Energy prices. It tends to hit poor households. Some are hit immediately, high petrol prices, others have a bit of a lag. The second hit is a more generalized increase in prices. And then the third element, if it gets bad, is we will see higher unemployment. So a lot will depend on the duration of this war. And I want to stress this notion that you can Stop the war immediately and everything goes back to normal is ludicrous.
Hello and welcome to The Rest is Money with me, Steph McGovern. And with me, Robert Paston. Now today we are joined by a podcast friend, uh Mohamed El Arian, is one of the world's most influential economists. He started his career at the IMF back in the 80s. He's a chief economic advisor at Allianz, which is the parent company of Pymcor. They manage something like $2 trillion worth of assets for central banks, for sovereign wealth funds.
uh and private money as well. And he is professor of practice at the Wharton School. So he is a man who knows what's going on, Robert, when it comes to global economics. He certainly does. And I can't think actually of a better person to assess. the economic and financial costs to the whole world. of this war launched by Israel and America against Iran. We should be under no illusion. This is doing harm, obviously terrible human harm within the region, but it's also
Gonna have a profound impact on all our living standards. So here's our interview with Mohamed Elerian. Mohamed, as ever, great to see you. What's your best estimate of the damage so far to the global economy? The current estimates are that growth in the global economy will be half a percent less than it would have been otherwise. which would take it below three percent. And inflation will be a full percentage points higher than it would have been otherwise, with the effects hitting the
most vulnerable segments of the global economy, particularly hard. The estimate so far is that we will see at least a hit of half a percent on growth, which is a big hit. And we will see inflation a full percentage points higher than it would have been otherwise. But then the third element is the dispersion, the inequality.
Um not all countries, not all households are gonna be hit the same. There's gonna be quite a range of outcomes. So I've been reading your substack and dispersion is a big theme of yours at the moment. Talk us through what you mean by that. So by dispersion it means that while it's a common shock, everybody feels it, the impact is very different depending on your initial condition. So this sort of shock hits countries and hits households and companies with existing fragilities especially hard.
And it will tend to make inequality worse. And is there I mean, with this, obviously the UK is particularly hit when there's energy shocks, but w when you're talking about Um that this dispersion, where are we gonna see it first? Who are we gonna see it first with? So so what you will see is is three effects. First, energy prices go up and that tends to hit poor households particularly hard.
Some are hit immediately, high petrol prices. Others have a bit of a lag. Heating, depending on your heating source, will be a lag, but that's that's the first hit. The second hit is a more generalized increase in prices, because energy is an input to many things, and other supply chains are being disrupted. And then the third element, if it gets bad, is we will see higher unemployment.
So a lot will depend on the duration of this war. And I wanna stress this notion that you can stop the war immediately and everything goes back to normal. is ludicrous. It will take time to get things going Normally again. Yeah. Which is makes it really interesting, Mohammed, that uh that investors seem to have taken so long to kind of really react to this. You know, d do you think they've underestimated the the risk of this unrest?
I do. And and there's a good reason why is because last year we throw virtually everything you can think of at the global economy and markets, and they proved resilient. So the investor playbook right now is that this is a temporary shock. It is quickly reversible, and we haven't seen the source of reaction that I expect will play out over time.
We're proud to say that the rest is money is powered by Octopus Energy this year. Greg Jackson is back to answer another question. Now this is something that we see a lot. That I wanted to ask you about. When you're starting something new, how do you think about risk and momentum? I think people think entrepreneurs love risk. But I'm not sure they do. I hate it.
I never buy individual stocks and shares on the stock market. Uh I uh don't gamble. I think the thing about an entrepreneur for me is I've got more control. Uh when you're working for a company, every day you're at risk of what that company chooses to do with you.
If you're an entrepreneur, actually you've got far more saying what happens tomorrow and next year than when you're, you know, at the mercy of your bosses. Nice one, Greg. Well, thanks to Octobus Energy for powering this episode of The Rest Is Money. Before we get back to the detail of it, can I just ask you a slightly broader question? It's it's one of the things that um a sort of exercised me for actually almost decades now, which is why our markets
so bad at pricing potentially catastrophic risk. Yeah, and and this is the the the notion uh of fat tails. Um the reason why is because low probability high impact events are very difficult to price. They're just very, very difficult to price. Because the probability is low. Um, you can hedge somewhat, but hedging becomes expensive. So what markets normally do is they wait for the event to happen.
And you saw this in oil prices. Robert, it's been amazing. Um just to give you a notion of of the moves, we were below seventy dollars. a barrel. We spiked all the way to$120. We've come back below$80. We've now almost 90. This is craziness. But it shows you exactly what you say is that people react immediately and don't plan for these shocks. I think um oil is now above ninety and um we've got this interesting I mean we'll we'll know the outcome of this by the time this is
um uh you know available to to listen. But we've got this G seven meeting. Looks as though they are going to release quite a significant amount of oil from strategic reserves. But the thing that I'm intrigued by is we've got this price
of over ninety now, um, as you say, on the uh after extraordinary. I mean, just uh you know, eye washing volatility. But the price for delivery in December is still about, I don't know, seventy five dollars or so, which, you know, is essentially suggests that, you know, investors do think there would be a relatively I mean that's still above where we started. Um uh the you know, it's still about I don't know, fifteen
twenty percent above where we started but you know, the price before the war. I mean, we're seeing so much disruption to the infrastructure in the and so much damage to the infrastructure in the Middle East, do you think it's realistic that the price will recover as quickly as that? Or fall as quickly as that? So if you look at different market prices, including what you just mentioned.
The market a attributes an eighty percent probability to the following scenario. The US will declare victory pretty soon, as President Trump said on on Monday night. And it has every reason to declare victory because it has It didn't declare its objectives.
So you can declare victory quite easily on that. Good point. The second assumption is that the declaration by the US will convince both Iran and Israel to also stop the war. Assumption number two. Assumption number three is that there will be an immediate restart of oil production that has been shut down, and that there'll be an immediate restart of shipping through the Strait. That's the 80% scenario right now in market.
I would give it a fifty percent scenario, not an eighty. First, it's not clear that the US can impose its will on Israel and on Iran. Second, this is an asymmetrical war. And the problem with asymmetrical walls is when you no longer have the top leadership and things have been delegated to commanders on the ground, it's very difficult to stop a war like that. And then thirdly, starting oil production is not like an on off button.
It takes time. Yeah. So so I think the market is is is a l is too optimistic right now on this. Um but again I stress that It is the playbook that has worked really well for the whole of last year. Is it partly to do, Mohammed, with this sense of what we you know has been termed the tack or chump always chickens out? And obviously we saw that with uh, you know, the big Liberation Day tariffs and
And then he tends to react to markets and if they're not going the way he wants, he then starts to pull back. So is it a bit of that, do you think? Yeah. I mean that is why the the sort of the the the s the the string of things that lead to A better outcome, start with the U.S. declaring victory. As you know, um, Steph, affordability is the number one political issue in the U.S. Um people are pushing back against high prices.
Now it's become the Republicans that own it. Before it was the Democrat that owned it and it helped President Trump win the election. Now the Republicans own the affordability issues. There are midterm elections coming in November. And the last thing this administration can wants to see is higher energy prices that translate into higher inflation. So yes, that's the the view is that ultimately the markets will impose outcomes simply the same as they did last year with Deliberation Day.
But remember this is a much more complicated landscape. If you look at the UK, we have a um home energy pricing regime where the price is effectively set by the regulator. Every three months. Are we, in your view, getting to a position where, you know, if the current inflated gas prices are sustained? It's likely that we'll have to see some government intervention, some government subsidies to particularly protect those on lower incomes? In theory, you should see it.
And we saw it after the last energy spike, which was in twenty twenty two. But the room for maneuver, the so called headroom, how much money the government has to spend. um is limited. So it will involve really difficult choices for the Chancellor as to how do you support lower income households who n who need support but at the same time meet all the other requirements. And you've already seen, Robert, the bond market nervous. If you look at the move in borrowing cost.
The move in the UK has been fifty percent more than the move in Europe and the move in the US. So the bond market is already on guard, if you like, as to the fiscal dynamics and the di dynamics of the UK. So should it happen? Yes. Is it easy to do? No it's not. There are gonna be some really difficult choices.
that the government will have to make. On top of this, I think the thing that's kind of worrying me the most at the moment with all of this is what's happening in the jobs market, because obviously we're starting to see unemployment rise in the UK now. Mae'n unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw.
That that that's a that could put a lot of pressure on things like the the welfare system here, obviously, you know, how much the government are then having to pay out for benefits and things. So It it could come from several angles, this pressure on like the fiscal headroom and everything else. Yes. And and that's a second fragility. So so the problem with shocks. Is that if they are of such scope and duration, they can expose fragilities.
and you get tipping points. And that's exactly what you just mentioned, Steph, is a tipping point in employment. So the U the UK has several fragilities. One, we talked about limited fiscal Too much debt. Too much debt. The second one you just mentioned, unemployment was heading the wrong way already. So you don't want to accelerate the increase in unemployment.
The third fragility is we have low productivity. So the economy isn't dynamic enough to reallocate resources quickly to compensate for that. And and the concern that that you would have is that you expose these fragilities and then there's one that hardly anybody is talking about except the Bank of England. which is financial fragility. And it's not in the banking system. It is in what's called the shadow banking system, particularly something called private credit.
where already we're starting to see stress. And the last thing you want is finance, the tail, to s to wag the economy, the dog. So, you know
Tipping points are something you c have to keep an eye on here. So so can you just explain that, Mohammed, what you mean by by private credit and and that fragility there? What's going on? So about ten to fifteen years ago Um, finance, which is very good at at finding market failures, far finding where the markets don't work, discovered a whole host of companies that deserved to borrow. They had good business plans.
But the banks coming out of the global financial crisis were hesitant to lend, and these companies were too small to access the big p capital markets, the so-called public markets. So a new market emerged called private credit. And in the beginning, it fulfilled a very important um requirement, which is to get money to companies that deserve to borrow, can pay it off. But like anything else in finance, when it's profitable, it tends to overshoot.
And in the last few years, we've seen very poor underwriting standards. We've seen too many people in this space. We have seen fraud. We have seen valuations that don't really reflect reality. and now these things are starting to get exposed so the latest news
is that one of the banks has decided that it will not lend to the private credit companies because it's worried that their valuations and their underwriting is not good enough. So suddenly something that was small outside the banking system has grown really big. And could undermine an economy at a time when we're already facing other headwinds.
And I say this because there is optimism, there is the potential of AI to improve productivity and growth, but we've got to get rid of all these headwinds. That keep on slowing us down. And just on AI, I mean obviously, you know, as you say, there is this tremendous productivity uh opportunity, although, you know, there's also the potential for shocks from
uh people losing their jobs. I mean one of the things that was striking uh you know, we we had sort of back to back two market jitters recently. One was the market jitters around private credit with Blue Owl.
telling that uh it tell you know telling its investors it couldn't get their money out. Um but there but almost exactly the same time we had Anthropic announcing its new coworker um service. Uh You know, that uh led to extraordinary neurosis and anxiety that a whole bunch of very big software companies, very famous software companies like Salesforce, you know, their share prices plummeted.
uh because it was thought that those sorts of very big businesses would be made redundant. So we are living a g you know, the one of the things that I that I've been sort of thinking about a lot. uh uh you know, uh uh in the context of this war and the shock that that has caused. We are living through a period where there are you know, a whole series of fragilities in the system. You're absolutely right. And I and you can add to that there's a small US payments company called Block.
That announced a forty percent layoff, forty percent of its labor force. Bec because of AI. Um, AI is an amazing technology. Um, not only is it is it was what's called this general purpose technology, think of electricity. It changes everything you do. But it is also to quote um a Google colleague um that I've worked with, James Manyaka, i it's an inventa of invention.
So it's a very dynamic element. And and there's two ways to think about it. One is it's labor displacing, meaning i it will basically um deindustrialize, if you like, many, many sectors. The other side is labor enhancing. that if you retrain, you retool, you can actually do more, um, a lot more with existing or more people. And the easy thing to do, and you've seen this whenever um business reacts, is cost minimization. Let's lay off people.
the harder thing to do, which pays off for for the for the business and the country, is the labour enhancing side. We talk a lot about AI on this on this show and about the kind of the potential wins but also the the pressures and it could put on industry. Uh so can I just come back to the in this moment then? Because We w you know, while we're waiting for AI to do its thing, we've obviously got all of this fragility as you say it. Then we've got central banks trying to work out What to do?
you know, they're already, particularly in the UK, wrestling with like sticky inflation. Even before this conflict started, there w you know, uh Robert and I have talked on this podcast about when in uh rates might come down a bit. Now that's being pushed, you know, further down the line and possibly if inflation becomes a bigger problem, they might have to go up. But what should they do now?
Because the the there's a double edged sword here, isn't there, of what's going on domestically and the pressure of putting rates up could mean for people here compared to the problem of inflation. Yeah, and what I'm gonna say people are not gonna like. Um there's two types of central banks. There are what's called single mandate central banks. They have one objective.
That is the Bank of England. That is the European Central Bank. It is inflation control it this price stability, inflation control. And you've seen the markets immediately change their view on what these central banks were go are going to do. In the case of the Bank of England, before the conflict The market expected the next move to be a weight cut. Now the market expects the next move to be a weight hike. So for for those central banks
they're gonna be under enormous pressure to raise interest rates. And and and very recently Christine Lagarde, the president of the European Central Bank, says we will not repeat the mistake of twenty twenty one. The mistake of twenty twenty one is is the central banks took the view that inflation was transitory, meaning it's temporary, it's reversible, don't worry about it, and it proved to be a real problem.
So it in my mind there's there's no doubt as to how those two central banks will react if the conflict continues. There will raise rates, which will make the growth side even more difficult. The Federal Reserve in the US has a dual mandate. It has maximum employment and price stability. And there, the market expects them to cut rates. because they're so worried about the employment side. Because You know, if th there is the kind of economic shock which leads to significantly lower growth
that will turn out to be disinflationary and and and all the banks would be doing if they do put up interest rates is reinforcing a slowdown that will lead to higher unemployment. I I I obviously these are incredibly difficult judgments. I'm not saying, you know, essentially it's an easy job at the moment to be on the Monetary Policy Committee and decide whether to hold, you know, ra you know, raise or or or or cut. But I am slightly anxious.
that i in in what Christine Lagarde said There's just an element of as I say, fighting, you know, the wrong war, the last war and that this will turn out b I mean, you know, i both the European and the UK economies are pretty soft at the moment. When you have a shock li like this one and and this is a stagflationary shock. Stagflation. Stag means lower growth. Flation means higher inflation. Um the inflation hits you first, and then the stag part hits you second.
So i i i if you are completely rational and have perfect foresight, you would wait. You wouldn't raise interest rates because you would know that the second leg of this shock is going to be lower growth, lower activity, and therefore lower price pressure. But there's a very important behavioral aspect here.
Which is while you don't want to fight the last war, you certainly don't want to repeat the last mistake. And the mistakes that central banks made in twenty twenty one, twenty twenty two was a really big mistake. And therefore, from a behavioral perspective, I suspect that they will be told, you know what, maybe Robert is right. Maybe ultimately
It will be lower growth and the price pressures will be off. What if he's wrong? Do I really want to repeat the same mistake? And it is the same central bankers. If you look at who has the ECB, who has the Bank of England, who has the Federal Reserve, it's the same ones as twenty twenty one, twenty twenty two. So would the mistake be to not do anything? The single mandate central banks are gonna have to be dictated by the single mandate.
And it's the government that's gonna have to do the hard work here. And in a perfect world, the UK government would accelerate what you've heard me say over and over again. which is its growth strategy. We've had a lot of talk about growth. But the actual strategy, the implementation of the strategy has been partial and slow. And you hear the desire to do more, more quickly, but the reality is that Every economic event in this country has now become simply a fiscal event.
And it's all become about adding up the numbers on the fiscal side rather than taking a much broader perspective about economic growth. Because without economic growth
Fiscal issues will simply be get worse over time. For a government that is committed to growth, they've put an awful lot of grits in the wheel, um, you know, whether it was putting up employers' national insurance, whether it was increasing uh you know th obviously there are perfectly good reasons to increase workers' rights, but there are Quite a lot of people.
you know, on every side of politics who just thought maybe that could have been delayed a two or three years until the economy was growing a bit a bit a bit faster. So there's been a lot of grit in the wheel. But with th they they've they've done all that. What can they do now to accelerate growth? You know uh in a timely way that doesn't cost the kind of money
which markets are currently you know, lenders to the UK are currently saying to them, do not borrow significantly more. So what can they do to accelerate growth that is not in the short term gonna lead to higher debt? Yeah, I mean the irony for the UK is it does really well on exciting start up activities and then they all have to migrate elsewhere in order to scale up. Yeah.
Um, y you need you need a holistic approach to growth. You need to have a better approach to innovation, a better approach to scaling up of activities that really move the needle, which which we don't have right now.
You also need to be But we talk about that a lot on the podcast, Mahama. We do talk a lot about this and we agree with you totally. But that's not gonna move the growth rate up over the next six months to a year. I mean we're t you know, i we need to do it, but that is a two, three year project. It is. And and and I always hear it's a two, three year project, so let's not do it now. And then in two, three years I hear I wish we had done it two, three years ago.
Um so true. You know, it's the whole thing of you've got to walk and chew gum at the same time. And that's why the word strategy is really important. You know, I'm a great believer that that you have there are biases in any system. The UK has a very strong treasury bias, which is make the numbers add up on the fiscal side. And and and you you literally need structure to do heavy lifting. You need a growth czar, you need someone there to say
But what about growth? What about growth? In in in every economic meeting. Otherwise you will go back to your comfort zone, which is let's make the fiscal numbers add up. There's a number of other areas. Consistency is really important. Don't underestimate what inconsistency in economic policy does to foreign investment. They just wait.
They just wanna know what is the consistent approach that that the authorities are taking. And unfortunately the UK has been forced or has has decided on a number of U turns
that comes across as inconsistent to the rest of the world. Yeah, and it's that issue of uncertainty we always talk about, which just completely kills off investment and You know, whether it's biz people wanting to invest into the country or just business investing themselves, they're just everyone is just waiting to hear what happens next, which is such a huge problem, isn't it? And, you know, it's a b it's a disease in growth is uncertainty. It really is. I mean, you you basically sideline
Things that can help you enormously. Mohammed, there's a load more we need to discuss with you, but first we're gonna go to a quick break. This episode is brought to you by Hargreaves Lansdown. Now, if the last four decades have shown us anything, it's that change keeps coming. There have been so many huge economic events that have shaped. our thinking today. Back in the 80s, we had Margaret Thatcher's deregulation of the stock market.
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For claim verification visit hl.co.uk slash platform. I mean the other lesson, I'm afraid, of this war is how weak and under resourced our defence uh is, our military is. I mean, we had this sort of I mean, you know, it was almost comic, right? We have now got one destroyer Sailing. It's on the Middle East. You know, President Macon gets to Cyprus before our Prime Minister. Uh, you know, there's a French aircraft carrier there. There are I think I I can't remember if it's five or six
destroyers, French destroyers there. It was almost as though he wanted to sort of ridicule the UK in those circumstances. But against that against that backdrop, there is no question
that we are gonna have to accelerate our defence spending. Um the world is just a more dangerous place. And I I guess again, paying for that is um uh you know, a big issue if if they accelerate, because we are talking about, you know, over the next ten years, you know, we are talking about the requirement to find something over forty billion po additional, you know, f you know, an additional forty billion pounds.
Th I saw the other day from a bloke called Nick Lyons, who used to be l Lord Mayor, this idea and as somebody who knows about bond markets, I just wondered if you thought this was a runner. He said that the government should fund this to an extent with additional borrowing, but the way to do it that doesn't spook investors. is to raise s considerably more money from the retail market, from British people.
And he basically has come up with this idea of effectively war bonds that And if you bought these war bombs i you know, i th th they would not incur inheritance tax when you die. And he thinks that would generate really quite a lot of money. Um so I just wondered those that sort of you know, c sort of creative accounting. Does it make you know, is is is that sort of thing a good idea? Yeah, and and Gordon Brown's ha ha ha has has an even better
idea which is let's acknowledge that this is a Europe wide issue. You're all European countries of are are gonna increase defense. We can have a Europe common bond. And if you look at the Sources of funding The the big dilemma the big tragedy for for for Europe, including the UK, is that its funding, including its pension funds, they go invest elsewhere. They go invest in the US.
Yeah. So so it's not that there isn't the private funding. It is that something breaks down in in in connecting the private funding to genuine and productive usage. So you know, there's there's several ways to approach this, um, if you want to do it, but it requires again consistencies, explanation, communication. And in a perfect world you'd say here are all these countries facing exactly the same problem
And if we solve it collectively, it's better. You know, th th there's something in economics called c game theory. And what game theory forces you to do is to identify strategies that work and strategies that don't work. And there are certain games and I'm sorry for the word, but that's how it's used, certain situations where it only solves collec cooperatively.
Defense is one of these things. Y y you know, if you if you do it cooperatively with your allies, you get a lot more bang for your boss. Um, and what game theory tells you is if you try to solve a cooperative game uncooperatively, which is what we're trying to do now.
It will fail. Is this one of those arguments again for w us not leaving the EU and the fact we should have stuck with them? You know, f from an economic and financial side, you should never eliminate something if you don't know what you're gonna replace it with. Because the lesson you get is you cannot replace something with nothing.
And I think the tragedy of the UK is that it was very keen to dismantle something in order to regain control. And I understand that. I really understand how powerful that notion is. But you need to know what are you gonna put in place instead of it, especially when you are dismantling a major economic and financial relationship.
Britain should have done Brexit or not, that's up to the British people. But there should have been a plan for what happens if we decide to exit the EU. I can just ask politically, do you think it's actually realistic that um You know, a you know, I mean even if we were in the EU, I I I wonder whether, you know, Britain with its hundred percent
debt to national income, debt to GDP ratio. You know, are the Germans really going to allow us to leverage their balance sheet to basically borrow money to fund our defence? Is that really going to happen? On defense, you know, it's more likely to happen than on something else. Let me tell you my experience. I spent fifteen years at the International Monetary Fund.
um which has 188 members. And there were a few people representative of governments that you absolutely had to get on board if you wanted anything done. Of course you would expect the US, but the UK was there. The UK has always punched above its weight internationally. Is that still true, Mohammed? Is it still true? Do we still punch above our weight?
f and you just cited the latest illustration of that that the whole world got to see, unfortunately. It is less true. But it's it's not permanent. It can be reversed. But the UK has to decide what role does it have to would like to play. When it was part of the EU, it played a very important role both within the EU And for the EU relative to the US, China and Russia. With inflation, I just want to throw a scenario at you.
Let's say the Bank of England decides to increase rates because they're worried about inflation because of everything going on with this conflict. So then mortgage costs go up, rents will probably go up because of it. uh, you know, the cost of borrowing for business is all going up and people spend less. That's the theory. But people are spending less, but at the same time, oil, energy, all of those costs are still a huge problem and our inflation doesn't come down, then what happens?
And and that's the risk, right? Um and and economists will tell you what what's the counterfactual, right? So so what what are you worried about? The thing you're worried about is what we saw in the seventies, um, is that costs go up. And then all of us go to our employer and say, wait a minute, I want to protect my real wage.
It was called real wage resistance. And not only that, but I no longer trust the Bank of England. So I want my wage increase to cover not just past inflation, but future expected inflation. And then you get you get the opposite. So th those are the judgments that the central banks have to make.
But if you have a single mandate central bank, if you have a single objective and if you're the Bank of England governor and you have to write a letter explaining why it is you don't meet that objective, You will end up raising interest rates if you think this inflation shock is uh of a long duration one. But surely if the majority of it is made up from the cost of energy and oil and everything that is not domestic, that's controlled internationally.
No matter how no matter what you do with rates, you're not gonna be able to bring down inflation if it's a price that is being, you know, built on what's going on abroad. What what you're not gonna be able to bring down is the first price. shock, but what you're hoping to minimize is what happens next.
You don't want it to spread throughout throughout the economy. Um I'll give you forget the Bank of England, I'll give you a a a simple example. Um in the United States last April, when tariffs went up, businesses had to make a decision. Do they pass on the price to their consumers? So turning a tariff increase into an inflation process. and risk alienating their consumers, or instead do they take it on their profit margin?
And the decision of most companies initially was we're going to take it on a profit margin to see whether this shock persists. And now you're starting to see companies raise prices and pass it on to the consumers. So, you know, these these effects vary over time. But I want to stress it's not as if the Bank of England has much choice.
it's going to be expected to raise rates. And if it doesn't raise rates, the markets will punish it. And either way it's going to be terrible for people, like normal people in the short term. Yeah. I'm really worried and I'm worried in particular about low income households because the th this shock, the three elements of it, h will hit
disproportionately hard low income households. Yeah, you're absolutely right. And it is a big problem. There was just one other aspect of this I would I wouldn't mind exploring with you. the Liberation Day widespread tariff increases uh imposed by Trump and then the initial shock to the market. And in that initial shock to the market, one of the things that was striking was despite the um uh global uncertainty. Um, the dollar and dollar assets actually fell.
um privilege the exorbitant privilege of the US that uh uh you know, investors in both, you know, sunshine and r and and and rain tend to favor dol the dollar and dollar assets. But it was so it was quite striking. that against almost all recent um precedent, you know, the dollar fell and dollar assets fell. Now in this crisis it's been quite interesting to see the dollar strengthening.
Quite significantly at a time when other assets are are falling. Um is that simply because it is basically oil and gas self sufficient? Or was that idea that Trump is undermining confidence in America and the dollar, has that has that gone away? Um so so I don't think the concern is gone and what I point to is the move in the dollar was much less than what you would have expected otherwise.
Um there's a dollar index that captures its value relative to many other currencies. It's called the DXY. It moved from just under ninety seven to ninety nine. That's not a big move at all. What's d what's different this time around is that the bond market has behaved better in the US than it has in the UK, for example. And that reflects what you were saying, Robert, which is the notion that the US is the cleanest, dirty shirt.
Um it is impacted. But you know what? What a phrase. I like that. You know, and it comes from this notion that that a lot of the time markets solve in relative space, not absolute space. So they compare different jurisdictions. And the US is self sufficient in energy, has a more dynamic um economy. And therefore it while it's gonna get dirty, to be clear, it's gonna get dirty from this. higher inflation, um
it will be the keenest dirty shirt compared to other countries. We've talked on this podcast before about the the you know, the fact that the the uh a lot of the safe assets are are dollar backed and and that's part of the reason, you know, why um why the dollar m manages to stay strong in all of this. But We were talking I think it was about this time last year, about how
Um, you know, is that gonna change because people are d cause is'cause at the minute it feels like Trump can do anything and he'll kind of be all right. I know, okay, we've got midterms coming up and he might lose them if people feel like their lives are a lot worse. But from a dollar perspective because of the fact, as you say, it's the cleanest dirty shirt.
Um, that kind of saves him a bit, but could we see that change? Like, does there need to be it not be all about the dollar anymore? And are we seeing any more signs of that?'Cause it felt like last year we we were a little bit. So in my conversations with a lot of people around the world, there is still the recognition as in last year that they are quote overweight the dollar.
There's still the recognition that that would like to reduce it, and there's still the dilemma of there is no single currency that can replace the dollar. So it's a very gradual process. You go into many things, including gold, but then when the gold price goes zooming up to five thousand, you slow it down a bit. So it it is the US has a much longer runway to misbehave um than other countries because there's no there's no other runway. There's n
Countries can't go elsewhere immediately. It's very dissimilar to what happened to the UK when it lost its status as a reserve currency. The US was ready to step in. Here there was nobody ready to s to step in. So it takes time, Steph, it takes time for all this diversification. to take hold. I'm struck that although we had this huge surge in the price of gold before the war, actually the price of gold has gone almost nowhere um since the war started. It rose a bit and then fell.
Um and the other bit of it that I think is quite interesting, the the sort of bulls, the fans of crypto kept saying it's a store of value. Well, quite interesting. that actually again uh there was actually quite a sharp seller right at the start of the war, the price of Bitcoin fell.
very sharply. So the idea that it's a store of value in uncertain times is is just rubbish, isn't it? Yeah, I mean Bitcoin has still a lot to prove, um, to become a safe haven asset because it hasn't behaved like one, as you said. And and Bitcoin had a lot of speculators. So when you start shaking speculators out, they they n they sh they shake each other out as well. Um Gold is an interesting one.
It had moved a lot. So we got to five thousand really quickly. And, you know, we we've stuck around five thousand. We haven't sold off in a meaningful way. Um So, you know, relative to other safe haven assets it has behaved better than other safe haven assets. But like you I would have thought it would have gone higher.
I mean so the other um I think if you just look at the big economies in the world, China, you know, before uh the outbreak of war downgraded its growth prospects. Um there's still Uh quite a lot of debt overhang in in in China. They are massively dependent on oil and gas. coming out of the Straits of Hormuz, um, which of obviously that tap has been turned off. Two questions really.
Is this gonna be very damaging for the Chinese economy? And how will China attempt to influence events in your view? So so first China is losing its second supplier of discounted oil. Um it lost Venezuela. And now it's losing Iran. And it only has one source of discounted oil left, which is Russia. So Islam lost two out of three sources and that's not good news because as you say the ha they're highly dependent. Now they had built up a lot of strategic reserves.
So it's not an immediate shock to be But it is in the context of lower growth. The only thing going well for China, which is a problem mainly for Europe, is its exports. We just got the numbers for January, February, and yet another record surplus. And just to show you how much they're doing, the market expectation was that their exports would grow by seven percent.
The export grew by over twenty percent. And that's at a y when the exports to the US are falling. And at some point Europe is gonna say, enough, we c we can't absorb all that. As to what is its role, um in this, it has been Surprisingly quiet. People expected it to to to to to say something. After all, it is a major Iran was a major tr Chinese ally. Um, it's been extremely quiet.
Um, and there's a lot of speculation as why it has been so quiet. Um, I'm not a specialist to say it, but I can tell you on the economic front, they're not gonna be able to repeat month after month
grow by dumping the exports into Europe. At some point Europe is going to say enough, we can't take this anymore. And and I suppose um I mean some of it may be related to the relationship that it wants to maintain with with other Gulf and Middle Eastern countries, but it's just on them How much damage has been done So their attempt to diversify
away from total reliance on on energy. I mean obviously there's been obviously they're gonna struggle to get the taps back on, but they were supposed to be basically a a safe haven for tax a exiles. They were trying to, you know, i you know, basically attract both talent and capital.
They've been hugely damaged by this, haven't they? Yeah, a lot depends what happens to Iran. I mean there's there's two scenarios. One is that Iran was a threat and Iran will come out of this weakened and will no longer be a threat and therefore those countries, especially the UAE, Bahrain, can really position themselves
even more as what they've positioned. Th and I think that's the central view and that's that's the most likely view. Okay. The other view is Iran fragments. You know, people forget that per the Persians are only sixty percent of the Iranian rev of the Iranian population. And if you're not careful, you could have domestic fragmentation of Iran that is problematic for for the neighborhood.
You know, again, you know, these th these are issues that that we're gonna see play out. It's a very uncertain time. um for the whole neighborhood right now. And we're gonna need to you to come back quite regularly just to talk us through it. Oh Muhammad if you don't mind. Before we go, I just need to say one thing. You raised
the need for the uh Prime Minister would to appoint a growth czar. I'm sure he's listening to this podcast. So if you're listening, um you know, I I vote for Mohammed as as your growth czar, Prime Minister. Seconded You're very kind. I I just think it's really important to let structure do the heavy lifting. Um this issue has came up with employment a long time ago.
The biases in a system are so deep that unless y y you look for a way structurally to fight it, you will go back to doing exactly what you've been doing. And we will not evolve. And and and that's true for businesses as well. Yeah, it's so true. We need growth and that needs to be the priority. Mohammed, thank you very much uh for your time. As ever, we will see you again soon, uh, when we can collar you. Uh but thank you very much and that's it from us. On the rest is money. Bye bye. Goodbye.