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What if the very forces meant to hold the global economy together are the ones quietly tearing it apart?
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Today's guest has spent decades mapping exactly how that happens.
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Ashwar, welcome.
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It's a pleasure to talk to you about it.
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Yes.
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So I guess I would love to start with the Doom Loop.
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And as far as I understand, you went into this project with a certain amount of optimism and eager to tell a positive story.
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And at some point along the way, you veered what happened.
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Things changed.
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So the idea for the book was born from my trying to make sense of what was happening in the world around us.
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You know, there is a great deal of turmoil that we see, especially in the geopolitical order, but also in the world of finance.
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And I wanted to make sense of this.
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And when I sit down to write a book, it's usually to make sense of the world in my own mind.
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And I started out with what I thought was a very clear and compelling thesis.
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That you know, in the post-war period in the 1990s, for instance, with the breakup of the Soviet Union, the United States became the dominant power in every respect economic, military, financial, and now, of course, economic power is more evenly distributed.
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And to an economist, instinctively one might think that more balanced competition is good for efficiency and it's also good for stability because the powers can keep themselves in check.
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So the hypothesis I started out with is the following that maybe we are just in the transition on the path to what we economists would call a new equilibrium where things are more balanced, and maybe we are just in this very volatile period during this transition, and we're going to get out of it, and everything is going to be just fine.
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So I started thinking about all the forces that could actually bring us back towards the stability.
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And as I started working through the forces in my mind, a much darker conclusion took hold in my mind that, in fact, each of these forces, rather than promoting stability, might in fact engender instability.
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So that became the defining theme of the book.
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So the notion of the doom loop is that economics, domestic politics, and geopolitics are reinforcing each other in this negative feedback loop.
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There was a period in the 1980s, 1990s when they were reinforcing each other in a positive direction, but that seems to be lost.
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So unfortunately, I came to the conclusion that many of these forces that I thought would create stability might in fact be leading us down this road to instability.
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So was there a single instance or event that prompted you to have this rethinking?
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Actually, I should tell you that the first draft of the book was written in 2024, and I had finished the full first draft of the book in October of 2024, just a couple of weeks before the November elections.
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I then read through the whole manuscript and thought, boy, this looks way too dark.
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Let's wait for the elections and let's see how things settle down.
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And maybe I should really rethink the hypothesis of my book.
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Because remember, during the entire writing of this book, my heart was pulling me in one direction towards this notion that we should be moving to a better world.
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And my head, all the analysis I was doing, was pulling me in the other direction, and I wanted my heart to win.
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But then the elections came along, but it was a long way to be.
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One of the forces that I talk about in my book is that of globalization, which of course is related to the topic of currencies.
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So in the 1980s, 1990s, and even 2000s, there was a sense that globalization might work for everybody, that in a sense we could move towards a world where countries would trade with each other, would send financial flows between each other, and they could promote shared prosperity.
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And for a while that did seem to work, but then it sort of started unraveling, and there was a sense that globalization works for some people and not for the others.
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So the forces of globalization infected domestic politics that then, as we can see in the US-China relationship, for instance, ended up infecting geopolitics as well.
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And we can talk more about globalization as we go along, but one of the key elements of globalization, of course, is international financial flows, flows of money, investors looking for diversification of their portfolios by investing in foreign assets, companies looking to raise capital in international financial markets.
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And in all of these markets, it turns out the dollar has been dominant.
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It's been dominant as a payment currency, as a reserve currency, a currency in which foreign central banks hold their sort of rainy day funds and also as a currency for denominating international transactions.
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In all of these dimensions, the dollar has remained dominant for a long time, but the world is chafing at this dominance.
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Why?
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Because the US, which used to be a paragon of stable policies, is no longer promoting that stability.
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We see very volatile policies coming out of the US.
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The US government is issuing a huge amount of debt, which would make investors worldwide concerned about investing in treasury securities.
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And of course, the US has weaponized the dollar.
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It has imposed financial sanctions against many of its rivals, such as Russia, Iran, Venezuela, but even against some of its traditional allies who are not falling in line with US policies.
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So the world desperately wants to disengage from the dollar.
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The dollar share of foreign exchange reserves has declined a little bit.
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The dollar's share and certain other elements has certainly gone down.
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But then if you start looking at the share of the dollar in international payments, in foreign exchange turnover, which is an important indicator of currency's dominance, in the denomination of international debt securities issued in global financial markets, in all of these dimensions, the dollar remains as dominant as ever.
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What is going on?
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The problem is that there are no good alternatives.
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The Euro is a mess.
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Politically and economically, it is not holding together very well.
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The other traditional reserve currencies currencies are not doing well.
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And one um potential rival started emerging in 2010, which is the Chinese Renmin B.
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And for a while it looked like the Chinese government's desire to internationalize the Renmin B might get traction.
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But then it turned out that the Renmin B stalled.
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Why?
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Because the Chinese government doesn't want to allow the free flow of capital across its borders, and that limits the ability for international investors to use that currency for payments, for buying assets, and so on.
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And fundamentally, people don't seem to trust China's institutions.
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You know, there is no clear system of checks and balance.
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Capacity and the rule of law.
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Now you might argue, and people have argued, that in the US, these institutions which are very important for the dollar's dominance, you know, the rule of law, the independence of the central bank, the Federal Reserve, the checks and balances are really withering away.
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But it turns out in international finance, it's all relative.
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You don't have to be the best team in the tournament, so long as you're the least worst, you're still going to win.
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So that's the paradox the world faces.
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The US is the dominant uh creator of the dominant currency.
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The world wants to detach, but what we are seeing is what I've characterized as fragmentation in the second tier, the euro, the pound sterling, the Japanese yen, um, and a whole host of smaller currencies are all sort of battling it out, leaving no serious rival to the dollar.
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So it's a terrible situation for the world.
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It's good for the US in some ways because it makes it easier to bring capital into the US.
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But ultimately, I don't think this is good for either the US, the world, or the global financial system.
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Well, there are you've indicated that things like stable coins are wildcards, right?
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I mean, so I mean there with stable coins there's fiat-backed, there's you know, uh there's crypto backed, there's commodity backed, so gold-backed or whatever.
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So what what I guess maybe could stable coins present uh an alternative or uh uh make the dollar a little less the the the the you know the only game in town?
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So that was in fact what my uh paper presented at the Jackson Hole Symposium was about, you know, financial innovations, because you know it seems like nothing is changing the international monetary system.
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Maybe financial innovation will create a level playing field where the countries that are issuing currencies that are less trusted can now start competing on a level playing field.
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Small countries can start you know allowing their currencies to be used more easily for international transactions.
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In principle, that works.
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In practice, there might be a very different outcome, and maybe it's worth talking about exactly what stable coins are.
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So stable coins are cryptocurrencies, just like Bitcoin, but with one very important difference.
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Something like Bitcoin does not have anything anchoring its value, its value is dependent purely on what people think it's going to be worth in the future.
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So at one level, it's a purely speculative financial asset.
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Now, stable coins, on the other hand, have stable value because they are backed up one-to-one by reserves of fiat currencies.
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So at some level, it's the antithesis of what Bitcoin was supposed to accomplish.
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It's not what the founders, what the architects of crypto intended, right?
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Because it's not about leveling the playing field, right?
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It's not about getting away from central bank currency.
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So it is still very much relying on the trust in central bank created official money.
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Uh, it's not private money in that true sense.
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But stable coins are getting traction because you know, international payments, if you've ever tried to send money to uh, you know, a friend or a relative in Europe, it's very slow, it's very expensive, it's difficult to track in real time.
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Technology can solve that, and stable coins are helping to solve that.
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But the paradox here is that while stable coins are getting traction, the particular types of stable coins are getting traction are the ones that are dollar denominated.
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So 99% of stable coins in circulation are backed up by and linked to dollars, so indirectly dollars are becoming even more dominant in international payments.
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And in my Jacksonwell paper, I made the argument that if we reduce frictions to acquiring cross-border assets, in other words, for an investor in one country to buy assets in any other country around the world, if you reduce those frictions, logically that investor could go buy assets anywhere.
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So this should help other countries.
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But it turns out that it might make it easier to buy US dollar-denominated assets, and in fact, that's what people seem to want.
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So you might end up with the dollar getting even more concentration as a payment currency, as a currency for holding assets, and so on.
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So financial innovation, while it should create a more level playing field, might actually have the more paradoxical outcome.
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Well, so you did you talked about kind of three international currencies possible systems, possible systems, and one is kind of the reification or or kind of solidification of the dollar.
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One is a kind of a you know, kind of multipolarity, multiple currencies, and then one is like a fracturing.
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So what what is the most in your if you were kind of prognosticating, what do you think is most likely?
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So I have a clear and somewhat disturbing vision.
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One possibility, as you said, is one where the dollar becomes even more dominant.
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That's terrible for the world because it means that the whimsies of American policies will continue affecting the rest of the world.
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There is going to be less discipline on American policies because if American government deficits will continue to be funded by the rest of the world, what is the need to be disciplined?
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This is not good for America in the long run or for the world at all.
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That's probably the most likely outcome.
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A second outcome is one where American policies are so destructive that people start losing faith in the dollar, but there are no other currencies to take its place, so we come to a fragmented system where there is no single currency that investors worldwide can anchor their trust on.
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That could be really problematic if we have an event like the global financial crisis.
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That was a terrible period, but the fact that we had the US Federal Reserve able to basically pump liquidity, that is money, into the global financial system, prevented a terrible situation from becoming worse.
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These are not very good outcomes.
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There is a good outcome.
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You know, the ideal world is one where other countries get their acts together, where they build up their financial markets, make them well regulated, improve their own institutions, have good policies so they're not running large deficits or have huge amounts of debt.
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That is a world in which we would have balanced currency competition and everything would be great.
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So there is a solution.
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So this is kind of middle power coordination.
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It's coordination among the large powers too.
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And certainly the middle powers might have a role to play.
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The emerging market countries like China and India could develop better institutions and financial markets.
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Europe could get its act together, um, which it shows no signs of doing.
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So all of these currencies could start competing on a level playing field.
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That would be the ideal outcome.
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What is the probability of that happening?
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Pretty slim, I'm sorry to say.
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Well, so but then you have events like Mark Carney's speech at Davos that, you know, was kind of shook things up and and and was a clear indication that even if kind of American hegemonic dominance is still a reality, people are very, very uh chafed at it, you know.
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They're they're eager to to see something else.
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And we're starting to see these allegiances.
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How could that affect things?
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How could even just taking Canada as an example, our longtime association with Canada being really fractured or or um uh at least curtailed for for now, how does that change kind of uh the dollar dominance or or what could happen in the in the near future?
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So Laura, I had great hope that the middle powers would be the answer to the dilemma I uh ended up uh um facing in my book.
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Because if you think about it, there are really two great powers right now, the US and China, and they have very different um um you know visions of the world and they have different approaches to a variety of issues.
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Um so the rest of the world is sort of stuck in the middle.
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Europe certainly has aspirations too and the potential to be a great power, but they're being torn apart by centrifugal forces that are making it very difficult for them to coalesce together.
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So the middle powers, not just advanced economies, but also emerging market countries like India, Brazil, and so on.
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So this is like the BRICS, because I know that the BRICS summit is ending right now.
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The BRICS summit took place uh very recently.
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Um the difficulty though that all of these groups are facing is that they don't fully trust each other.
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You know, some of these countries are rich, some of these countries are poor, so they have very different objectives.
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Um, some of these countries, even the BRICS grouping that you would think would have very shared interests.
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You know, China and India.
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Um China is again one of the big powers, but India fundamentally doesn't trust China.
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And China is getting the chairship next year, right?
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So it could just become the China show, right?
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And there are concerns that it is already the uh China show to a very large extent.
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So the middle powers have not been able to call us.
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Now at the Davos Forum um earlier this year, uh Mark Carney gave a very powerful speech, and I was in the room, and I can tell you that his speech received a you know a it was a very good speech, it received a standard.
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You're not at the table, you're on the menu.
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I mean it was it was provocative.
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So he pointed out a very pragmatic way forward.
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He said the middle powers will not agree on everything, but let's find some issues on which we agree and let's move forward in a practical way.
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It's a very pragmatic, very sensible approach.
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The concern I have is that this is not built on any fundamental shared values or trust.
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So these are going to be alliances that are not very durable, and if you think about the middle powers as providing a sense of balance between the two great powers, that's not going to happen because these are very transactional relationships, and if these are not going to endure in good times and bad times on a variety of issues, the middle powers might end up actually adding to instability.
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India is a very good example of this.
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You know, India certainly sees its interests aligned with those of other emerging markets, including China, but at the same time it doesn't want to get too close to China.
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So when Russia invades Ukraine, India values cheap oil, so it sides with Russia and China, but it sees its fundamental values as aligned more closely with those of the West, including the US, even though President Trump has been trying to push away Prime Minister Modi and not um um you know respect his entries.
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So now India is stuck in this very difficult situation where it is wavering from one side to the other, again trying to promote its own interests but not promoting balance.
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So unfortunately, I concluded in my book that the middle powers, rather than fostering stability, are again creating somewhat more instability.
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Well, a lot of your book also was about institutions, you know, the IMF, the UN, World Bank.
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Um are those all kind of are are they going to endure kind of maybe with a a tweak here and there or a new iteration or a reinvention of themselves?
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Or are they kind of doomed and we're gonna have to replace them with something else?
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So this was another force that I thought would be the equilibrating one.
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If everybody agrees on common rules of the game, then that is going to promote stability.
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But what do we see?
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Institutions like the IMF, which is dear to my heart because I work there, the World Bank, the UN, and so on, they are facing a crisis of legitimacy from both sides.
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The advanced economies, especially the US, feel that these institutions have gone way over to promoting the interests of emerging market economies, while the emerging market economies, in their turn, feel that these institutions have been captured by the advanced economies and are promoting their interests.
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So what doesn't sound wrong, right?
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Yeah, there is some legitimacy on both sides, but what the emerging markets have done now is start creating their own institutions.
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China has set up the Asian uh infrastructure investment bank, which is sort of a competitor to the World Bank.
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Um, then you have the BRICS New Development Bank, which has been set up just by the five BRICS economies: Brazil, Russia, India, China, and South Africa.
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Um, and these are competing with the existing institutions.
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Again, competition might be a good thing, but the problem now is that you have rather than cohesion in terms of the rules of the game, you have fragmentation because you have different groups of countries playing by different rules of the game.
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So this is yet another force that could promote stability, but in fact is now being perverted to creating instability.
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So, I mean, we also have all of these kind of populist governments and and you know, the rise of autocracy in a lot of places, which must further destabilize some or do destabilize some of these long-standing institutions, international institutions.
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So, what can be done to preserve the integrity of some of these kind of faltering institutions?
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So these forces that I spoke about, you know, the negative feedback loop between economics, domestic politics, and geopolitics, this we are seeing play out in many countries around the world.
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There are many recent examples from Europe, of course, of uh populist parties.
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And one must be clear that these are false populists.
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You know, they claim to have the interests of the common people at hand, at heart.
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But uh the way they are working, the policies they have in mind, are not necessarily going to improve the welfare.
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In fact, in most cases, this are more detrimental to the welfare of uh the common peoples, but still.
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I think this notion of this politics of resentment, the sense that the political and economic elites are walking away with all the benefits of globalization, of technology and everything else while leaving you know the dregs for everybody else, that is a very powerful force in the hands of politicians who can use it to twist the minds of the electorate in their favor.
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So the answer, which was going to be the answer in the cheerful version of my book, and is still the answer, is that we need to do the very hard work of rebuilding institutions.
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And there are two types of institutions, those are the domestic level but also the international level that are going to be really important.
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At the domestic level, this includes things like the system of checks and balances, the rule of law, and even the democratic process that is necessary for the checks and balances to work.
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And then we need to think about rebuilding the international institutions in a way that they have the legitimacy of all the relevant countries rather than particular groups of countries.
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This is extraordinarily challenging.
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But if a lot of those allegiances were based on trade, you know, frequently that was the the root of them.
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I think COVID certainly it didn't kickstart it, but it made it very apparent the dangers of relying upon you know free trade.
00:23:30.240 --> 00:23:40.720
So what how can those institutions, those international institutions, be shored up by something other than uh mutually beneficial trade agreements?
00:23:41.920 --> 00:23:46.160
One can think about minor tweaks, but maybe we should think about this as an opportunity.
00:23:46.160 --> 00:23:57.359
And in fact, some colleagues uh of mine uh and I, the Brooking Institution, are thinking about you know using this as a moment to think about what the right principles for these institutions should be.
00:23:57.359 --> 00:24:06.079
Um, because these institutions were created in the post-war period and they've really been very important for global economic prosperity and stability.
00:24:06.079 --> 00:24:23.839
But you know, they've not proven flexible enough to be able to accommodate changes in economic realities like the emerging markets becoming much more powerful, but with one very important difference that while China is very big, its per capita income relative to the United States and other advanced economies is still much lower.
00:24:23.839 --> 00:24:31.759
So there are these differences that tend to play a very important role in uh you know trying to come to agreement on issues like climate change and so on.
00:24:31.759 --> 00:24:38.000
So we need institutions that have legitimacy but also flexibility to adapt to changing realities.
00:24:38.000 --> 00:24:40.559
So this is a lot easier said than done.
00:24:40.559 --> 00:24:50.480
But I think it's important to view this as a moment to go back to first principles to think about how we might design those institutions rather than just tweaking the existing ones.
00:24:50.480 --> 00:25:04.480
Um I think about my book as really, you know, trying to give us an answer about why we ended up in the mess that we are in right now, and to think about these big principles that are really important.
00:25:04.480 --> 00:25:10.400
It's not going to be an easy path if you take the notion of the doom loop seriously.
00:25:10.400 --> 00:25:11.839
It can end in two ways.
00:25:11.839 --> 00:25:25.359
Either there is a smooth exit path that we sort of start getting things together and we pull out of this, or it ends very badly, and then out of the embers of that um disaster, we start rebuilding again.
00:25:25.359 --> 00:25:46.400
I'm hoping it'll be a smooth exit, but it's going to take a lot of work from each of us, you know, as engaged citizens who um you know get very involved in the political process domestically and start thinking about ourselves as citizens, not just you know, of our uh countries but of our communities, but and of also of the broader global community.
00:25:47.200 --> 00:25:49.039
I I I love that the idea of that.
00:25:49.039 --> 00:25:52.640
I would like to also just ask one question about uh technology.
00:25:52.640 --> 00:25:59.200
So obviously you've talked a bit about kind of financial innovation, but how about technological innovation?
00:25:59.200 --> 00:26:08.400
We haven't really mentioned AI or the possible ramifications of AI doing some of the things even that we've heard about in this past week.
00:26:08.400 --> 00:26:14.000
How could that affect currencies or uh kind of the interactions of countries?
00:26:14.400 --> 00:26:22.559
So that again was a force that I was hoping would be the answer to the difficult dilemma that I started thinking about as I worked on the book.
00:26:22.559 --> 00:26:29.039
Because you know, technology um does expand the frontier of resources, meaning you have more things available.
00:26:29.039 --> 00:26:41.920
And if you think about um you know the scarcity of resources as the as the root of most conflicts, then expanding resources should surely reduce conflict you know within countries, between countries, and so on.
00:26:41.920 --> 00:26:47.359
But of course, relative prosperity matters a great deal as well, and this is where things become complicated.
00:26:47.359 --> 00:26:58.400
So if you think about uh financial innovation, we've talked a little bit already about how that might actually make powerful countries more powerful and less powerful countries less so.
00:26:58.400 --> 00:27:01.359
Uh AI could play exactly the same role.
00:27:01.359 --> 00:27:04.319
It could act as a leveling force where poorer countries can adopt.
00:27:06.480 --> 00:27:11.039
I mean, there are all kinds of ways that you could conceive of it as a leveling of the playing field.
00:27:11.279 --> 00:27:23.119
That is a very logical proposition, but what we were seeing already play out is that both within countries and across countries, AI might actually lead to even more concentration of economic and financial power.
00:27:23.119 --> 00:27:44.720
You know, um, so when I was at Davos, I was speaking to some entrepreneurs from Africa who were hugely excited about how they might incorporate AI, and these were um uh CEOs of uh manufacturing as well as service sector firms, and all of them were equally enthusiastic about how it would allow them to increase their productivity, how it would allow them to compete on the global stage.
00:27:44.720 --> 00:27:53.680
But then I happened to ask a question about what effect it would have on employment, and that turned the conversation in a somewhat darker direction.
00:27:53.680 --> 00:27:55.200
And this is a real problem.
00:27:55.200 --> 00:28:06.960
You know, if you think about many countries that have still not emerged on the global stage, and Africa is where a lot of the global population increase is going to take place over the next uh couple of decades.
00:28:06.960 --> 00:28:15.839
You're going to have people who are looking for jobs who are going to find it very difficult to find jobs, even as their countries at the surface are going to be doing very well.
00:28:16.240 --> 00:28:22.079
The GDP can go up, but if there's still widespread unemployment, uh that's exactly right.
00:28:22.160 --> 00:28:26.160
So within countries, and we're going to see this, I suspect, in the US as well.
00:28:26.160 --> 00:28:28.880
We don't know what the net employment effects are going to be.
00:28:28.880 --> 00:28:30.559
They could turn out to be positive.
00:28:30.559 --> 00:28:36.960
There is a raging debate among economists about how it's going to play out, but certainly we're going to see some disruption.
00:28:36.960 --> 00:28:48.640
And if you see some disruption, you know, some sectors doing well, some sectors not doing well, and you don't have good social safety nets in place to catch people uh who are falling off the economic ladder.
00:28:48.640 --> 00:28:49.680
That is a problem.
00:28:49.680 --> 00:28:55.519
So I think technology is going to sort of intensify the adverse dynamics of the Google.
00:28:56.400 --> 00:29:00.799
Universal basic income, or is that kind of we need to find some solution.
00:29:00.960 --> 00:29:02.720
We need to find some sensible solution.
00:29:02.720 --> 00:29:13.200
And the universal basic income is certainly appealing to any uh economist because it does not distort any markets, you're basically giving uh people money, and that ends up with a better outcome.
00:29:13.200 --> 00:29:16.000
But we need to find the political consensus as well.
00:29:16.000 --> 00:29:28.400
And maybe if economists should really be thinking not just about the technocratic aspects of designing policies, but about the political economy of how we get those policies into the public discussion.
00:29:28.400 --> 00:29:39.200
And many of my colleagues are working very hard at exactly this because we need to be able to communicate to the public and to policy makers, and we need to get the incentives aligned.
00:29:39.200 --> 00:29:58.799
Even if we have a policy like free trade that makes perfect sense at the aggregate level, we need the losers from any of these policies, and invariably there are losers, and politicians to understand that we can find ways to get these overall benefits while protecting those who are going to be hurt.
00:29:58.799 --> 00:30:06.960
It takes some creativity in terms of design, but it takes even more creativity in terms of selling these policies, and I think we have some work to do there.
00:30:07.680 --> 00:30:09.279
Well, I think we're going to leave things there.
00:30:09.279 --> 00:30:12.480
Eshwar Prasad, thank you so much for coming in today.
00:30:12.480 --> 00:30:15.599
And his book is called The Doom Loop.
00:30:15.599 --> 00:30:21.920
Um, it has been widely praised uh in even as a just a as a good read.
00:30:21.920 --> 00:30:25.039
Uh so look for that in in your favorite bookstore.
00:30:25.039 --> 00:30:28.559
And you've been listening to Research Matters, a Cornell podcast.
00:30:28.559 --> 00:30:32.000
We are uh easily found on YouTube.
00:30:32.000 --> 00:30:37.839
Look for us on LinkedIn, Instagram, and thanks so much for tuning in today.
00:00:00.640 --> 00:00:06.559
What if the very forces meant to hold the global economy together are the ones quietly tearing it apart?
00:00:06.559 --> 00:00:11.359
Today's guest has spent decades mapping exactly how that happens.
00:00:11.359 --> 00:00:13.919
Ashwar, welcome.
00:00:14.240 --> 00:00:15.759
It's a pleasure to talk to you about it.
00:00:16.079 --> 00:00:16.399
Yes.
00:00:16.399 --> 00:00:19.440
So I guess I would love to start with the Doom Loop.
00:00:19.440 --> 00:00:27.839
And as far as I understand, you went into this project with a certain amount of optimism and eager to tell a positive story.
00:00:27.839 --> 00:00:32.479
And at some point along the way, you veered what happened.
00:00:32.880 --> 00:00:33.759
Things changed.
00:00:33.759 --> 00:00:41.600
So the idea for the book was born from my trying to make sense of what was happening in the world around us.
00:00:41.600 --> 00:00:49.520
You know, there is a great deal of turmoil that we see, especially in the geopolitical order, but also in the world of finance.
00:00:49.520 --> 00:00:51.200
And I wanted to make sense of this.
00:00:51.200 --> 00:00:56.479
And when I sit down to write a book, it's usually to make sense of the world in my own mind.
00:00:56.479 --> 00:01:00.960
And I started out with what I thought was a very clear and compelling thesis.
00:01:00.960 --> 00:01:16.799
That you know, in the post-war period in the 1990s, for instance, with the breakup of the Soviet Union, the United States became the dominant power in every respect economic, military, financial, and now, of course, economic power is more evenly distributed.
00:01:16.799 --> 00:01:28.319
And to an economist, instinctively one might think that more balanced competition is good for efficiency and it's also good for stability because the powers can keep themselves in check.
00:01:28.319 --> 00:01:48.079
So the hypothesis I started out with is the following that maybe we are just in the transition on the path to what we economists would call a new equilibrium where things are more balanced, and maybe we are just in this very volatile period during this transition, and we're going to get out of it, and everything is going to be just fine.
00:01:48.079 --> 00:01:54.400
So I started thinking about all the forces that could actually bring us back towards the stability.
00:01:54.400 --> 00:02:10.639
And as I started working through the forces in my mind, a much darker conclusion took hold in my mind that, in fact, each of these forces, rather than promoting stability, might in fact engender instability.
00:02:10.639 --> 00:02:13.599
So that became the defining theme of the book.
00:02:13.599 --> 00:02:23.520
So the notion of the doom loop is that economics, domestic politics, and geopolitics are reinforcing each other in this negative feedback loop.
00:02:23.520 --> 00:02:31.840
There was a period in the 1980s, 1990s when they were reinforcing each other in a positive direction, but that seems to be lost.
00:02:31.840 --> 00:02:41.439
So unfortunately, I came to the conclusion that many of these forces that I thought would create stability might in fact be leading us down this road to instability.
00:02:41.759 --> 00:02:48.960
So was there a single instance or event that prompted you to have this rethinking?
00:02:49.520 --> 00:03:02.960
Actually, I should tell you that the first draft of the book was written in 2024, and I had finished the full first draft of the book in October of 2024, just a couple of weeks before the November elections.
00:03:02.960 --> 00:03:08.560
I then read through the whole manuscript and thought, boy, this looks way too dark.
00:03:08.560 --> 00:03:12.000
Let's wait for the elections and let's see how things settle down.
00:03:12.000 --> 00:03:16.800
And maybe I should really rethink the hypothesis of my book.
00:03:16.800 --> 00:03:25.520
Because remember, during the entire writing of this book, my heart was pulling me in one direction towards this notion that we should be moving to a better world.
00:03:25.520 --> 00:03:32.080
And my head, all the analysis I was doing, was pulling me in the other direction, and I wanted my heart to win.
00:03:32.080 --> 00:03:35.919
But then the elections came along, but it was a long way to be.
00:03:35.919 --> 00:04:54.160
One of the forces that I talk about in my book is that of globalization, which of course is related to the topic of currencies.
00:04:54.160 --> 00:05:11.120
So in the 1980s, 1990s, and even 2000s, there was a sense that globalization might work for everybody, that in a sense we could move towards a world where countries would trade with each other, would send financial flows between each other, and they could promote shared prosperity.
00:05:11.120 --> 00:05:20.560
And for a while that did seem to work, but then it sort of started unraveling, and there was a sense that globalization works for some people and not for the others.
00:05:20.560 --> 00:05:30.560
So the forces of globalization infected domestic politics that then, as we can see in the US-China relationship, for instance, ended up infecting geopolitics as well.
00:05:30.560 --> 00:05:50.240
And we can talk more about globalization as we go along, but one of the key elements of globalization, of course, is international financial flows, flows of money, investors looking for diversification of their portfolios by investing in foreign assets, companies looking to raise capital in international financial markets.
00:05:50.240 --> 00:05:54.399
And in all of these markets, it turns out the dollar has been dominant.
00:05:54.399 --> 00:06:07.279
It's been dominant as a payment currency, as a reserve currency, a currency in which foreign central banks hold their sort of rainy day funds and also as a currency for denominating international transactions.
00:06:07.279 --> 00:06:14.240
In all of these dimensions, the dollar has remained dominant for a long time, but the world is chafing at this dominance.
00:06:14.240 --> 00:06:14.879
Why?
00:06:14.879 --> 00:06:22.399
Because the US, which used to be a paragon of stable policies, is no longer promoting that stability.
00:06:22.399 --> 00:06:25.360
We see very volatile policies coming out of the US.
00:06:25.360 --> 00:06:34.639
The US government is issuing a huge amount of debt, which would make investors worldwide concerned about investing in treasury securities.
00:06:34.639 --> 00:06:37.600
And of course, the US has weaponized the dollar.
00:06:37.600 --> 00:06:49.360
It has imposed financial sanctions against many of its rivals, such as Russia, Iran, Venezuela, but even against some of its traditional allies who are not falling in line with US policies.
00:06:49.360 --> 00:06:53.279
So the world desperately wants to disengage from the dollar.
00:06:53.279 --> 00:07:10.639
The dollar share of foreign exchange reserves has declined a little bit.
00:07:10.639 --> 00:07:17.199
The dollar's share and certain other elements has certainly gone down.
00:07:17.199 --> 00:07:37.600
But then if you start looking at the share of the dollar in international payments, in foreign exchange turnover, which is an important indicator of currency's dominance, in the denomination of international debt securities issued in global financial markets, in all of these dimensions, the dollar remains as dominant as ever.
00:07:37.600 --> 00:07:38.879
What is going on?
00:07:38.879 --> 00:07:41.920
The problem is that there are no good alternatives.
00:07:41.920 --> 00:07:45.519
The Euro is a mess.
00:07:45.519 --> 00:07:48.959
Politically and economically, it is not holding together very well.
00:07:49.199 --> 00:07:54.480
The other traditional reserve currencies currencies are not doing well.
00:07:55.120 --> 00:08:00.959
And one um potential rival started emerging in 2010, which is the Chinese Renmin B.
00:08:00.959 --> 00:08:08.399
And for a while it looked like the Chinese government's desire to internationalize the Renmin B might get traction.
00:08:08.399 --> 00:08:11.600
But then it turned out that the Renmin B stalled.
00:08:11.600 --> 00:08:11.920
Why?
00:08:11.920 --> 00:08:24.879
Because the Chinese government doesn't want to allow the free flow of capital across its borders, and that limits the ability for international investors to use that currency for payments, for buying assets, and so on.
00:08:24.879 --> 00:08:30.240
And fundamentally, people don't seem to trust China's institutions.
00:08:30.240 --> 00:08:32.639
You know, there is no clear system of checks and balance.
00:08:32.639 --> 00:08:34.480
Capacity and the rule of law.
00:08:34.480 --> 00:08:49.679
Now you might argue, and people have argued, that in the US, these institutions which are very important for the dollar's dominance, you know, the rule of law, the independence of the central bank, the Federal Reserve, the checks and balances are really withering away.
00:08:49.679 --> 00:08:53.679
But it turns out in international finance, it's all relative.
00:08:53.679 --> 00:08:59.840
You don't have to be the best team in the tournament, so long as you're the least worst, you're still going to win.
00:08:59.840 --> 00:09:02.720
So that's the paradox the world faces.
00:09:02.720 --> 00:09:08.080
The US is the dominant uh creator of the dominant currency.
00:09:08.080 --> 00:09:25.440
The world wants to detach, but what we are seeing is what I've characterized as fragmentation in the second tier, the euro, the pound sterling, the Japanese yen, um, and a whole host of smaller currencies are all sort of battling it out, leaving no serious rival to the dollar.
00:09:25.440 --> 00:09:27.840
So it's a terrible situation for the world.
00:09:27.840 --> 00:09:32.159
It's good for the US in some ways because it makes it easier to bring capital into the US.
00:09:32.159 --> 00:09:38.080
But ultimately, I don't think this is good for either the US, the world, or the global financial system.
00:09:38.480 --> 00:09:43.200
Well, there are you've indicated that things like stable coins are wildcards, right?
00:09:43.200 --> 00:09:52.879
I mean, so I mean there with stable coins there's fiat-backed, there's you know, uh there's crypto backed, there's commodity backed, so gold-backed or whatever.
00:09:52.879 --> 00:10:07.279
So what what I guess maybe could stable coins present uh an alternative or uh uh make the dollar a little less the the the the you know the only game in town?
00:10:07.840 --> 00:10:18.000
So that was in fact what my uh paper presented at the Jackson Hole Symposium was about, you know, financial innovations, because you know it seems like nothing is changing the international monetary system.
00:10:18.000 --> 00:10:28.559
Maybe financial innovation will create a level playing field where the countries that are issuing currencies that are less trusted can now start competing on a level playing field.
00:10:28.559 --> 00:10:34.639
Small countries can start you know allowing their currencies to be used more easily for international transactions.
00:10:34.639 --> 00:10:36.240
In principle, that works.
00:10:36.240 --> 00:10:42.960
In practice, there might be a very different outcome, and maybe it's worth talking about exactly what stable coins are.
00:10:42.960 --> 00:10:48.720
So stable coins are cryptocurrencies, just like Bitcoin, but with one very important difference.
00:10:48.720 --> 00:10:58.000
Something like Bitcoin does not have anything anchoring its value, its value is dependent purely on what people think it's going to be worth in the future.
00:10:58.000 --> 00:11:01.919
So at one level, it's a purely speculative financial asset.
00:11:01.919 --> 00:11:10.480
Now, stable coins, on the other hand, have stable value because they are backed up one-to-one by reserves of fiat currencies.
00:11:10.480 --> 00:11:14.320
So at some level, it's the antithesis of what Bitcoin was supposed to accomplish.
00:11:14.720 --> 00:11:18.480
It's not what the founders, what the architects of crypto intended, right?
00:11:18.480 --> 00:11:21.039
Because it's not about leveling the playing field, right?
00:11:21.519 --> 00:11:23.840
It's not about getting away from central bank currency.
00:11:23.840 --> 00:11:29.679
So it is still very much relying on the trust in central bank created official money.
00:11:29.679 --> 00:11:32.559
Uh, it's not private money in that true sense.
00:11:32.559 --> 00:11:45.519
But stable coins are getting traction because you know, international payments, if you've ever tried to send money to uh, you know, a friend or a relative in Europe, it's very slow, it's very expensive, it's difficult to track in real time.
00:11:45.519 --> 00:11:49.919
Technology can solve that, and stable coins are helping to solve that.
00:11:49.919 --> 00:12:00.159
But the paradox here is that while stable coins are getting traction, the particular types of stable coins are getting traction are the ones that are dollar denominated.
00:12:00.159 --> 00:12:12.000
So 99% of stable coins in circulation are backed up by and linked to dollars, so indirectly dollars are becoming even more dominant in international payments.
00:12:12.000 --> 00:12:30.559
And in my Jacksonwell paper, I made the argument that if we reduce frictions to acquiring cross-border assets, in other words, for an investor in one country to buy assets in any other country around the world, if you reduce those frictions, logically that investor could go buy assets anywhere.
00:12:30.559 --> 00:12:32.399
So this should help other countries.
00:12:32.399 --> 00:12:40.799
But it turns out that it might make it easier to buy US dollar-denominated assets, and in fact, that's what people seem to want.
00:12:40.799 --> 00:12:48.639
So you might end up with the dollar getting even more concentration as a payment currency, as a currency for holding assets, and so on.
00:12:48.639 --> 00:12:55.759
So financial innovation, while it should create a more level playing field, might actually have the more paradoxical outcome.
00:12:56.159 --> 00:13:08.240
Well, so you did you talked about kind of three international currencies possible systems, possible systems, and one is kind of the reification or or kind of solidification of the dollar.
00:13:08.240 --> 00:13:15.120
One is a kind of a you know, kind of multipolarity, multiple currencies, and then one is like a fracturing.
00:13:15.120 --> 00:13:21.440
So what what is the most in your if you were kind of prognosticating, what do you think is most likely?
00:13:21.759 --> 00:13:24.879
So I have a clear and somewhat disturbing vision.
00:13:24.879 --> 00:13:29.600
One possibility, as you said, is one where the dollar becomes even more dominant.
00:13:29.600 --> 00:13:36.720
That's terrible for the world because it means that the whimsies of American policies will continue affecting the rest of the world.
00:13:36.720 --> 00:13:46.399
There is going to be less discipline on American policies because if American government deficits will continue to be funded by the rest of the world, what is the need to be disciplined?
00:13:46.399 --> 00:13:50.480
This is not good for America in the long run or for the world at all.
00:13:50.480 --> 00:13:52.879
That's probably the most likely outcome.
00:13:52.879 --> 00:14:09.679
A second outcome is one where American policies are so destructive that people start losing faith in the dollar, but there are no other currencies to take its place, so we come to a fragmented system where there is no single currency that investors worldwide can anchor their trust on.
00:14:09.679 --> 00:14:14.320
That could be really problematic if we have an event like the global financial crisis.
00:14:14.320 --> 00:14:26.799
That was a terrible period, but the fact that we had the US Federal Reserve able to basically pump liquidity, that is money, into the global financial system, prevented a terrible situation from becoming worse.
00:14:26.799 --> 00:14:29.200
These are not very good outcomes.
00:14:29.200 --> 00:14:30.879
There is a good outcome.
00:14:30.879 --> 00:14:47.120
You know, the ideal world is one where other countries get their acts together, where they build up their financial markets, make them well regulated, improve their own institutions, have good policies so they're not running large deficits or have huge amounts of debt.
00:14:47.120 --> 00:14:52.240
That is a world in which we would have balanced currency competition and everything would be great.
00:14:52.240 --> 00:14:53.360
So there is a solution.
00:14:54.000 --> 00:14:56.080
So this is kind of middle power coordination.
00:14:56.720 --> 00:14:58.720
It's coordination among the large powers too.
00:14:58.720 --> 00:15:01.120
And certainly the middle powers might have a role to play.
00:15:01.120 --> 00:15:06.720
The emerging market countries like China and India could develop better institutions and financial markets.
00:15:06.720 --> 00:15:11.440
Europe could get its act together, um, which it shows no signs of doing.
00:15:11.440 --> 00:15:15.679
So all of these currencies could start competing on a level playing field.
00:15:15.679 --> 00:15:17.679
That would be the ideal outcome.
00:15:17.679 --> 00:15:19.919
What is the probability of that happening?
00:15:19.919 --> 00:15:21.519
Pretty slim, I'm sorry to say.
00:15:22.159 --> 00:15:41.519
Well, so but then you have events like Mark Carney's speech at Davos that, you know, was kind of shook things up and and and was a clear indication that even if kind of American hegemonic dominance is still a reality, people are very, very uh chafed at it, you know.
00:15:41.519 --> 00:15:43.840
They're they're eager to to see something else.
00:15:43.840 --> 00:15:46.320
And we're starting to see these allegiances.
00:15:46.320 --> 00:15:48.639
How could that affect things?
00:15:48.639 --> 00:16:09.200
How could even just taking Canada as an example, our longtime association with Canada being really fractured or or um uh at least curtailed for for now, how does that change kind of uh the dollar dominance or or what could happen in the in the near future?
00:16:09.759 --> 00:16:17.679
So Laura, I had great hope that the middle powers would be the answer to the dilemma I uh ended up uh um facing in my book.
00:16:17.679 --> 00:16:29.120
Because if you think about it, there are really two great powers right now, the US and China, and they have very different um um you know visions of the world and they have different approaches to a variety of issues.
00:16:29.120 --> 00:16:31.679
Um so the rest of the world is sort of stuck in the middle.
00:16:31.679 --> 00:16:41.679
Europe certainly has aspirations too and the potential to be a great power, but they're being torn apart by centrifugal forces that are making it very difficult for them to coalesce together.
00:16:41.679 --> 00:16:47.600
So the middle powers, not just advanced economies, but also emerging market countries like India, Brazil, and so on.
00:16:47.840 --> 00:16:50.960
So this is like the BRICS, because I know that the BRICS summit is ending right now.
00:16:51.519 --> 00:16:54.240
The BRICS summit took place uh very recently.
00:16:54.240 --> 00:17:01.360
Um the difficulty though that all of these groups are facing is that they don't fully trust each other.
00:17:01.360 --> 00:17:06.240
You know, some of these countries are rich, some of these countries are poor, so they have very different objectives.
00:17:06.240 --> 00:17:11.359
Um, some of these countries, even the BRICS grouping that you would think would have very shared interests.
00:17:11.359 --> 00:17:12.880
You know, China and India.
00:17:12.880 --> 00:17:17.759
Um China is again one of the big powers, but India fundamentally doesn't trust China.
00:17:18.160 --> 00:17:20.400
And China is getting the chairship next year, right?
00:17:20.400 --> 00:17:22.480
So it could just become the China show, right?
00:17:22.799 --> 00:17:26.799
And there are concerns that it is already the uh China show to a very large extent.
00:17:26.799 --> 00:17:29.279
So the middle powers have not been able to call us.
00:17:29.279 --> 00:17:40.960
Now at the Davos Forum um earlier this year, uh Mark Carney gave a very powerful speech, and I was in the room, and I can tell you that his speech received a you know a it was a very good speech, it received a standard.
00:17:41.359 --> 00:17:43.119
You're not at the table, you're on the menu.
00:17:43.119 --> 00:17:45.119
I mean it was it was provocative.
00:17:45.440 --> 00:17:48.000
So he pointed out a very pragmatic way forward.
00:17:48.000 --> 00:17:55.839
He said the middle powers will not agree on everything, but let's find some issues on which we agree and let's move forward in a practical way.
00:17:55.839 --> 00:17:58.640
It's a very pragmatic, very sensible approach.
00:17:58.640 --> 00:18:04.480
The concern I have is that this is not built on any fundamental shared values or trust.
00:18:04.480 --> 00:18:27.519
So these are going to be alliances that are not very durable, and if you think about the middle powers as providing a sense of balance between the two great powers, that's not going to happen because these are very transactional relationships, and if these are not going to endure in good times and bad times on a variety of issues, the middle powers might end up actually adding to instability.
00:18:27.519 --> 00:18:29.759
India is a very good example of this.
00:18:29.759 --> 00:18:40.400
You know, India certainly sees its interests aligned with those of other emerging markets, including China, but at the same time it doesn't want to get too close to China.
00:18:40.400 --> 00:18:59.359
So when Russia invades Ukraine, India values cheap oil, so it sides with Russia and China, but it sees its fundamental values as aligned more closely with those of the West, including the US, even though President Trump has been trying to push away Prime Minister Modi and not um um you know respect his entries.
00:18:59.359 --> 00:19:08.960
So now India is stuck in this very difficult situation where it is wavering from one side to the other, again trying to promote its own interests but not promoting balance.
00:19:08.960 --> 00:19:17.839
So unfortunately, I concluded in my book that the middle powers, rather than fostering stability, are again creating somewhat more instability.
00:19:18.319 --> 00:19:23.920
Well, a lot of your book also was about institutions, you know, the IMF, the UN, World Bank.
00:19:23.920 --> 00:19:35.039
Um are those all kind of are are they going to endure kind of maybe with a a tweak here and there or a new iteration or a reinvention of themselves?
00:19:35.039 --> 00:19:38.640
Or are they kind of doomed and we're gonna have to replace them with something else?
00:19:39.119 --> 00:19:42.160
So this was another force that I thought would be the equilibrating one.
00:19:42.160 --> 00:19:47.119
If everybody agrees on common rules of the game, then that is going to promote stability.
00:19:47.119 --> 00:19:48.160
But what do we see?
00:19:48.160 --> 00:19:56.640
Institutions like the IMF, which is dear to my heart because I work there, the World Bank, the UN, and so on, they are facing a crisis of legitimacy from both sides.
00:19:56.640 --> 00:20:12.720
The advanced economies, especially the US, feel that these institutions have gone way over to promoting the interests of emerging market economies, while the emerging market economies, in their turn, feel that these institutions have been captured by the advanced economies and are promoting their interests.
00:20:12.799 --> 00:20:14.799
So what doesn't sound wrong, right?
00:20:15.119 --> 00:20:22.240
Yeah, there is some legitimacy on both sides, but what the emerging markets have done now is start creating their own institutions.
00:20:22.240 --> 00:20:29.200
China has set up the Asian uh infrastructure investment bank, which is sort of a competitor to the World Bank.
00:20:29.200 --> 00:20:37.759
Um, then you have the BRICS New Development Bank, which has been set up just by the five BRICS economies: Brazil, Russia, India, China, and South Africa.
00:20:37.759 --> 00:20:41.200
Um, and these are competing with the existing institutions.
00:20:41.200 --> 00:20:54.960
Again, competition might be a good thing, but the problem now is that you have rather than cohesion in terms of the rules of the game, you have fragmentation because you have different groups of countries playing by different rules of the game.
00:20:54.960 --> 00:21:03.599
So this is yet another force that could promote stability, but in fact is now being perverted to creating instability.
00:21:04.240 --> 00:21:19.440
So, I mean, we also have all of these kind of populist governments and and you know, the rise of autocracy in a lot of places, which must further destabilize some or do destabilize some of these long-standing institutions, international institutions.
00:21:19.440 --> 00:21:26.079
So, what can be done to preserve the integrity of some of these kind of faltering institutions?
00:21:26.640 --> 00:21:36.640
So these forces that I spoke about, you know, the negative feedback loop between economics, domestic politics, and geopolitics, this we are seeing play out in many countries around the world.
00:21:36.640 --> 00:21:41.200
There are many recent examples from Europe, of course, of uh populist parties.
00:21:41.200 --> 00:21:44.160
And one must be clear that these are false populists.
00:21:44.160 --> 00:21:47.839
You know, they claim to have the interests of the common people at hand, at heart.
00:21:47.839 --> 00:21:53.759
But uh the way they are working, the policies they have in mind, are not necessarily going to improve the welfare.
00:21:53.759 --> 00:21:59.519
In fact, in most cases, this are more detrimental to the welfare of uh the common peoples, but still.
00:21:59.519 --> 00:22:23.279
I think this notion of this politics of resentment, the sense that the political and economic elites are walking away with all the benefits of globalization, of technology and everything else while leaving you know the dregs for everybody else, that is a very powerful force in the hands of politicians who can use it to twist the minds of the electorate in their favor.
00:22:23.279 --> 00:22:34.160
So the answer, which was going to be the answer in the cheerful version of my book, and is still the answer, is that we need to do the very hard work of rebuilding institutions.
00:22:34.160 --> 00:22:41.119
And there are two types of institutions, those are the domestic level but also the international level that are going to be really important.
00:22:41.119 --> 00:22:51.599
At the domestic level, this includes things like the system of checks and balances, the rule of law, and even the democratic process that is necessary for the checks and balances to work.
00:22:51.599 --> 00:23:01.599
And then we need to think about rebuilding the international institutions in a way that they have the legitimacy of all the relevant countries rather than particular groups of countries.
00:23:01.599 --> 00:23:03.839
This is extraordinarily challenging.
00:23:04.240 --> 00:23:12.079
But if a lot of those allegiances were based on trade, you know, frequently that was the the root of them.
00:23:12.079 --> 00:23:30.240
I think COVID certainly it didn't kickstart it, but it made it very apparent the dangers of relying upon you know free trade.
00:23:30.240 --> 00:23:40.720
So what how can those institutions, those international institutions, be shored up by something other than uh mutually beneficial trade agreements?
00:23:41.920 --> 00:23:46.160
One can think about minor tweaks, but maybe we should think about this as an opportunity.
00:23:46.160 --> 00:23:57.359
And in fact, some colleagues uh of mine uh and I, the Brooking Institution, are thinking about you know using this as a moment to think about what the right principles for these institutions should be.
00:23:57.359 --> 00:24:06.079
Um, because these institutions were created in the post-war period and they've really been very important for global economic prosperity and stability.
00:24:06.079 --> 00:24:23.839
But you know, they've not proven flexible enough to be able to accommodate changes in economic realities like the emerging markets becoming much more powerful, but with one very important difference that while China is very big, its per capita income relative to the United States and other advanced economies is still much lower.
00:24:23.839 --> 00:24:31.759
So there are these differences that tend to play a very important role in uh you know trying to come to agreement on issues like climate change and so on.
00:24:31.759 --> 00:24:38.000
So we need institutions that have legitimacy but also flexibility to adapt to changing realities.
00:24:38.000 --> 00:24:40.559
So this is a lot easier said than done.
00:24:40.559 --> 00:24:50.480
But I think it's important to view this as a moment to go back to first principles to think about how we might design those institutions rather than just tweaking the existing ones.
00:24:50.480 --> 00:25:04.480
Um I think about my book as really, you know, trying to give us an answer about why we ended up in the mess that we are in right now, and to think about these big principles that are really important.
00:25:04.480 --> 00:25:10.400
It's not going to be an easy path if you take the notion of the doom loop seriously.
00:25:10.400 --> 00:25:11.839
It can end in two ways.
00:25:11.839 --> 00:25:25.359
Either there is a smooth exit path that we sort of start getting things together and we pull out of this, or it ends very badly, and then out of the embers of that um disaster, we start rebuilding again.
00:25:25.359 --> 00:25:46.400
I'm hoping it'll be a smooth exit, but it's going to take a lot of work from each of us, you know, as engaged citizens who um you know get very involved in the political process domestically and start thinking about ourselves as citizens, not just you know, of our uh countries but of our communities, but and of also of the broader global community.
00:25:47.200 --> 00:25:49.039
I I I love that the idea of that.
00:25:49.039 --> 00:25:52.640
I would like to also just ask one question about uh technology.
00:25:52.640 --> 00:25:59.200
So obviously you've talked a bit about kind of financial innovation, but how about technological innovation?
00:25:59.200 --> 00:26:08.400
We haven't really mentioned AI or the possible ramifications of AI doing some of the things even that we've heard about in this past week.
00:26:08.400 --> 00:26:14.000
How could that affect currencies or uh kind of the interactions of countries?
00:26:14.400 --> 00:26:22.559
So that again was a force that I was hoping would be the answer to the difficult dilemma that I started thinking about as I worked on the book.
00:26:22.559 --> 00:26:29.039
Because you know, technology um does expand the frontier of resources, meaning you have more things available.
00:26:29.039 --> 00:26:41.920
And if you think about um you know the scarcity of resources as the as the root of most conflicts, then expanding resources should surely reduce conflict you know within countries, between countries, and so on.
00:26:41.920 --> 00:26:47.359
But of course, relative prosperity matters a great deal as well, and this is where things become complicated.
00:26:47.359 --> 00:26:58.400
So if you think about uh financial innovation, we've talked a little bit already about how that might actually make powerful countries more powerful and less powerful countries less so.
00:26:58.400 --> 00:27:01.359
Uh AI could play exactly the same role.
00:27:01.359 --> 00:27:04.319
It could act as a leveling force where poorer countries can adopt.
00:27:06.480 --> 00:27:11.039
I mean, there are all kinds of ways that you could conceive of it as a leveling of the playing field.
00:27:11.279 --> 00:27:23.119
That is a very logical proposition, but what we were seeing already play out is that both within countries and across countries, AI might actually lead to even more concentration of economic and financial power.
00:27:23.119 --> 00:27:44.720
You know, um, so when I was at Davos, I was speaking to some entrepreneurs from Africa who were hugely excited about how they might incorporate AI, and these were um uh CEOs of uh manufacturing as well as service sector firms, and all of them were equally enthusiastic about how it would allow them to increase their productivity, how it would allow them to compete on the global stage.
00:27:44.720 --> 00:27:53.680
But then I happened to ask a question about what effect it would have on employment, and that turned the conversation in a somewhat darker direction.
00:27:53.680 --> 00:27:55.200
And this is a real problem.
00:27:55.200 --> 00:28:06.960
You know, if you think about many countries that have still not emerged on the global stage, and Africa is where a lot of the global population increase is going to take place over the next uh couple of decades.
00:28:06.960 --> 00:28:15.839
You're going to have people who are looking for jobs who are going to find it very difficult to find jobs, even as their countries at the surface are going to be doing very well.
00:28:16.240 --> 00:28:22.079
The GDP can go up, but if there's still widespread unemployment, uh that's exactly right.
00:28:22.160 --> 00:28:26.160
So within countries, and we're going to see this, I suspect, in the US as well.
00:28:26.160 --> 00:28:28.880
We don't know what the net employment effects are going to be.
00:28:28.880 --> 00:28:30.559
They could turn out to be positive.
00:28:30.559 --> 00:28:36.960
There is a raging debate among economists about how it's going to play out, but certainly we're going to see some disruption.
00:28:36.960 --> 00:28:48.640
And if you see some disruption, you know, some sectors doing well, some sectors not doing well, and you don't have good social safety nets in place to catch people uh who are falling off the economic ladder.
00:28:48.640 --> 00:28:49.680
That is a problem.
00:28:49.680 --> 00:28:55.519
So I think technology is going to sort of intensify the adverse dynamics of the Google.
00:28:56.400 --> 00:29:00.799
Universal basic income, or is that kind of we need to find some solution.
00:29:00.960 --> 00:29:02.720
We need to find some sensible solution.
00:29:02.720 --> 00:29:13.200
And the universal basic income is certainly appealing to any uh economist because it does not distort any markets, you're basically giving uh people money, and that ends up with a better outcome.
00:29:13.200 --> 00:29:16.000
But we need to find the political consensus as well.
00:29:16.000 --> 00:29:28.400
And maybe if economists should really be thinking not just about the technocratic aspects of designing policies, but about the political economy of how we get those policies into the public discussion.
00:29:28.400 --> 00:29:39.200
And many of my colleagues are working very hard at exactly this because we need to be able to communicate to the public and to policy makers, and we need to get the incentives aligned.
00:29:39.200 --> 00:29:58.799
Even if we have a policy like free trade that makes perfect sense at the aggregate level, we need the losers from any of these policies, and invariably there are losers, and politicians to understand that we can find ways to get these overall benefits while protecting those who are going to be hurt.
00:29:58.799 --> 00:30:06.960
It takes some creativity in terms of design, but it takes even more creativity in terms of selling these policies, and I think we have some work to do there.
00:30:07.680 --> 00:30:09.279
Well, I think we're going to leave things there.
00:30:09.279 --> 00:30:12.480
Eshwar Prasad, thank you so much for coming in today.
00:30:12.480 --> 00:30:15.599
And his book is called The Doom Loop.
00:30:15.599 --> 00:30:21.920
Um, it has been widely praised uh in even as a just a as a good read.
00:30:21.920 --> 00:30:25.039
Uh so look for that in in your favorite bookstore.
00:30:25.039 --> 00:30:28.559
And you've been listening to Research Matters, a Cornell podcast.
00:30:28.559 --> 00:30:32.000
We are uh easily found on YouTube.
00:30:32.000 --> 00:30:37.839
Look for us on LinkedIn, Instagram, and thanks so much for tuning in today.
