Mohamed A El-Erian is chief economic advisor at Allianz and chair of President Obama’s Global Development Council His last book, When Markets Collide, won the Financial Times/ Goldman Sachs Award for the best business book of the year, was highlighted as a best book of the year by The Economist, and was called the best business book of all time by The Independent El-Erian is a contributing editor at the Financial Times, a Bloomberg columnist and his writings have appeared in The Guardian, Project Syndicate, The Telegraph, the Huffington Post and Reuters “In this characteristically insightful book, Mohamed El-Erian explains how central banks have saved the world economy from financial and economic disaster But the capabilities of these institutions are inherently limited They cannot restore rapid, inclusive and reasonably stable economic growth If the world is to enjoy this combination, he argues, other state and non-state actors have to play a bigger, more pro-active and more imaginative role.” —Martin Wolf, Financial Times “This book is a must-read for anyone interested in the global economy A masterful account of how central banks became the only game in town after the global financial crisis but also how other structural and fiscal policies are necessary to resolve key global economic issues El-Erian is the best thinker on the key global issues of our times.” —Nouriel Roubini, chairman, Roubini Global Economics and professor of economics, Stern School of Business, NYU “If you are only going to read one book which explains how we got to where we have and what needs to be done, I recommend The Only Game in Town Mohamed El-Erian lifts the veil which shrouds the secretive central banks, and lays bare the deep weaknesses which continue to bedevil the global economy.” —Ian Goldin, director of the Oxford Martin School and professor of globalization and development at the University of Oxford “An indispensable guide to understanding the rapid expansion and current role of central banks in the global economy, as well as the challenges and opportunities that they will confront in responding to future economic shocks.” —James Poterba, professor of economics, MIT, and president and CEO, National Bureau of Economic Research ISB N 978-0-300-22253-1 Jacket design by Pete Garceau Printed in Great Britain YALE UNIVERSITY PRESS NEW HAVEN AND LONDON yalebooks.com www.yalebooks.co.uk 780300 222531 MOHAMED A EL-ERIAN Widely regarded as one of the most astute observers of global economic trends, Mohamed El-Erian is famous for having coined the now-ubiquitous phrase ‘the new normal.’ Five years ago, he was worried that the global economy might take years to regain its footing Now El-Erian worries it could fall off a cliff The good news from this book is that if policymakers get their act together, things could be a lot better The bad news is that this seasoned and influential veteran isn’t at all sure this will happen The Only Game in Town is simply a must-read for anyone trying to understand how the global economy might unfold in the next five years.” —Kenneth Rogoff, Thomas D Cabot Professor of Public Policy at Harvard University, and former chief economist and director of research at the International Monetary Fund THE ONLY GAME IN TOWN “The Only Game in Town explains how central banks have found themselves driving an untested car down an unmarked road in uncharted territory It also provides a possible roadmap back home For students and watchers of central banking – as well as for central bankers themselves – it is as close to essential reading as you are likely to find.” —Andrew G Haldane is the chief economist at the Bank of England and executive director, Monetary Analysis and Statistics #1 NEW YORK TIMES and BESTSELLING AUTHOR #1 WALL STREET JOURNAL of WHEN MARKETS COLLIDE M O H A M E D A EL-ERIAN THE ONLY GAME IN TOWN CENTRAL BANKS, I N S TA B I L I T Y , AND AVO I D I N G THE NEXT COLLAPSE M O H A M E D A EL-ERIAN THE ONLY GAME IN TOWN Surrounded by sluggish growth, high rates of unemployment, rising inequality and increased social tensions, pessimism about our future abounds Dr Mohamed A El-Erian, one of the world’s most influential economic thinkers, explains lucidly the realities of the economic choices that we will soon face The path that the global economy and markets are on is ending But what comes thereafter is far from predestined It critically depends on choices that we make as households and companies, and decisions that our political representatives take The Only Game in Town details how the world is increasingly being shaken, both from above and from below It illuminates the growing internal contradictions, the constraints that are undermining growth and prosperity, and the radical overhaul in thinking that is required In the aftermath of the financial crisis, central banks were handed responsibility for the fate of the global economy Lifting the veil on the inner workings of these powerful and innovative institutions, El-Erian explains why they cannot save us this time around Laying out a road map for growth, The Only Game in Town shows how and why collaboration between central bankers, policymakers and business leaders is essential Drawing on insights from behavioral science, economics and finance, this book provides the tools needed to understand the uncertainties that lie ahead and return us to a path of prosperity Thought provoking and insightful, this book is required reading for investors, policymakers, and anyone interested in the future Praise for THE ONLY GAME IN TOWN “The Only Game in Town achieves the nearly impossible: It takes complex financial issues and events and makes them both enlightening and entertaining It’s a must-read for anyone who cares about the global economy and its future, raising critical questions, exploring all the relevant topics, and offering sound policy recommendations It’s a terrific book.” —Jack Welch “Mohamed El-Erian understands markets and economics, and he clearly and coolly articulates the forces that created the current global slowdown and the dangerous fork in the road that the world economy is approaching The road ahead could lead to a perilous U-turn or more durable, inclusive growth The good news, as ElErian convincingly argues, is that policymakers, businesses, and the rest of us still have our collective hands firmly on the wheel and can steer the economy in a better direction.” —Alan Krueger, Bendheim Professor of Economics and Public Affairs at Princeton University “An indispensable guide to understanding the rapid expansion and current role of central banks in the global economy, as well as the challenges and opportunities that they will confront in responding to future economic shocks.” —James Poterba, professor of economics, MIT, and president and CEO, National Bureau of Economic Research “The Only Game in Town says it is about central banks, but it really is about so much more: everything from the investment strategy needed in today’s macroeconomic environment to the hard choices about taxes and public works that our politicians face to the economics underlying the still relevant ‘new normal’ (which he coined) El-Erian has an incredibly rich worldview, far greater than the sum of his impressive diverse experience, and seeing today’s world economy through his eyes offers a real education.” —Dr Adam S Posen, president of the Peterson Institute for International Economics “This book is a must-read for anyone interested in the global economy A masterful account of how central banks became the only game in town after the global financial crisis but also how other structural and fiscal policies are necessary to resolve key global economic issues El-Erian is the best thinker on the key global issues of our times.” —Nouriel Roubini, chairman, Roubini Global Economics and professor of economics, Stern School of Business, NYU “Mohamed El-Erian knows the global economy as an investor, a public servant, and an analyst with a rare ability to grasp its essentials He has an urgent message to convey here: Central banks cannot [continue to] carry the global economy on their backs for much longer without a high risk of a very bad global outcome If he’s right—as he has often been before—all of us, governments, business, finance, and individuals, need to understand why and how to take evasive action.” —Jessica Mathews, former president of the Carnegie Endowment for International Peace “Widely regarded as one of the most astute observers of global economic trends, Mohamed El-Erian is famous for having coined the now-ubiquitous phrase ‘the new normal.’ Five years ago, he was worried that the global economy might take years to regain its footing Now El-Erian worries it could fall off a cliff The good news from this book is that if policymakers get their act together, things could be a lot better The bad news is that this seasoned and influential veteran isn’t at all sure this will happen The Only Game in Town is simply a must-read for anyone trying to understand how the global economy might unfold in the next five years.” —Kenneth Rogoff, Thomas D Cabot Professor of Public Policy at Harvard University, and former chief economist and director of research at the International Monetary Fund “In his next book, The Only Game in Town, Mohamed El-Erian has done several important things superbly First, he has presented the first really comprehensive assessment of the multiple challenges to sustainable and inclusive growth facing a wide range of countries and the global economy Second, he does it through the illuminating lens of central banks and monetary policy—with few exceptions, the only game in town Third, he then deftly and insightfully dissects the limits and risks of this almost ubiquitous one-handed policy response And fourth, he argues persuasively that this is a journey we cannot continue; that we will break either right to a much superior level and quality of growth, or left to declining performance and rising instability He then suggests mind-sets that will help everyone—policymakers, and the rest of us—navigate this complex and uncharted territory It is a tour de force.” —Michael Spence, Nobel Laureate and professor of economics, Stern School of Business, NYU “From setting interest rates to avoiding financial crises, if you want to understand the expanding - and sometimes mysterious - role of central banks then look no further than this book Expertly written, it cuts through the jargon to explain how they will be instrumental in getting the economy back on track to deliver growth in an era when the risk of debt crises makes stagnation a serious threat.” —George Buckley, chief UK economist at Deutsche Bank “There are few economists with the breadth of experience of Mohamed El-Erian His insights have been well-honed in the private sector and policy sphere, which shine through in this mustread book It covers not only where we have been, but also where the global economy is headed, and why economies need a better strategy for growth which is a key question for our time.” —Dr Linda Yueh is fellow in economics at St Edmund Hall, Oxford University, adjunct professor of economics at London Business School, and visiting professor of economics at Peking University THE ONLY GAME IN TOWN BY MOHAMED A EL-ERIAN The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse When Markets Collide: Investment Strategies for the Age of Global Economic Change THE ONLY GAME IN TOWN CENTRAL BANKS, INSTABILITY, AND AVOIDING THE NEXT COLLAPSE Mohamed A El-Erian YALE UNIVERSIT R a n d o m H oYu sPRESS e NEW HAVEN AND New YorkLONDON Copyright © 2016 by Mohamed A El-Erian All rights reserved This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press) without written permission from the publishers For information about this and other Yale University Press publications, please contact: U.S office:   sales.press@yale.edu  www.yalebooks.com Europe Office:  sales@yaleup.co.uk  www.yalebooks.co.uk Book design by Christopher M Zucker Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Control Number: 2016930471 ISBN 978-0-300-22253-1 A catalogue record for this book is available from the British Library 10  9  8  7  6  5  4  3  2  Dedicated to my daughter, my mother, and my sister In memory of my late father Thank you for your amazing love, your terrific companionship, your enduring support, and your awesome inspiration 284 notes CHAPTER 33: THE POWER OF SCENARIO ANALYSES Further information and demonstration tests may be found on the website of Project Implicit, https://implicit.harvard.edu/implicit/demo/ Gary Klein, “Performing a Project Premortem,” Harvard Business Review, September 2007, https://hbr.org/2007/09/performing-­a-­project-­premortem Gary Klein, The Power of Intuition: How to Use Your Gut Feelings to Make Better Decisions at Work (New York: Crown Business, 2004) CHAPTER 34: VALUING LIQUIDITY AND OPTIONALITY Mohamed A El-­Erian, “Global Tug of War Is Focus for Investors,” Financial Times, February 9, 2015, http://www.ft.com/intl/cms/s/0/1e0e8662-­ ac80​ -­11e4-­9d32-­00144feab7de.html CHAPTER 35: IN SUM John Maynard Keynes, The General Theory of Employment, Interest, and Money (N.p.: CreateSpace Independent Publishing Platform, 2014) Norman Mailer, The Fight (New York: Vintage International, 1975) Eler_9780812997620_3p_all_r3.j.indd 284 12/9/15 3:26 PM INDEX Page numbers in italics refer to figures Abe, Shinzo, 173 accountability, 104 active inertia, 219 Afghanistan, 158 Africa, 16 “HIPC” Initiative in, 154–­55 African Americans, 86–­87 aggregate demand, 72 Airbnb, 112, 136–­37, 206, 211 Alderman, Liz, 93 Ali, Muhammad, 260–­62 Alloway, Tracy, 52, 114 alpha, 245 Alphavile, 207 Alternative for Germany (AFD), 99 Eler_9780812997620_3p_all_r3.j.indd 285 Amazon, 112, 213 Annan, Kofi, 81 annuities, 89 applications, 207 Appelbaum, Binyamin, 23, 50 Apple, 78, 94 Argentina, 188 default by, 78, 153 Arnott, Rob, 245 artificial intelligence, 205 Asian credit boom, 29 Asian crisis, 78, 105 Asian Infrastructure Investment Bank (AIIB), 104–­5, 106 Asian Monetary Fund, 105 asset managers, 118 12/9/15 3:26 PM 286 index asset prices, 89, 112, 122, 124 decoupled from fundamentals, 126, 128–­29, 134, 192 asset quality reviews (AQRs), 108 Atlantic, 85 austerity, 14, 87 bailouts, 55 Geithner’s defense of, 92 balance of trade, 192 Banaji, Mahzarin, 225–­26, 233, 238 bank deposits, 6–­7 Bank for International Settlements (BIS), 51, 60, 77, 80, 120, 165, 254 Bank of England, 126 creation of, xvii monetary stimulus by, 71 Bank of Japan: activism of, 184 and monetary stimulus, 61, 71–­72 unconventional policy of, 72, 191 banks: capital cushions of, 108–­9 credit created by, xviii excessive risks of, 32, 34–­36, 38 excess reserves at Fed of, 54 proposed nationalization of, 47 regulation of, 109–­10 safety nets for, 33 stress testing of, 108 see also finance Banque de France, 10, 76–­77 Barclays, 240 barriers to entry, 112, 209, 211–­12 Bear Stearns, 40, 239, 240 behavioral finance, 128 behavioral science, 26, 212, 222 bell curve, 173, 179–­81, 204, 217–­20, 219 Berggruen, Nicolas, 205 Bernanke, Ben, 70, 73 on central bank guidance, 190 congressional testimony of, 43, 48 Eler_9780812997620_3p_all_r3.j.indd 286 on economic collapse, 47 on emerging economies, 76 press conferences of, 20 on QE tapering, 75 reassurance on housing market by, 40 tapering by, 115 on trust deficit, 92 on unconventional policy, 14–­15 on “unusually uncertain outlook,” 26, 61, 138, 173, 212 beta, 245 Bezos, Jeff, 207 biases, 223–­28 big data, 205, 206, 209 bimodal distribution, 26, 174, 174, 204, 208, 217–­47 pivot from normal distribution to, 218–­20, 219 BIS Quarterly Review, 128 Black Monday, 73 BlackRock, 119, 135–­36 Bloomberg View, 22 blue dots, 20 Blyth, Mark, 149 bonds, 123 emerging-­market corporate, 118 high-­yield, 118, 204 U.S Treasury, 74, 114, 122 Borio, Claudio, 17 bottom-­up forces, 210 Brady Plan, 153 brands, 94 Brazil, 66, 74, 77, 160, 196, 244 market turmoil in, 196–­97 stagflation in, 78 2002 crisis in, 79 as wildcard economy, 187–­88 Bremmer, Ian, 102, 161, 193 Brescoll, Victoria, 226 Bretton Woods Agreement, 151 BRICS, 104–­7 Bruegel think tank, 43 Bruni, Frank, 89 12/9/15 3:26 PM index 287 Brynjolfsson, Erik, 205 bubbles, 36, 111 interest rates and, 60 Bullard, James, 143 Bullock, Sandra, 17 business cycle, 38, 70, 87, 146 Business Insider, 33 Calvin, Geoff, 179 Canada, 160 “can’t, won’t, and shouldn’t” syndrome, 149 capital flows, 74–­75 capital outflows, 192 Carney, Mark, 10, 36–­37, 55 Caruana, Jaime, 111, 113, 130 CBOE Volatility Index, 117, 117 “Central Banking: The Way Forward?” (symposium), 10–­11, 12–­15, 16 importance of, 251–­63 central banks: in 1970s and 1980s inflation, 18–­19, 31 alleged golden age of, 31–­32, 38 ballooning balance sheets of, 15, 20 branding of, 94 conventionality of, xvi–­xvii, xix divergent policies of, 189–­90 expectations influenced by, 19 failure to evolve by, 32–­33 financial stability purchased by, 172 fund managers’ criticisms of, 126–­27 hawkishness of, 142–­43 inequality and, 88–­90 lack of faith in, light regulation by, 38–­39 market involvement of, 126–­27 meetings of, 165 multi-­track policies of, 180 policy burdens of, 12–­13 Eler_9780812997620_3p_all_r3.j.indd 287 popular ignorance about, 17–­18, 21 as “quasi-­fiscal” agencies, 22, 48, 61 real growth vs., 172 reduced-­form equation used by, 146 responsibilities of, xvii–­xviii risks taken by, xix, 5–­6 secrecy of, 18 short-­term caution by, 143–­44, 147–­48 stock prices influenced by, 124–­25 systemic change and, 144 see also specific central banks central banks, in global financial crisis, xvi, 13, 14, 48–­51, 59, 121, 252–­54 asset prices decoupled from fundamentals by, 126, 128–­29, 134, 192 blunt instruments of, 123 central role of, xvi–­xvii, xix–xx, 12 criticisms of, 21–­23, 47, 55 limitations of, 163–­65 limited response of, 59–­61 sufficient tools lacked by, 141–­44 unconventional policies of, 13, 14–­15, 21–­22, 48–­49, 51–­52, 59, 60, 73, 89, 125, 142 certificates of deposit, 89, 95 Chiang Mai currency swap, 105 China, 77, 126, 160 currency move in, 74 domestic demand in, 184 economic growth in, 183–­84 economic strength of, 49 energy demand in, 200 exchange rates and, 65 growth rates in, 78, 200 influence of, 106 middle-­income transition in, 173, 184 rise of, 32 trade by, 65 12/9/15 3:26 PM 288 index Chinese credit boom, 29 Churchill, Winston, 251, 260 cities, 100 Citigroup, 41 cognitive diversity, 229–­32 commodity prices, 122 Compaq, 220 complexity, 175–­78 Congress, U.S., in failures to pass budgets, 87, 95, 149, 183, 193–­94 consumer confidence, 54 consumer enchantment, 94 coordination, 207 corporate cash, 121, 122, 133–­38, 196 corporate profitability, 133 corporate taxation, 149–­50 Covey, Stephen R., 229 credit, xviii, 17 credit booms, 29 Crimea, 160, 185 crossover funds, 74 crowdfunding, 112 Cuba, 203–­4 currency denomination, 155 currency depreciation, 65–­66 “currency wars,” 164–­65 Cyprus, 64 Danish People’s Party, 99 Darwin, Charles, 223 Dealbook, 207 debt, 36, 72, 79, 184 accumulation of, 15 debt and debt service reduction (DDSR), 153–­54 debt default, 14, 78, 97, 153 debt overhangs, 71, 72, 83, 152–­56 debt payments, 192 debt sustainability, 155 deflation, 51, 184 deleveraging, 14 Democratic Party, U.S, 98 democratization, 207 Eler_9780812997620_3p_all_r3.j.indd 288 demography, 71 Denmark, 11, 12 extremist parties in, 83, 99, 194 derivatives, 111–­12 digital revolution, 199, 207 Dimon, Jamie, 109, 116 direct lending platforms, 208 disinflation, 72 divergence, 182–­88, 189–­92, 193–­98, 199–­209 Dobbs, Richard, 210, 211–­12, 217 Dodd-­Frank, 109 dollar, 71–­72, 192 Draghi, Mario, 22–­23, 50, 52 on inequality, 84 driverless cars, 205 Dubai, 39 Dudley, Bill, 93 Dudley, William, 33 Dwyer, Jim, 38 earned media, 246–­47 Eastern Airlines, 221 economic growth, xvii, 6, 14, 15, 24, 62, 103, 178, 254 inclusive, 147–­48 slowdown in, xv, 72 Economic Report of the President, 146–­47 Economist, 10, 60, 180, 189 Edison, Thomas, 233 education, 205 education reform, 150 efficient market literature, 128 Eggertsson, Gauti, 71 elections, France, 196 elections, Greece, 99–­100 elections, U.S.: 2010, 194 2016, 170 El-­Erian, Mohamed, 48 Ellevate, 208 Emanuel, Rahm, 221 emergency funding windows, 48 12/9/15 3:26 PM index 289 emerging economies, 29, 160, 182 in international economy, 74–­80 low resilience of, 79–­80 employment remuneration, 205 energy supply, 200–­204 euro, xvi, 72 worries over collapse of, 50, 158 Europe, 126 banking system in, 157 central and eastern, 32 fiscal policy in, 151, 157 as free-­trade area, 158–­59 in global transition, 173 incomplete regional integration project in, 72 institutional initiatives opposed by, 105–­6 international issues and, 103 political disputes in, 194–­95 refugees in, 16, 158, 159, 194 regional institutions in, 158 as unimaginative, 156–­57 European Central Bank (ECB), 256 activism of, 184, 242 banks aided by, 187 complicated situation of, 94 continued stimulus of, 61 creation of, xvi and European banking system, 157 Fed’s divergence from, 189–­90 German criticism of, 142 Greece’s dependence on, 186, 195 liquidity injected by, 39, 40 and monetary stimulus, 71 negative interest rates pushed by, 51 quantitative easing by, 52 securities purchased by, 191 single-­mandate approach of, 73 and stress testing of banks, 108 unconventional policy of, 191 European Commission, 94 European Parliament, 99 Eler_9780812997620_3p_all_r3.j.indd 289 Eurozone, 50, 51, 172, 185 fragmentation averted in, 241–­42 GDP in, 63, 64 lack of historical awareness in, 156 low interest rates in, 89 political dysfunction in, 99 reform fatigue, 66 stress testing of banks in, 108 Switzerland affected by crisis in, 130–­31 unemployment in, 81 Ewing, Jack, 23, 50 exchange rates, 65, 71–­72, 79, 130, 192 exchange-­traded funds (ETFs), 114, 119 exogenous factors, 193–­98 exports, 65 Facebook, 246 failed states, 158 Federal Open Market Committee (FOMC), 20, 124, 125 Federal Reserve, U.S (Fed), 256 in Bear Stearns crisis, 40 creation of, xvi criticism of, 92–­93 dual-­mandate approach of, 73 ECB’s divergence with, 189–­90 end of monetary stimulus by, 61, 115 excess bank reserves at, 54 finance overseen by, 92–­93 increased transparency in, 19–­21 language used by, 125, 190 and Lehman crisis, 42 mission statement of, xviii–xix monetary stimulus by, 71–­72, 100, 144 quantitative easing by, 54, 55, 125, 190 on rising inequality, 86 scrutiny of, 142 “Fedspeak,” 18 Feroli, Michael, 127 12/9/15 3:26 PM 290 index FICO credit scores, 209 Filardo, Andrew, 128 finance: in eurozone crisis, 50 Fed’s oversight of, 92–­93 ignorance of, 33–­34 increasing role of, 34–­35 inequality and, 85–­86 lack of trust in, see also banks financial buffers, 79 financial instability, xvi, xx, 8, 9, 15, 21, 23, 54, 61–­62, 74, 111, 124, 137, 142, 169, 170, 192, 257 see also global financial crisis financial instability hypothesis, 54, 111 Financial Stability Board (FSB), 103–­4 Financial Times, 18, 19, 41, 52, 71, 107, 160, 207 financing, 133 Fink, Larry, 135–­36 FinTech, 209 fiscal policy, 148–­51 Fischer, Stanley, 83, 129, 143 Fisher, Richard, 126 flash crash, 74 foreign exchange markets, 92 Foreman, George, 260–­62 Fortune, 231 Fortune Global 500, 106 forward policy guidance, 20, 128, 190 Four Seasons, 211 fragility, 33, 129, 178 franc, Swiss, 12 France: extremist parties in, 83, 194 in G8, 160 unemployment in, 81 Friedman, Tom, 161 Front National, French, 194 Fry, Richard, 86–­87 Furman, Jason, 147 Future of Work, 205 Eler_9780812997620_3p_all_r3.j.indd 290 G-­0 world, 102, 161, 193 G7, 160, 164 G8, 160 G20, 49, 50, 152, 160, 170 game theory, 159 Gardner, Dan, 249 Geithner, Tim, 33 Europe visited by, 161 on fixing financial system, 55–­56 on nationalization of banks, 47 on trust deficit, 92 General Social Survey, 95 Germany, 11, 12 bonds in, 36, 36, 74, 115 and demand mismatch, 151 ECB criticism in, 142 in G8, 160 Greece’s relationship with, 159 political disputes in, 194 reforms in, 67 unemployment in, 81 Giugliano, Ferdinando, global financial crisis, 24, 40–­42 consequences of, xv role of central banks in, xvi, xix, 13, 14 globalization, 65 global systemically important banks (GSIBs), 109 global transitions, 171–­73 Goldin, Ian, 206 Google, 213, 235–­36 government bonds, 11, 95 negative interest on, Graccident, 173, 186–­87 Grant, Adam, 226, 233 Grant, Jim, 59 Gravity (film), 17 “Great Recession, The” (Fischer), 83 Greece, 6, 64, 65, 66, 142, 195 bonds in, 36, 36 budget deficit in, 66 debt in, 152–­53, 185 12/9/15 3:26 PM index 291 default by, 12 and demand mismatch, 151 elections in, 99–­100 GDP of, 67 Germany’s relationship with, 159 loans to, 156 reform measures in, 66 reliance on ECB of, 186, 195 in T junction, 176 tourism in, 186 unemployment in, 81, 186 as wildcard economy, 185–­86, 188 Greenspan, Alan, 18, 20, 31, 33, 73, 93 Greenwald, Anthony, 225–­26, 238 Haldane, Andy, 24 Hansen, Alvin, 71 Harding, Robin, 42 health, 150 hedge funds, 118, 126, 127 Hensarling, Jeb, 93 Hewlett-­Packard, 220 Hildon company, 120–­21 Hilsenrath, Jon, 190 Hilton group, 211 “HIPC” Initiative, 154–­55 Hispanics, 87 Hofmann, Boris, 128 House of Debt (Mian and Sufi), 35 housing market, U.S., 40 How Google Works (Schmidt and Rosenberg), 235 Huffington, Arianna, 205 Hunt, David, 116 hyperconnectivity, 161–­62 Iacocca, Lee, 57 IBM, 205, 220 Iceland, 39, 64 Imagination Game, The (film), 10 Implicit Association Test, 238 improving economies, 182–­83 incentives, 134 Eler_9780812997620_3p_all_r3.j.indd 291 “Inclusive Capitalism” conference, 36–­37 income, inequality of, 16, 78, 84–­90, 147, 150, 173, 183 India, 74, 77, 160 improving economy of, 182, 183 pent-­up growth in, 78 individual empowerment, 205 Indonesia, 160 inequality, xv, 7, 9, 62, 71, 83, 137, 178 heightened concerns over, 55 of income, 16, 78, 84–­90, 147, 150, 173, 183 and incentives, 88 interest rates and, 89–­90 neuroscience and, 88 of opportunity, 84, 87, 173, 150, 183, 255 of wealth, 78, 84, 85, 87, 88, 150, 173, 183, 255 inflation, xvii, 6, 15, 43, 61, 72, 73, 78 in 1970s and 1980s, 18–­19, 31, 93 worries about, 15 inflation targets, 19 infrastructure, 148, 150 investment in, 71 Instagram, 246 institutional credibility, 91–­96, 137 insurance, life, 95, 142 insurance companies, 89–­90, 118, 150 interest rates, xviii, 13, 20, 155 inequality and, 89–­90 low levels of, 54, 143, 153 negative, 6, 11–­12, 51, 180 steady-­state, 73 International Monetary Fund (IMF), 12, 76, 94, 95, 105, 153, 154, 160, 162–­63, 177, 239 Japan’s arrears to, 173 international reserves, 79 international system, 159–­63 Internet, 199, 207 12/9/15 3:26 PM 292 index Ip, Greg, 110 Iran, 98, 202 Iraq, 16, 158 Ireland, 39, 64, 187 Irwin, Neil, 19 ISIS, 100, 162, 197–­98 Italy, 12 in G8, 160 inadequate growth in, 67, 68 unemployment in, 81 Ivory Tower (film), 89 Jackson Hole conference, 14–­15, 76 Japan, 23 credit boom in, 29 in G8, 160 GDP in, 63, 64 in global transitions, 173 inadequate growth in, 6, 67, 68 as lesson for West, 70 lost decades in, 72, 173 reform fatigue in, 66 job creation, 7, 9, 14, 15 Johnson, Michael Bassey, 175 JPMorgan Chase, 40, 240 Jurassic World, 167 Kahneman, Daniel, 222, 233, 242 Karan, Donna, 167 Kashyap, Anil, 128 Kay, Alan, 48 Kennedy, John F., 63 Keynes, John Maynard, 121, 169, 251 Khan Academy, 100 King, Martin Luther, Jr., 139 Kinshasa, Zaire, 260–­61 Klein, Gary, 242 Kochhar, Rakesh, 86–­87 Kocherlakota, Narayana, 128 Kohn, Donald, 92–­93 Krugman, Paul, 33 Lagarde, Christine, 70, 129 language tantrum, 125–­26 Eler_9780812997620_3p_all_r3.j.indd 292 Latin America, 187 debt in, 153–­54 lost decade in, 76, 154, 155 Lean In (Sandberg), 231 Lehman Brothers, 42, 43, 44–­45, 50, 177, 239, 240 Lending Club, leverage, 32, 39, 45 unsustainable, 64–­65 LIBOR, 92 Libya, 158 life insurance, 95, 142 LinkedIn, 246 liquidity, 49, 54, 114–­19, 147, 153, 191, 196, 243–­47 liquidity-­assisted growth, 13 liquidity paradox, 116–­17 liquidity traps, 70 loans, 112 London, G20 Summit in, 49, 50 low-­flation, 51, 72 Lula da Silva, Luiz Inácio, 187, 196–­97 McAfee, Andrew, 205, 258 Mackenzie, Michael, 114 McKinsey Global Institute, 89, 206, 211, 226 macro changes, 199–­209 macro-­prudential measures, 129 Mailer, Norman, 262 Manyika, James, 210, 211–­12, 217 marginal propensity to consume, 88, 150, 203 market failure, 44–­46 market instability, 178 Marks, Howard, 114, 243 maturity, 155 maturity/currency mismatches, 192 media, traditional, 206–­7 megacities, 100 Mehrota, Neil, 71 merger and acquisition (M&A) deals, 122, 133, 245 12/9/15 3:26 PM index 293 meritocracy, 106 Mexico, 160, 188 tequila crisis in, 78 Mian, Atif, 35 Middle East, 16, 64, 185 middle-­income transition, 173 Miller, Rich, 69 Minsky, Hyman, 54, 111, 121 misery index, 78 mobility, 207 money market segment, 46 money supply, xvii, 48 Montier, James, 141 moral hazard, 40–­41, 92, 128 mortgage crisis, 33, 35 multi-­speed growth, 180 Netherlands, 93 networking, 207 neuroscience, 26, 212 inequality and, 88 new development bank, 104–­5 New Keynsianism, 71 new normal, 68–­69 New Yorker, 20 New York Federal Reserve, 93, 239 New York Times, 19, 23, 50, 89, 93, 112, 200, 207, 226 New Zealand, 19 Nigeria, 16 NORC, 95 normal distribution, 173, 179–­81, 204, 217–­20, 219 North Atlantic credit booms, 29 Noyer, Christian, 10, 11, 50 nuclear weapons, 197 Obama, Barack, 98, 203–­4 O’Brien, Matthew, 43 oil, 200–­204 price of, 54, 126, 185, 188, 201–­2, 202, 203, 204 opportunity, inequality of, 84, 87, 150, 173, 183, 255 Eler_9780812997620_3p_all_r3.j.indd 293 Organization for Economic Co-­operation and Development, 84 Organization of the Petroleum Exporting Countries (OPEC), 200–­201 Ostrander, Madeline, 84 P2P (peer-­to-­peer) interactions, 112, 208, 209 Page, Scott, 229–­30, 231, 233 paid media, 247 Pan American World Airways (Pan Am), 221 Paribas, 39 Pattanaik, Swaha, 132 Paulson, Henry, 43 congressional testimony of, 48 on economic collapse, 47 Payoff, 7, 208 Pelosi, Nancy, 43 pensions, 118, 142 personal computers, 137, 220 Petrobras, 187, 244 Piketty, Thomas, 87 PIMCO, 67–­68, 175, 220, 236–­37, 239–­41 Plosser, Charles, 21, 124, 143 political dysfunction, xv, 97–­101, 102–­7, 137 political extremism, 16, 51 Portugal, 64, 187 predictions, 169–­74 price stability, 14, 62 pricing anomalies, 180 Prince, Chuck, 41 productivity, 148, 150 productivity trends, 71 protectionism, 103 public-­private partnerships, 106, 148, 150 Publilius Syrus, 91 Putin, Vladimir, 160, 185 12/9/15 3:26 PM 294 index quantitative easing, 52, 107, 128, 191 inequality and, 89 QE3, 54, 125 QE4, 54, 55 U.S tapering of, 75, 190 race against machines, 71 Rajan, Raghuram, 10, 76, 77 rational bubble riding, 53–­54 rational fool, 170–­71 reduced-­form equation, 146 refinancing, 35 refugees, 16, 158, 159, 194 regulations, 7, 109–­10, 112–­13 international, 103–­4 lack of, 32, 34 regulatory capture, 42 Reinhart, Carmen, 156 remote health diagnoses, 205 Rent the Runway, 112 Renzi, Matteo, 156–­57 Republican Party, U.S, 98 risk, 129–­30 and corporate cash, 133–­38 migration of, 108–­13 uncertainty in, 171 see also liquidity risk mitigation instruments, 33 risk premium, 134 Rivlin, Alice, 189 Robinson, Joan, 31 Rogoff, Kenneth, 156 Rosenberg, James, 235 Roubini, Nouriel, 116 Rousseff, Dilma, 187, 188 Rumble in the Jungle, 260–­62 Russia, 77, 244 Cuba supported by, 204 currency instability in, 78, 126 default by, 78, 153 in G8, 160 oil prices and, 203, 204 sanctions on, 185 Saudi Arabia vs., 202 Eler_9780812997620_3p_all_r3.j.indd 294 in Syrian crisis, 197 Ukraine and, 172, 185, 197–­98 as wildcard economy, 185, 188 Samaras, Antonis, 66 Sandberg, Sheryl, 226, 231, 233 Saudi Arabia, 160, 201–­3 savings accounts, 95 scenario analyses, 238–­42 Schmidt, Eric, 235 Schoenholtz, Kermit, 127 Schumacher, Ernst F., 175 Scotland, 95–­96 second-­generation structural reforms, 80 second machine age, 205 secular factors, 87 secular stagnation, 24, 70, 179 securitization, 34 self-­disruption, 213 self-­interest, 142 self-­organization, 208 Sellers, Pattie, 231 Senate, U.S., 98 Banking Committee of, 93 sexism, 227 shadow banking, 33 shale technology, 200, 204 sharing economy, 100 Shin, Hyun Song, 127 Singapore, 11 60 Minutes, 20 Slaughter, Anne-­Marie, 233 smartphones, 199 social media, 207 social safety nets, 83 social tensions, 137 solvency, 153 Somalia, 158 Soros, George, 126 South Africa, 160 South Korea, 160 trade by, 65 Southwest Airlines, 221 sovereign wealth funds, 150 12/9/15 3:26 PM index 295 Soviet Union, 197 Sputnik and, 177 Spain, 12 extremist parties in, 83, 194 unemployment in, 81 Spence, Michael, 148, 159, 182, 198 spending, 148–­52 Sputnik moments, 177, 257–­58 stability, 121 stabilizing economies, 182, 183–­84 stagflation, 78 stagnating economies, 182 Standards & Poor (S&P), 135 Starwood, 211 Stein, Herbert, 37 Stein, Jeremy, 93, 128, 130 stock market, 124–­25 stress testing, 108 structural factors, 87 structural reforms, 72, 147–­48 Sufi, Amir, 35 Sull, Don, 220, 230 Summers, Larry, xv, 62, 70 superadditivity, 230 surcharges, 109 Swiss National Bank: currency peg exit of, 11–­12, 51, 130–­31 negative interest rates of, 11–­12 Switzerland, 39 as affected by Eurozone crisis, 130–­31 central banks’ meetings in, 165 Syria, 16, 83, 158, 202 Russia-­West tension over, 197 U.K response to crisis in, 162 Syriza, 66, 97, 99–­100, 186, 194, 195, 196 System 1, 222 System 2, 222 tablets, 199 Taleb, Nassim Nicholas, 162 taper tantrum, 74, 75, 125, 190 taxes, incentives and, 150 Eler_9780812997620_3p_all_r3.j.indd 295 tax loopholes, 149 tax reform, 148 Tea Party, 16, 97, 193, 194 technological change, 148 technological revolution, 100 technology, 199–­209, 210–­13 Tetlock, Philip, 249 Theory of Everything, The (film), 145 Thomson Reuters Core Commodity CRB Index, 122 TIPs, 119 T junction, economy as, 176–­78, 177, 179, 210, 224, 230, 257, 258, 259–­60, 263 top-­down forces, 210 tourism, 186 tourist flows, 74–­77 trade, 44, 45, 65, 103 Trans World Airlines (TWA), 221 Treasuries, U.S., 74, 114, 122 Trichet, Jean-­Claude, 39 Truman, Harry, 215 trust, 46, 104 trust deficit, 91–­96 Tsipras, Alexis, 66 Turkey, 77, 160, 188 Twitter, 246 Type I errors, 239 Type II errors, 239 Tyson, Mike, 38 Uber, 112, 136–­37, 206, 211 Ukraine, 64, 160, 172, 185, 197–­98 uncertainty, 171 unemployment, xvii, 44, 45, 62, 78, 81–­83, 103, 179 effects of, 82–­83 in Greece, 81, 186 in stagnating countries, 184–­85 structural, 51 youth, 8, 81–­83, 82 United Kingdom, 158 EU referendum in, 196 in G8, 160 GDP in, 63, 64 12/9/15 3:26 PM 296 index United Kingdom (cont.): leverage in, 64 light regulation in, 38 low interest rates in, 89 Sotland referendum in, 95–­96 stress testing of banks in, 108 Syria response of, 162 United States, 23 budget in, 87, 95, 149, 183, 193–­94 in cold war, 197 Cuba deal of, 203–­4 domestic distractions in, 160–­61 economic collapse in, 44–­47 economic recovery of, 6, 42, 48–­49, 54, 82, 86 economic rescue plan in, 43 exchange rates and, 65 fiscal policy in, 149 in G8, 160 GDP in, 63, 64 global financial crisis as originating in, 79 in global transitions, 173 improving economies of, 182–­83 inflation in, 18, 31 institutional initiatives opposed by, 105–­6 international issues and, 103 leverage in, 65 light regulation in, 38 low interest rates in, 89 political dysfunction in, 98–­99 shale technology in, 200 Sputnik and, 177 stress testing of banks in, 108 unemployment in, 44, 45, 82, 86 wage recovery in, 86 yield curve of, 180 see also Federal Reserve, U.S urbanization, 100 U.S Monetary Policy Forum, 127–­28 Valls, Manuel, 99 Venezuela, 6, 187, 188 Cuba supported by, 204 Eler_9780812997620_3p_all_r3.j.indd 296 currency instability in, 78 oil prices and, 203, 204 vesting periods, 110 VIX, 117, 117 volatility, 52–­54, 121, 123–­24, 178 Volcker, Paul, 18, 31, 73, 93 Volcker Rule, 114 VOX, 207 Wall Street Journal, 52, 53, 190 War Games (film), 238 Warren, Elizabeth, 93 Washington Post, 43, 207 Watson, 205 wealth, inequality of, 78, 84–­85, 87, 88, 150, 173, 183, 255 When Harry Met Sally (film), 114 White, William S., 102 White House Council of Economic Advisers, 147 wildcard economies, 185–­88 “winner-­take-­all” investments, 87, 136, 206 Woetzel, Jonathan, 210, 211–­12, 217 Wolf, Martin, xv, 29, 71, 132 World Bank, 76, 105, 177 World Economic Forum, 55 WorldPost, 205, 258 Yellen, Janet, 10, 73 on economic projections, 24 on excessive risk, 129 on Federal oversight of finance, 92 on Fed impact on stock prices, 124 on financial system, 23 press conferences of, 20 on slow recovery, 42 on unconventional policy, 73 Yemen, 202 yen, 72 Yergin, Daniel, 20 12/9/15 3:26 PM ABOUT THE AUTHOR Author of the New York Times and Wall Street Journal bestseller When Markets Collide and winner of the Financial Times/Goldman Sachs Business Book of the Year, Mohamed A El-­Erian was named to Foreign Policy’s list of “Top 100 Global Thinkers” four years in a row He chairs President Obama’s Global Development Council and is a columnist for Bloomberg View, a contributing editor at the Financial Times, and chief economic adviser of Allianz He has served as CEO of PIMCO, deputy director of the International Monetary Fund, CEO of the Harvard University endowment, managing director at Salomon Smith Barney, and chair of Microsoft’s Investment Advisory Board An honorary fellow of Queens’ College (Cambridge University), he was awarded master’s degree and doctorate at Oxford University after completing his undergraduate degree at Cambridge University @elerianm Eler_9780812997620_3p_all_r3.j.indd 297 12/9/15 3:26 PM Eler_9780812997620_3p_all_r3.j.indd 298 12/9/15 3:26 PM ... Business School, and visiting professor of economics at Peking University THE ONLY GAME IN TOWN BY MOHAMED A EL-ERIAN The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. ..Praise for THE ONLY GAME IN TOWN The Only Game in Town achieves the nearly impossible: It takes complex financial issues and events and makes them both enlightening and entertaining It’s a must-read... Collapse When Markets Collide: Investment Strategies for the Age of Global Economic Change THE ONLY GAME IN TOWN CENTRAL BANKS, INSTABILITY, AND AVOIDING THE NEXT COLLAPSE Mohamed A El-Erian YALE