Navigating uncertainty in the global economy

Cryptocurrency does not currently threaten financial stability, according to London Business School (LBS) Professor of Economics Richard Portes.

But the economist warned that, despite that positive assessment, cryptocurrency remained a flawed innovation.

His comments came during a recent LBS Think Ahead panel also featuring fellow LBS Professor of Economics Lucrezia Reichlin, and Professors of Management Science and Operations Jérémie Gallien and Nicos Savva. Each leading expert addressed a different aspect of uncertainty affecting the global economy.

The session was moderated by Eshe Nelson, business and economics reporter for The New York Times.

“There’s no obvious use case for crypto,” Professor Portes said. “It’s not money. It doesn’t perform - couldn’t perform - the same functions as money (being a unit of account, store of value, medium of exchange) very efficiently and the so-called ‘stable coins’ are simply ‘so-called’ stable coins.”

Professor Portes also highlighted that cryptocurrency remained tethered to the traditional banking system despite proponents’ claims to the contrary.

Addressing uncertainty created by current inflationary pressures, Professor Reichlin characterised the European experience as a primarily supply-driven shock.

“Since European citizens are not producers of energy, (they) are net importers of energy, that shock has made all of us poorer,” she said. “This is not the case for the US, because they are net exporters.”

But Professor Reichlin said both regions had seen significant changes in relative prices and so were experiencing an inflationary dynamic that central banks struggled to understand.

“First energy goes up and then manufacturing prices go up, because they’re direct users of energy. And then services (are affected), because they’re users of manufacturing products and so on and so forth,” she said.

“Now the other characteristic of this inflation is that inflation expectations have been stable and this is very different from the inflation of the 70s … So with that background, then we can ask, ‘ok, where are we now after more than a year of tightening?’ And my view is that we have tightened enough and I think it would be dangerous to tighten more.”

Professor Savva spoke about the disruption and uncertainty created by generative AI. He said while ChatGPT had existed for several years, its recent explosion in popularity had been driven by two innovations: an increase in the size of the models used and the improved accessibility of the platform to everyday users.

“Why’s this important? Because the ability to create text that’s at human-level quality is having the potential to automate tasks that are difficult to codify, tasks that are related to creativity, tasks that are related to the knowledge-based work,” he said.

“And these were exactly the tasks that were very difficult to automate in the past.”

Professor Savva also highlighted research findings indicating that the least experienced workers benefited most from using the tool.

“So in a sense you can think of ChatGPT as the great equaliser, in terms of performance, and all of this is going to have tremendous implications.”

Professor Gallien said that the complexities of the modern world meant supply chains were highly exposed to disruption. While that supply chain disruption was more likely to be systemic rather than simply “a streak of bad luck”, he said significant work had already been done on best practice responses.

“There’s very well-known - they’re not easy to do, but they’re well-identified - types of ideas and concepts and tools that can be applied,” he said.

“The first one … is to move from fire-fighting and becoming a good crisis manager to looking at it as a strategy, much more in advance, and really looking at the assessment, prevention, mitigation and action that companies can do in these areas.”

Professor Gallien suggested that “the right kind of data”, and risk management focussed on assets rather than on events, could also prove useful.

“The opportunity is to think instead of supply chains as assets, facilities, products, suppliers, transportation links. And for each of these assets, not think of the specific event that could disrupt them, but think of what would be the consequences and the actions that would be dictated by this particular asset being taken out,” he said.

LBS’s Think Ahead event and podcast series features discussions with leading faculty and other global experts focussed on the world’s most pressing business issues. It offers future-focused, actionable insights for audiences.

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