The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed El-Erian, Yale University Press, 2017, 320 pages.
Following the success of Mohamed El-Erian’s first book, “When Markets Collide”, El-Erian comes back with his second book titled “The Only Game in Town”. It stars the global central banking institutions, following the recession and financial crisis of 2007-8, as the institutions who helped prevent further economic damage and malaise being brought upon the global scale. El-Erian makes the case that there’s been a lack of a concerted effort in global policy co-ordination and indeed, co-operation, between national governments and the central banks themselves. In particular, he refers to such institutions failing to co-operatively create a clear comprehensive strategy in overcoming the residual effects of the financial crisis, and national governments in ensuring a robust and inclusive economic growth through the use of fiscal and structural policies. The result then is that central banks have shouldered the majority of the burden, and have reluctantly taken on the role of salvaging the global economy at the behest of their national governments – thus being christened as “the only game in town”.
The book aims to provide the reader with a ground knowledge in understanding the role of the central bank as previously being technical wizards hiding behind the curtains operating in keeping the economy afloat, to them being at the spotlight in the press, holding extra responsibilities. The book also aims to show how increasingly intertwined central banks have become between themselves, the financial markets, and the economy as a whole. To this extent, El-Erian lays bare how even a single announcement from the central bank can cause a frenzy and increase market volatility. Consider the “taper tantrum” case in 2013 when the Fed announced a rollback in one of their Quantitative Easing (QE is a policy tool used by the central banks to inject money into the financial system) programs. This resulted in investor panic where money began flowing out of the bond markets, pushing bond yields up dramatically.
But this is not just a book about central banks, it is more about providing a diagnosis of the world that we are currently living in, more so, what factors are causing headwinds in political, social and economic progress. Building from this, El-Erian seeks to single out these factors to break down, analyse, and provide policy prescriptions in resolving these. Thus the most important issues he regards facing us involve, the dwindling of trust in our institutions, a liquidity illusion in the financial markets, high unemployment, political dysfunction, and the “inequality trifecta” (income, wealth, and opportunity).
El-Erian draws from his wealth of knowledge and his vast network of contacts from working as a Deputy-Director in the IMF, to CEO of PIMCO, and Chief Economic Adviser of Allianz in assisting his research whilst writing this book as well as utilising journals on economics. He introduces two main concepts and builds an analytical framework around this. One of which he calls a “T-Junction” where the world is approaching a fork in the road, one road leading to high and inclusive growth along with political and financial stability, whereas the second road is paved with continuous low growth, periodic recessions and political instability.
The second concept is one which he coined back in 2008 when he was CEO of PIMCO, called the “New Normal”. It is essentially an extension of the secular stagnation theory, the idea that market-based economies will experience a condition of low and sustained growth. El-Erian adds to this theory by adding the scourge of rising inequality in wealth, income, opportunities and also greater political dysfunction. Although, he makes perhaps a too simplistic theory that the “New Normal” cannot go on any further and that we need to make drastic changes. That much, I would hope, is what all the key policy makers are already thinking and working towards.
He also dabbles with the probability theory of “Bi-Modal Distribution” and applies it here. The bottom line of the theory is that a previously unthinkable outcome (extreme), whether good or bad, is more likely to occur than whatever outcome was previously held as being most likely (less than extreme/status quo). The example used here was the Cuba-US deal under Obama as a previously unthinkable outcome, but one that came to fruition potentially due to the disruption in the oil markets of 2014. This is perhaps the most insightful part of the whole book for me as it encourages lateral thinking for policy makers, to flirt with ideas on the extreme ends of the scale.
These concepts however aren’t necessarily the most radical theories you may have come across, after all, to any keen observer of the financial markets and global affairs, it may seem almost like common knowledge. We already know that central banks are using outdated tools to help stimulate the economy. We know that lowering interest rates any further, or printing yet more insane sums of money yields to an increasingly diminishing effect. But it should be said that the concepts go a long way in laying the groundwork for the rest of the book, making it much easier to the reader to digest the ideas explored as they navigate through the book.
El-Erian does an excellent job of doing away with too much technical jargon when explaining the facts, so much so that even if you aren’t wholly accustomed to buzzwords used in the spheres of economics and finance, you won’t be playing mental gymnastics trying to decipher the contents of the book. Furthermore, he lays out the book in a simple logical order whereby he addresses ten pertinent issues affecting us globally as decision makers. Each matter being given its own chapter for El-Erian to carefully provide diagnostic analysis on, that way the reader is never lost with understanding the author’s thoughts.
It should be added that coming from such an experienced investor and analyst like El-Erian, it is disappointing to see a lack of radical ideas on what direction central banks and monetary policy should take. Rather, we are left with policy prescriptions that emphasise on addressing the political dysfunction that exists, improving cross-border policy co-ordination, and pro-growth structural reforms alongside debt-restructuring. Whilst the issues and ideas explored throughout the book may seem almost lacking in innovation, or indeed as “old news” to shrewd observers, the book expressly encapsulates why the issues matter.
El-Erian makes clear on the urgency for key figure heads and policy makers to acknowledge the social, economic, and political risks we are bound by, to rubbish old narrow ways of thinking and to develop a fresh approach to generating ideas, encouraging cognitive diversity. Without coming across as a doomster, El-Erian provides a good kick to the reader on understanding the consequences of inaction from our governments. The Only Game in Town provides that step towards calling our decision makers and policy makers together in working out the best possible way to navigate ourselves into a world of stability, inclusiveness, and stable economic growth. For that reason, The Only Game in Town is recommended reading.
Sameer Qureshi 