The Great Unwind: Dambisa Moyo on inflation, interest rates and global governance
"I don't think we will quickly end up in a world where we have the two percent inflation traditionally targeted by the Federal Reserve and other central bankers globally."
The financial and economic world is at an inflection point. Inflation is at levels not seen in a generation. Growth is slowing, technology stocks are in a tailspin, energy prices have soared and globalization is being unwound. Interest rates are again on the rise. Against this backdrop, the world must still find ways of managing serious secular issues from climate change to pandemic prevention to improving inequality. To try to make sense of it all and the likely path forward, I caught up with the renowned economist Dambisa Moyo, one of the world’s leading experts on global growth and governance and the author most recently of How Boards Work, for her views on what is causing the current inflationary spiral, her outlook on the economy and interest rates, and her insights into how we can properly navigate the major economic issues facing the world. Our conversation is below.
Octavian Report: What is your current outlook for inflation in the United States and globally? What do you think is driving it?
Dambisa Moyo: I think that there are some complexities with answering the question. For the last several decades, we’ve been living in an abnormal dislocation, a low inflation, low interest rate environment. We're now in a world where there are at least three drivers of the current inflation.
One is clearly cheap money, the wall of stimulus, and really not just because of the pandemic, but also the financial crisis before that. Number two is the aggregate demand shock: the fact that we were all sent home and therefore had this artificial reduction in demand which is now being reversed in large part post-pandemic. So there is massive demand. And then related to this, third, are the concerns around supply chains, the part of the pandemic that has led to more difficulty moving things around and therefore contributing to this inflationary shock. And I did not mention Russia and Ukraine, which also is adding additional pressure to the inflationary picture.
It's hard to calibrate exactly where we go from here. By the way, I should start off by saying I have fundamentally been a person worried about long-term growth and worried about inflation, meaning that I've tended to err on the side of this being a longer term, deeper problem than perhaps other people might view it.
Clearly there are efforts to try and address the inflation problem through raising interest rates, but that might not immediately solve some of the issues around supply chains, which to my mind are not just a pandemic problem but really a structural problem that's emerging because of de-globalization.
In short, I would say we have longer and deeper problems around inflation. And although I think we might see a bit of a dip because higher interest could lead to demand destruction and therefore put downward pressure on prices, I don't think we will quickly end up in a world where we have the two percent inflation traditionally targeted by the Federal Reserve and other central bankers globally.
I'm fundamentally worried. I think Larry Summers’ view that we could end up with 8% rates longer term seems hard to swallow and there are reasons such as demand destruction that argue that's probably too high, but I definitely am closer to his view than that inflation will all be gone by the autumn.
OR: It's interesting that you talk in terms of multi-decades. Do you think we're also going into a long period of higher interest rates?
Moyo: The reason it's hard to make that call is I tend to wake up every day and think to myself, "What is different from the past?" And the reason I think it might not be exactly as it has been in the past is because we've had technology really create diminution in prices. So it's not just that interest rates were low and inflation was low. A lot of that is an artifact of a lower-price environment from technological gains. Things like telecommunications, transportation, and in fact, I'd even add to that globalization. Technology really provided us with that reprieve.
What that means to me is that while we're in the middle of a pandemic, a war, and this unique aggregate demand reversal, I can see an argument that those things could reverse in a reasonable time, meaning between a year to three years. And therefore, we wouldn't then be in a long-term cycle of high interest rates.
OR: But if we have elevated inflation like you're worried about, can you have low interest rates?
Moyo: Well, my point is that I think we remain in this higher-inflation environment for the next year to two years, and as a response to that we've already started to see massive increases in rates. But I don't see that long-term because I think you'll get demand destruction and you'll see the unwind of some of these problems.
I don't think we're going back into a negative-rate environment. But barring more shocks, I also don't see us staying at a high-rate environment for long given the likelihood that inflation three to five years out is likely to sort of recoil with demand destruction.
OR: How do you think this plays into the massive amount of debt that we now have?
Moyo: The debt problem is something I've been writing about since 2018. I think we all know that there are only a handful of ways to deal with it. You can inflate it away. You can default or restructure. You can grow your way out of it. The one thing that I've been quite focused on is the weakness in growth, which is the route I would have preferred. I don't see that growth outlook emerging. I worry a lot about the low-growth environment, not just in developed economies, but in developing economies as well.
I think the debt to GDP ratio now globally is over 250%. With low growth, countries are more likely to start looking at some form of renegotiation: principal, interest rate, and maturities. We’ve started to see that already, particularly with China renegotiating with many emerging market economies. China is now the largest trading partner, lender, and investor in the world's emerging markets.
So I am worried about the debt picture. In a world without growth – look at the IMF and World Bank forecasts showing growth continuing on a downward trajectory – it leads to a higher vulnerability to a debt default or debt contagion issues. We've started to see that already around the world.
OR: What's your outlook on emerging markets generally?
Moyo: I worry a lot about emerging markets. Ninety percent of the world's population lives in the emerging market economies. They have spent the better part of the past 30 years really altering the structure of their economies in order to be participants in globalization. Now I think that they are quite vulnerable, not just because of the exogenous factors of the pandemic, but they're also incredibly vulnerable to the unwind of trade reductions, reduction in capital flows, higher barriers to immigration, the breakdown of multilateralism. I think all of those things make it harder to make the case to invest in the emerging markets.
OR: Are you worried about elevated food prices and perhaps political blowback from that?
Moyo: I am, absolutely. Again, many of these countries rebuilt their economies to basically produce and sell things that they were, in principle, best equipped to do. And they were very happy to cede a lot of the expertise in different areas because they believe in the global free trade system and that idea that they could buy and sell goods and services and didn't need to be all things to all people, so to speak. But clearly, now in a world where many countries are vulnerable, they're financially dependent on China or on the West. Their food supplies are extremely exposed. Recalibrating those systems is extremely difficult. I don't think they can do it quickly enough to avert a backlash or challenges to political instability at home.
OR: You're very involved with energy and climate change. What do we need to do to effectively transition to a carbon-neutral world?
Moyo: My starting point is that there are a bunch of things that we all agree on. I think we all agree that climate change is urgent, it's here, It's a big problem. I think we can all agree that whatever our path to the new equilibrium—and I'm glad you said transition because it is a transition, it's not just an on-off switch—we don't want to prejudice certain groups of people. You certainly don't want to prejudice emerging market countries that are trying to create economic growth for their populations.
I think we should agree, because it's so urgent, because it's so big, that we cannot a priori assume that some things don't work. So, in other words, everything needs to be on the table. And I fear that very often when you speak to people about climate change, they want to defund energy companies or they want to take a very anti-carbon capture view. I think that's a very narrow approach to something that is extremely complicated and at its heart is a science problem, not a public policy problem. And for science problems, you want everything to be on the table and to be considered.
OR: Dambisa, it's fair to say you are one of the world’s leading experts on ESG. Are you optimistic that we have the right governance in place to be able to actually deal with things that are so complicated and require really long-term thinking and decision-making?
Moyo: Where I think there's still the gap in governance is that there are still too many parallel conversations going on. Governments in one room, NGOs and leaders of civil society in another room, business in a different room. And I think where there needs to be a better orchestration of the conversation is making sure that these three perspectives and voices are working in concert. It's really about changing how we manage society and think about broader issues of inequality, growth, inflation, globalization, et cetera, as being part and parcel of a world that's going to become much more ESG-focused.
OR: Is there one main trend you would try to counter or conversely lean into more?
Moyo: First of all, I fundamentally believe that China is not going away. So, thinking about how to invest in China over the next several decades is an important thing for society at large but also for investors. Another area is the energy transition we just talked about. We're 9 billion people on the planet, going to 11 billion. There is massive demand for natural resources, massive demand for energy. So how can we invest in solar, wind, geothermal, biofuels, nuclear, and Gen IV in a way that generates returns and is actually sustainable?
The third area for me is technology. There's going to be a massive move away from networks and social media type of platforms and from consumer platforms like Amazon, and much more towards what I think is real disruption to public goods like education and healthcare. Obviously, we've seen some of them already, for example in bioscience. So these are areas that I'm invested in. I think they're real opportunities. I will also say, I tend to take a very long view.
OR: Okay, so what is your view on crypto and the blockchain?
Moyo: I'm glad you separated the question. I'll start with the blockchain. I’m very optimistic. There are lots of applications. Many of them we haven't even begun to see yet. We're seeing it in procurement. We're seeing it in distribution of goods and services across borders. I'm super excited about the blockchain and what it can do.
I’m less excited about crypto, perhaps unsurprisingly. I would never say, "It's going to zero." Some would argue it doesn't meet the high hurdle for money: store of value, units of account, medium of exchange. But I can even get my head around that. But I think that there's still the question about why would a government, who has the monopoly power on the production of money in a fiat world, just give up that right?
There's going to be more biting regulation coming down the pike. I'm not talking about digital currencies. Obviously, I think there is going to be a digital dollar, digital renminbi. But how it is that an exogenous cryptocurrency survives when governments derive their power, economic power but also military power, from having fiat money and controlling money supply. I don't see how that goes away. And so I would say I'm underweight cryptocurrencies, as we put it in our traditional parlance.
OR: Are you a gold bug?
Moyo: I have been, traditionally. I was on the board of the largest gold producer in the world. I think for similar reasons, gold has become less obvious. There are many other things you can do with your money. So I think that's another case of markets in the world have moved further ahead of the traditional thinking around gold.
This interview has been edited for length and clarity.