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everybody on this call believe it or not have been a disinflationary force we are now enabled to do things that we were not able to do before which takes away pricing power i call it very simply the amazon google and uber effects uh muhammad just to pick up on that theme on central bank easing of course it's been a very very major uh talking point uh throughout 2020 and in fact in the lead up to 2020 and i guess the timing is quite interesting because of course we have the federal reserve convening this week for their last policy meeting of 2020 um of course amid surging corona various cases stateside and unbalanced u.s economy which you related to and unfortunately no congressional fiscal package to speak of yet at the time of this recording many economists see this as an opportunity for perhaps a dovish fed to expand on that 120 billion monthly bond purchases or they may even look at adjusting the maturity of these purchases on the other hand there's also a school of thought that suggests the fed may sit on their hands with the hope of putting pressure back on the federal government and calling for more action from the fiscal side um and perhaps waiting until until january to decide on on additional measures with so much uncertainty muhammad leading up to this meeting what are you expecting uh to come out of this so let me let me divide it between what the fed should do go off and what the fed will do the fed should sit on his hands the fed should not be dragged back in because i think there is a lot of evidence right now that when you look at the key phrase that ben bernanke put out there in 2010 when the fed went unconventional not to normalize markets but to pursuing macroeconomic objectives he said quote it's about benefits costs and risks and i think most people agree now that the economic benefits of more qe are de minimis but importantly the costs and risks are going up so what the fed should do is sit on its hands to quote you but what the fed will do is be even more dovish and to understand that you've got to understand the mentality of a central bank um the central bank is like it's like a doctor a doctor never walks away from that patient never even if the doctor doesn't have the right medicine the doctor will continue to try and treat the patient and what the fed is looking at right now is the worst of all worlds it's this risk in the us it's main focus of a vicious cycle public health is getting worse covet is basically out of control right now in terms of hospitalization in terms of death in terms of cases over 200 000 cases in the u.s over 30 000 in california alone public so there's a public health issue the economy as i mentioned is already contracting as you pointed out fiscal policy is not getting anywhere and what will materialize and i suspect something will materialize will be very small and individual behaviors people are losing trust in the process so what you get is risk aversion building up economic risk aversion building up on the economic pressure so in a situation like that the fed will feel that it has no choice but to do more so expect the fed to at least at least give us very reassuring guidance on qe basically telling us it's not just low for long on weights it's long for long on on on qe and that will continue this process of providing markets enough reassurance of liquidity to set aside all the other things that are less convenient so it certainly is a growing risk and it's a growing risk um for two reasons one and there's a lot of uncertainty here so so let me let me explain uncertainties first we have gone through a massive period of disinflation of downward pressure on crisis and it has to do with our behavior everybody on this call believe it or not have been a disinflationary force we are now enabled to do things that we were not able to do before which takes away pricing power i call it very simply the amazon google and uber effects amazon what do we do in amazon we basically disintermediate suppliers that's what we do when you order on amazon you're taking out someone in the supply chain and that lowers pricing power when you google you search you become a much more informed consumer you become much more price sensitive you gain okay pricing information which means that you you again limit how much you can be charged on pricewise that's this inflationary an uber which which is spreading which is the notion that you bring existing assets cars in uber exist but they're not being used efficiently when you bring existing cars into the marketplace what you do is you increase supply in a way that limits the price rise so we have gone through this multi-year effects i i don't know whether these are repeated every year or not my own gut feeling is there's a limit to that disinflationary effect so on the supply side would have been very strong this inflationary winds are going to start to die down on the demand side you're having a reaction to increase concentration we're coming out of this covate with much more concentrated firms than before plus you have all this massive liquidity so my own view is there's a really high risk that the markets even with the adjustments you've noted are underestimating the longer term longer term not not this year not next year but the longer term from 2022 onwards the longer term inflationary trends they really are underestimating the longer term inflation trends and that we will see a significant steepening of yield curves as people realize that they no longer have these supply disinflationary where there's stag so that's deflation part yes i do worry about deflation part whether it's the stack part is going to depend on what comes after the vaccine it's the scarring element scarring is this very simple economic notion that you turn short-term problems into long-term structural issues let me give you two examples suppose today you are a restaurant or suppose today you are a small shop that has to shut down because of restrictions if you go bankrupt recreating that shop is much much harder than if you just simply open it up again before that if you are someone who just graduated from school and university entering the labor force and who is unemployed people may not be hiring you right now because of situation the longer you are unemployed at the beginning of your career the more unemployable you become and that's especially true for people who drop out of high school with few qualifications and skills so these longer term scarring elements are the ones we have to keep an eye on if they become material then yes go off yes we may end up with stagflation i i'm more confident about deflation side that we may see two and a half to three percent inflation in two to three years than i am on the stack side because i think policy can limit the amount of scarring if we get the proper policy response look i think that when you reduce what we're going through right now you end up with four major theme they explain about call it 80 to 85 percent of what we're going through one is exactly what you mentioned inequality covet is proven to be what i call the great unequalizer it has increased inequality of income it has increased inequality of wealth and most importantly it has increasing inequality of opportunity the second thing we're seeing not just within countries and around the world is dispersion a very big difference in sectors a very big difference in countries um you know i used to work at the imf a long long time ago it would have been unthinkable to have a year like 2020 where china may grow by two to three percent and the uk may contract by 11 spain by 16 it would have been unthinkable within the advanced countries to have a four percent contraction in the u.s and a 16 contraction in spain but we're having this great dispersion that's the second theme the third theme is scarring the longer term effects and the fourth theme which is a result of all that is what i call the great disconnect that depending whether you are on main street or wall street life is very different if you're in the financial sector it's hard to believe that we've gone through a generation defining moment u.s indices are at record high near record highs depending on which they talk about um bond prices have been very well behaved the the currency markets have been well behaved credit spreads liquidity spreads any spread you look at is really compressed and basically the financial markets say there's nothing going on everything is fine of course it's a very different issue in the wheat economy europe is back into a double dip recession the u.s is slowing really fast we saw last week's dropless number is yet another indicator and to reconcile these two things it's about central bank liquidity it's about the ample and predictable provision of central bank liquidity and this is really important to understand that if you're looking around the fed is very attractive because the fed can do things without going to congress not everything right but it can do a lot without going to congress um so the fed is what people look to as to be not just a first responder but the constant responder now on the other side the fed inherits more and more objectives with the same tools so what the fed looks for is to increase its flexibility so let's talk about what it did in august in early august it introduced its new medium-term policy framework and as you pointed out zach the main issue of the medium-term policy framework is more flexibility vis-a-vis the inflation target that we will no longer aim for a specific inflation target we will aim for an average inflation target and we could go well above that number to achieve the average over time now on the surface that it that looks like great flexibility if you sort of scratch your head a little bit so you say let's so let me get this right it the fed and of course the ecb on the other side of the atlantic have not been able to achieve the inflation target and the answer to that is to raise the inflation target that doesn't make sense but it does make sense if you think of them as wanting more flexibility and that's what they're looking for as as they inherit more and more objectives and now we have four objectives in play you have to understand we have the dual mandate employment and inflation we have a financial stability objective that's out there and now as you pointed out the fed has stumbled into an inequality let me say first of all if you're a low-cost producer if you're saudi arabia if you are abu dhabi um your outlook is very different than if you're ecuador and you're a high cost producer if you're a high cost producer your outlook is pretty scary it's pretty scary on account of three things one is that demand is being eroded day in and day out by move away from hydrocarbon and that's going to continue that's not going to stop um if anything that's going to build up steam so you have a move away from hydrocarbon and you're the high cost producer in that world that's not great news two is that the willingness of a few countries saudi russia and uae in particular in an opec plus context to give up their market share for you is going to be declining over time so don't look for others to carry your burden and then the third element is you are competing with alternative uh providers of energy and those pro and alternative energy are going to be subsidized and you're not going to be subsidized right so i i do think that if you're a high cost producer your outlook is pretty grim right now even when demand comes back um if you're a low cost producer you have time but that time has to be used to do two things and you're seeing it happening around the middle east one is diversify your wealth understand that your wealth that's under the ground can be diversified today to make sure the senior pub scene and future populations are as protected as current population have been and past population have been that's the first thing you do the second thing you do is is is ironically you are also very well positioned for alternative sources of energy and you can play it from position of strength so so i do think there's opportunity there but you have to think very differently from the very strict opec mindset which is we control supply until demand comes back and this is a repeated game this is not a repeated game anymore this is a different game and there's a lot of tendency now to fade the dollar say that this is it the dollar is is going to lose its reserve currency status whenever someone tells you that something is going to go away the next question the immediate next question you should ask is what's going to replace it because in a in a global system you cannot replace something with nothing so what when someone says the dollar is no longer going to be the global reserve currency the question is okay that's fine i'll give you that what's it what is the global reserve currency if it's not the dollar and the answer is well it can't be the euro because the euro actually is in a worse situation than the dollar is it can't be the chinese winnemby because the chinese renemi is um being issued by a country that doesn't have capital account liberalization that actually doesn't want the currency to be global it's looking for something else it can't be the sdr because the sdr the rate of acceptance of the str is quite low so this has to be the dollar right so ibrahim we're not going to see the dollar give up as reserve currencies here but we are going to see a different global system and to understand that let's say you're sitting right now in parts of asia you bought into a system where the nucleus of the system is the u.s the u.s is the issuer of the reserve currency the us has the most liquid global markets so the u.s actually you outsource your savings to the u.s because they are the most liquid markets and in the middle of that the us acts as the anchor to the system but when when you're an anchor you run an implicit contract with the rest of the world you provide those services and you get incredible what they call exuberant privileges from doing so but in return you run the system responsibly and what we've seen in the last 12 years is an erosion in the trust that this system is being run responsibly first the global financial crisis originated in the united states and remember in this system crises are supposed to be in the periphery not in the center and then second the u.s went in 2017 from being the champion of free trade to being the most protectionist advanced economy so the trust in this system it gets eroded so what do you do if you're sitting in asia you do what china's doing you start building pipes small pipes around the system and these spikes are proliferating they started by being bilateral payments agreement with two countries settle in their own bilateral currencies and don't go through the dollar then it became the the bri which is a regional arrangement that's extended now as far as italy just to give you a notion of it and this initiative with the one belt one road the belt and road initiative comes with a payments element to it so what we're going to see is the dollar remain in the reserve currency but its influence gets eroded by all these little pipes that are being built in the system that's that's what the global system is going to look like for the next 10 to 15 years
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