January 22, 2016
1:29 pm
‘The
Only Game in Town: Central Banks, Instability, and Avoiding the Next
Collapse’, by Mohamed El-Erian
Review by Felix
Martin
The US stock market
has just endured its worst start to a year on record. The fear is
that America may be close to recession, with baleful consequences for
the global economy — and, worse, that policymakers are out of ammo
with which to respond.
What better moment
could there be for a book subtitled “Central Banks, Instability,
and Avoiding the Next Collapse”? And who better to write it than
Mohamed El-Erian — the man who captured the essence of the present
era of low growth, low inflation and low investment returns better
than anyone else with his memorable concept of the “new normal”?
The first striking
message in The Only Game in Town will therefore cause some alarm. It
is that the new normal is soon to be no more.
El-Erian, chief
economic adviser at Allianz and an FT contributing editor, believes
it is a mistake to see the current state of the global economy as a
modestly disappointing equilibrium — “sluggish, but relatively
stable”, in the version he quotes from the Economist. In reality,
we have been incubating an ugly brood of existential challenges: high
unemployment and rising inequality; the decay of the system of global
economic governance bequeathed by Bretton Woods; the disintegration
of trust in national institutions and the growth of political
insurgency; and a financial system that is more prone to liquidity
illusion and less well anchored to economic reality than ever.
Forget the new
normal; the correct metaphor for our immediate future, El-Erian
warns, is a “T junction”. The road we are on is about to come to
an abrupt end. Take the right turn, and the world can be on the way
to inclusive growth and peace. Take the wrong one, and things will
get considerably worse.
Having held out this
stark prospect, El-Erian moves on to the first of his two main
themes: the appropriate future role of central banks. The response to
the crash of 2008, he argues, has relied disproportionately on
monetary policy. Emergency lending, zero interest rates and
quantitative easing have done the heavy lifting whilst fiscal policy
and structural reform have stood idly by. Central banks have been the
titular “Only Game in Town”.
The trouble is that
monetary policy alone cannot solve the kinds of challenges haunting
the new normal. It has bought time but cannot buy reform. It is now
for politicians to take the lead; the central bankers have done all
they can.
That is certainly an
important message, and I hope it will be heeded. Yet to my mind it
somewhat skirts the question actually obsessing the markets at the
moment: are the unprecedented monetary experiments under way a stroke
of genius or a terrible mistake?
Few would dispute
that central bankers cannot cure the world’s problems on their own.
But opinions differ widely — and the recent market action shows
that the differences are becoming fraught — over what they should
do from now on, and whether we are going to reap a harvest or a
whirlwind from what they have done so far.
Yet El-Erian is coy
on the future of monetary policy itself. Given his unparalleled
experience of economics and investing in both the public and the
private sectors, that is the reader’s loss.
Thankfully, he shows
no such reticence when it comes to his second central theme: how to
make policy of any sort in an unprecedentedly complex world. Today’s
policymakers, he explains, are buffeted by a bewildering maelstrom of
interacting forces: the decoupling of the developed and the emerging
markets, divergent monetary policy, unpredictable politics,
disruptive technological innovation, and more. How to predict their
effects, and strategise accordingly? It seems an impossible task.
In the fog of
policymaking, striving constantly to keep one’s options open can be
counter-productive
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El-Erian proposes a
radical solution. We must jettison, he says, conventional modes of
analysis that focus on unique central predictions and accept instead
that today’s unusually uncertain world follows no single likeliest
path. In the ungainly language of probability theory, we must learn
to navigate bimodal distributions. The imminent approach of the
T-junction calls for new tools and techniques: above all, the
cardinal virtues of “optionality, resilience, and agility” — in
other words, the ancient arts of keeping all your options open for as
long as possible, rolling with the punches and, if necessary,
changing horses midstream. In a world where all is flux, says
El-Erian, flexibility is all.
There is a great
deal of wisdom in this take on our current predicament. It is
refreshing to read a policy book with the confidence to say that it
is pointless to dispense elevator-pitch solutions to epochal economic
challenges. Yet I wonder if El-Erian the investor has not unduly
eclipsed El-Erian the policymaker here. Flexibility, liquidity, free
hands — these are indeed the master-virtues on the financial
markets. Policy, and political leadership more generally, has a
rather different logic. In the fog of policymaking — let alone of
war — striving constantly to keep one’s options open can be
counter-productive. What is often required instead is public
commitment, as the prime means of convincing others to act in the
face of uncertainty.
At the start of his
final chapter, El-Erian cites Churchill as an apostle of agility:
“Success is not final, failure is not fatal: it is the courage to
continue that counts.” Yet at the moment of utmost crisis, it was
the virtue of uncompromising commitment that Churchill extolled: “We
shall fight on the beaches, we shall fight on the landing grounds, we
shall fight in the fields and in the streets, we shall fight in the
hills; we shall never surrender.”
If the challenges
the world faces as the new normal careers towards a T-junction are as
daunting as El-Erian argues in this sobering book, I suspect we will
need our policymakers to show the spirit of “never surrender”
too.
Felix Martin is a
fund manager at Liontrust Asset Management and author of ‘Money:
The Unauthorised Biography’ (Vintage)
The Only Game in
Town: Central Banks, Instability, and Avoiding the Next Collapse, by
Mohamed El-Erian, Random House, RRP$28, 320 pages
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