeah. Great. Okay, one final question tonight. So it's from Jan. Does this pandemic weaken the neoliberal argument that small government is better for the economy? Or does this pandemic suggest that we need a strong, resilient government with a more socialistic plan that has greater control over the economy? Great question, Jan, for us to end on. It is a big one. And it's certainly one I know in the United States, Mohammed, with an upcoming presidential and congressional

election, that there's going to be a pretty hot conversation around in the months to come. You know, they always tell you the last question is the one that's going to trip you up completely or put differently. You know, when you are a speaker answering question, there's a thin line that divides courage from stupidity. And it tends to be the last question that tips you over. So, Jen, let me tell you, that is a. great question. We have stumbled into big government. If you're an economist, there were two theories that were deemed by most economists to be completely impractical and really there weren't studied enough. One was universal basic income that came out of the technology side that people

are being marginalized. Society may own the obligation to pay a citizen simply for being a citizen. And the other one is called modern monetary theory, MMT. where there's no limit to the size of government other than inflation happening. And we've learned that inflation doesn't happen very quickly. So really, there's no limit to the size of government and the central bank and simply fund government. And had you asked the majority of economists in January, how likely are these two things for the United States in the next five years that will tell you less than 10%. Well, we're applying both.

We sent checks in the mail to citizens, $1,200. And we are seeing massive deficits financed by money. massive central bank liquidity. So we have entered a world of bigger governments. It's not something that we did in a way that answers your question. What are the benefits? What are the costs? We just stumbled into it. And that is going to fuel, like you say, a massive debate, a massive debate as to how quickly can we unwind that. We know that beyond a certain point, you sacrifice productivity and dynamism. And we're going to have to figure out where we are. The thing I'm most worried about, is the spaghetti bowl we talked about earlier, that we have entered this not through principles,

but we've entered it through ad hoc responses to whatever was issue number one. And the result is this massive entanglement that is going to take us years to undo. Well, Muhammad, you've given us a wonderful spaghetti bowl of ideas and thoughts and stimulation. So just on behalf of the monk dialogues, I really want to thank you for coming on. You've addressed these topics again with your usual kind of honesty and humility. And it's always just such a pleasure to speak with you. And I just urge listeners to pick up the second edition. It's out now, right, Muhammad, on? No, it will be out in July. It'll be out in July. Okay. The only game in town edition number one, though, is available. And there'll be an update to that edition in July. And if you want to understand global economics, you want to understand

this moment. This is the book that I'm reading and the book that I would recommend. and Muhammad Aalarian's the only game in town. So, Muhammad, be well, be safe. And thank you again so much for coming on the Monk Dialogues. Thank you. It's a huge honor, privilege. Let me thank you all for listening and devoting time. And please stay safe, you and your families.

And to continue with the honesty, don't buy the book now, wait until the new edition comes out in July. It's better than the old edition. Hey, thank you, Muhammad. Well, ladies gentlemen, that concludes our third dialogue in the series with Muhammad Alarion. I hope you enjoyed it. We've got some great conversations coming up for you in the weeks ahead. Next week, we have former UN ambassador, Samantha Powers, appointed by Barack Obama to head the U.S. mission at the United Nations. She was also a member of the U.S. Security Council.

So we're going to have a conversation with Samantha Power, who is one of our monk debaters, to talk about developing countries, international institutions, what is happening in terms of COVID's impact on the world and its institutions that allow everything that we know to happen and to function and that Canada is a key player in many of those global institutions. So we'll have that conversation next week with Samantha Power. We have some other great dialogues coming up for you. We've got Kara Shwisher, who is one of the smartest commentators on technology.

She's going to do a dialogue for us on COVID-19's impact on technology, big tech and Silicon Valley. Don't miss that conversation. And what would the monk dialogues be without our friend Neil Ferguson coming back? He's writing a big book right now on this pandemic, and he's going to participate in a dialogue with us on the lessons that history holds for understanding. the impact of COVID-19 on our society, on our economy, and on our values. That concludes our program for this evening. Again, I just want to reiterate what Mohammed said. Thank you for listening.

Thank you for tuning in. I enjoy these civil and substantive conversations. I think it's a great opportunity to stretch our minds outside of the immediate crisis of what's happening today, tomorrow and to think about the positive also that could come from this crisis. what we need to do now to come out of this stronger, resilient, and ready to thrive as a nation, as a people, and as individuals. So I'm Rudyard Griffiths, the host of the Monk Dialogues. We'll see you next week for our dialogue with Samantha Power. All that information on our website,

www.w monkdebates.com. Be safe. Be happy and good night. The Monk Debates are produced by Antiquet Productions and supported by the Monk Foundation. Redyard Griffiths and Ricky Gurwitz are the producers. The president of Antica Productions is Stuart Cox. Be sure to download and subscribe wherever you get your podcast. And if you like us, feel free to give us a five-star rating. Thanks again for listening.