Former Schwab CEO Evelyn Dilsaver talks AI, crypto and future of financial services

Joe Kornik: Welcome to the VISION by Protiviti Interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of money, and I couldn’t be more excited to welcome in financial executive Evelyn Dilsaver. Evelyn is the former president and CEO of Charles Schwab Investment Management, where she led all facets of the business, growing its assets from 137 billion US$ to more than 200 billion in just four years, all while generating more than a billion dollars in revenue. Prior, she served as the chief financial officer and chief administrative officer for U.S. Trust. She currently sits on several public and private boards, including Protiviti’s advisory board. Evelyn, thank you so much for joining me today.

Evelyn Dilsaver: Joe, thank you so much for having me.

Joe Kornik: Evelyn, I mentioned in your introduction that you spent more than 16 years as an executive VP at Charles Schwab. Talk to me a little bit, if you will, about the evolution of the industry over that time, and even what’s happened in the space in the 15 years since. It strikes me that it’s a radically different industry today than it was way back in the 1990’s when you joined.

Evelyn Dilsaver: Right. It has changed so much. If you think about the evolution of the industry when I joined Schwab in 1991, I could break it into two parts. The first part is around the brokerage side of the business, and the second part is around the investment management. On the brokerage side of the business, I would term it with the rise of the individual investor, that can do their own trades instead of having to go through a broker, and it was also at rise of choice and one platform.

If you remember back then when you wanted to buy a mutual fund, for example, you would have to go to the mutual fund company, whether it was Vanguard or Fidelity or any of those mutual funds. So, you ended up having to deal with many statements at the end of the month. And then Schwab invented OneSource, which allowed all of those mutual fund companies to be on one platform so you, as a customer, were able to buy multiple different company funds and get one statement at the end of the month. That was an evolution for the industry. Having said that, from the mutual fund side, you lost the sight of the customer, because Schwab owned the customer, not you, and that made for a different kind of marketing.

The other thing that really rose up during that time in the mid-90s was online trades. All of a sudden, your computer could do your trades for you, and for a while, we started separating out trades in the branch versus trades online and pricing it differently. But we found our customers were arbitraging us and trying to do both at the same time. And that leads me to investment management and how much it has changed. Again, I mentioned before, the customer used to be owned by the mutual fund company, and now this platform where you get to sell all of your funds, that platform owned the customer, so you had to sell differently. At the same time, we were moving away from active investing into passive investing, and the rise of the index funds were showing up a lot.

And then as I mentioned sales. You used to be able to go sell to the branches and to the brokers, and now, because of the construct of portfolios for individuals, you now had to sell to a centralized team that dictated to the brokers and the portfolio managers what kind of investments to invest in. So, it changed the whole sales process.

And then for portfolio management, again, the rise of technology allowed you to optimize your portfolio and do risk optimization better than you ever did before, because now you had all this data at your fingertips. That’s what’s changed.

Joe Kornik: Right. And I would imagine that technology piece is what’s going to—really, what’s supercharging the evolution of the industry now. So, when you look out over the investment management landscape right now, what disruptors do you see in this space, and how should investment managers navigate them? What would be your advice?

Evelyn Dilsaver: Well, I would agree with your last comment, Joe. Technology is going to still be a huge factor. There’s the robo-advisors. So, now, you use technology to be able to give advice, and you don’t need an individual there. And of course, that really depends on the size of the portfolio and the trust of the customer. There’s also auto investment advice, and there’s even more advanced data analytics to be able to do your investment research.

I was talking to a friend of mine who is in the investment management business, and because of the data analytics, he indicated that some portfolio managers are actually moving to very concentrated portfolios versus the very diversified portfolios because they can, because of data analytics and the ability to research and dive deeper into the stocks that they choose.

Alternative investments will continue to rise. Over the last 15 years, at least when I was still at Schwab, and of course, it’s gone on, the rise of exchange-traded funds where it’s very tax advantaged vehicles, but I’m even seeing exchange-traded funds for crypto. Imagine that. So, they’re taking digital assets, if you will, and creating ETFs out of them.

We’ll continue to see regulatory reform. That’s still big because of the focus on enhanced transparency and improving risk management. Big focus on ESG. Of course, there’s some debate about whether it really does perform better than those without the ESG metrics. And then, more global. Emerging markets is continuing to make a big dent in where people spend their time.

Joe Kornik: Yes, interesting. Thanks, Evelyn. You mentioned the word crypto, which is on the tip of everyone’s tongue, it seems, when we talk about the future of this space. So, I’d be curious to hear your thoughts on crypto and its future.

Evelyn Dilsaver: Well, thanks, Joe. Crypto is fascinating to me. Have I invested in it? No, not yet, but having said that, if you think about crypto or even Bitcoin when they first started, the reason they started was to try to make transactions easier, faster, and decentralize the power that banks had to charge fees. So, for example, if you wanted to wire funds to your friend in Europe, you had to pay a pretty hefty fee, and it would take several days to do that. The belief of Bitcoin and crypto is that fees would be less because it's digital. You don't have to worry about the time. You can actually see your transaction in your account within seconds and minutes, and it was a very decentralized approach.

Having said that, some of the big issues—so for example, if you’re using Bitcoin—Bitcoin uses huge computer systems to verify the transactions, but they’re expensive. So, you build more and more systems, and eventually, it becomes centralized, and it has to be governed just like banks do.

Interesting thing is that many of the banks now are moving towards digital assets, which again, is to make life more easy and efficient for the consumer. In May of 2020, there were only 35 central banks using digital currencies. Today, there’s 114. So, the banks are really moving into this, pretty big time, again, to make life easier for them and more efficient, because think about it, you don’t have to print anything. If you do a transaction, for example, in a brokerage, it takes two days to settle your trade. Now, it can take minutes to settle your trade instead of two days.

So, to me, it’s fascinating, but I think where you’re going to invest are the underlying platforms that make it happen versus the very edge of the crypto.

Joe Kornik: If you could take me out, let’s say, even to 2030, and look almost a decade into the future, what do you see? I mean, there’s lots of challenges or lots of opportunities. What do you think the next decade holds?

Evelyn Dilsaver: Joe, I think the next decade will still be one of “Can I trust you?” and security and privacy. Think about what we just mentioned on digital assets. I mean, you’re okay if you go to the store and buy something with your Visa card. For example, in China, everything is tied back to the government so that they can see your information, and in the U.S., I know we’re not really good about letting the government have our information. So, I think privacy and the regulation of that will continue to be big for us going forward.

Trust is going to be another big one. If you can get back into where people will trust you as a company and you as an individual, because we’ve lost a lot of that today. And if I look at the macro environment, I think employment is going to be tough. There’s declining population. I see it in the schools and the universities where schools are shutting down because there aren’t enough students to come through, and that trickles all the way up through college, and of course, employment.

So, there will be, over the next several years, a fight for talent, especially as the baby boomers retire and the younger ones come up, and the declining birth rate would lead up to that. Then, I think, again, digital assets will take off. Once they start to become favored by everybody and accepted by everybody, it’s going to be a huge change for our country moving forward.

Joe Kornik: Right. And specifically, in the investment management space or in the financial industry, any bold predictions for 2030 and beyond?

Evelyn Dilsaver: We’re all going to have to learn how to accept crypto. So, even my companies today, I’ll ask them, “What is our policy about accepting crypto if somebody wants to buy something?” Or “Have we even been asked for that?” and the answer today is no. Now, it depends on which industry you’re in, but the answer today for my companies is, “Oh, no. No, we’re not taking crypto. We’re not accepting it.” But over the next several years, whether it’s crypto or some sort of digital asset, we’re going to have to figure out how to accept it. And it also means what do we do for our employees in terms of using AI.

We didn't talk about that, but AI and chat. Can our employees use them, and what regulations or guidelines do we have around that that we want to employ, because you don’t know where that data is coming from, right? So, again, in the future, I think data analytics is going to be big because you’re going to have to be able to discern truth from fiction, and companies are going to have to be able to use that data in a way that makes sense for them moving forward.

Joe Kornik: Evelyn, I have to ask this question. Could AI replace financial advisors some day?

Evelyn Dilsaver: That’s a great question, because when I was going to do this with you, I went on to ChatGPT and I asked about what is the future for investment management, and actually came back with a lot of the same answers that I have just given you, but I also asked for investment advice. Now, I won’t tell you what the investment advice was, but it was really credible. So, yes, I think that can happen. To a certain degree, we’re already doing it, right? The robo-advisors that many of the firms are using, those are all built off of data analytics that give you the optimized portfolio for where you are in your life, and when you want to retire and all of that, and what your assets are. So, I think it’s already happening.

Joe Kornik: We all have to up our game, it sounds like.

Evelyn Dilsaver: It does.

Joe Kornik: Well, thank you so much, Evelyn. I appreciate you joining us today.

Evelyn Dilsaver: Thank you, Joe. This was fun.

Joe Kornik: And thank you for watching the VISION by Protiviti interview. On behalf of Evelyn Dilsaver, I’m Joe Kornik. We’ll see you next time.

The Economist’s Swarup Gupta on cash, privacy and data in a digital future

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of money, and who better than Swarup Gupta, lead industry analyst for financial services at The Economist Intelligence Unit, the research arm of The Economist, to help us explore that topic. Gupta is an expert on digital finance, including central bank, digital currencies, and cryptocurrencies, as well as issues of privacy and data protection. It certainly sounds like we have a lot to talk about, so Swarup, I appreciate you joining us today.

Swarup Gupta: My pleasure, Joe. Thank you for having me.

Joe Kornik: So, let’s talk about the future of money, and specifically, the rise of digital currencies and cryptocurrencies, whether that’d be Bitcoin or other currencies from the private sector or the central banks. What’s your view of where digital currencies go over the next three to five or even 10 years, and what are the potential impacts of that evolution?

Swarup Gupta: Right. So, even now, across the greatest part of the planet, cash is definitely—it remains king, and it continues to be the major mode of payment, but there are various estimates that show that as a mode of payment, cash would decline to as low as 5% by 2030 to 2031. So, digitalization is something that is definitely picking up, and that is likely to continue over the rest of this decade and then even farther, and it’s quite likely that some form of digital payments will emerge in different parts of the world. It could take up different forms across the planet.

For example, real-time payments, very fast digital payments, are a reality across several countries in Southeast Asia, many of whom have also simultaneously all, prior to this, rolled digital identity services; whereas the private sector might actually take up a major role in the developed countries as we can see. First, for example, in the U.S. with Venmo, and now with the progress and the unceasing march of Apple Pay. Digital payments are definitely going to take center stage. The use of cash is going to fall, and that’s going to take several forms. That’s going to be the real-time payment systems; instant payment systems, both private and public; a small amount of cryptocurrencies; and ultimately, central bank digital currencies, which I’m sure, will come to innovate.

Joe Kornik: Right. That’s kind of where I was going next. As digital currencies become more mainstream, and as you pointed out, I think we’re all in agreement that it’s heading that way. What do you view as the role of governments or international bodies in regulating those currencies, and who takes the lead on such an effort, and what does that potentially mean for the U.S. dollar, and assuming it has a diminished role in the future, what could potentially replace the U.S. dollar?

Swarup Gupta: Well, let me start with the faith of the U.S. dollar. I’m afraid for the next years of the U.S. dollar, that isn’t happening any time soon. Lots of statistics show that almost 90% of cross-border transactions in Southeast Asia, definitely one of the fastest growing parts of the planet, is conducted using the U.S. dollar. Whether as an initial form of conversion or as a last-mile channel in which you convert different currencies across the region. So, yes, the U.S. dollar’s share of foreign trade is likely to decline over time, perhaps over the next decade, but that’s not happening any time soon.

At the same time, the U.S. government itself has shown, especially through the action of the SEC, that it wants to take back the use of money as a sovereign tool of governance and policy making. The way it’s gone after crypto exchanges in particular, those which have refused to register, shows that the U.S. government, and in fact, governments across the world, are keen to reassert their sovereignty over money as a form of exchange of value. So definitely governments will take an increasingly important role, whether it’s through government-backed real-time payment systems like the U.S.’ FedNow, or multi-CBDCs, or CBDCs themselves.

Coming to CBDCs, there are various benefits to the promotion and introduction of a CBDC. It encourages innovation in many spheres, enhances efficiency and reduces cost for internal as well as external economies in terms of foreign exchange transactions, and also promotes greater financial inclusion, not just in the developing world, but surprise, surprise, also in developed countries where large amounts of cash dominate population. So here, by financial inclusion, I’m not referring only to a poverty element, but also access to financial services of multiple kinds, for example, debit and credit services and insurance.

So, it’s going to be a very gated development of central bank digital countries across the world. Several initiatives have actually taken off. For example, China, Hongkong, Japan, Malaysia, Saudi Arabia and the UAE have experimented not just with retail CBDCs, but also with wholesale CBDCs. CBDC development is proceeding along two forks. One is retail, and the other is wholesale. While a lot of attention of both policy makers and analysts and the press is devoted to retail CBDCs, what is likely to take off initially is wholesale CBDCs, and that is related to another issue we’ll probably come to later in the conversation, which I would try and end with this particular section.

So, wholesale CBDCs are concerned more with interbank payments, and essentially, are trying to replace or reset the financial infrastructure of a country as it exists in pre-digitalization format. Basically, if countries can digitalize a large part of their financial transactions within a country, it improves transactions, it improves efficiencies, reduces transaction cost, and essentially shortens the chain which is required when a currency is converted into another currency. This itself has taken several forms. The most common form is using a single token, which is issued jointly by multiple commercial banks across countries. The UAE and Saudi Arabia have been working on a similar project where the same token is issued by multiple banks. The other form that it has taken is known as a multi-CBDC format, where CBDCs of different countries, different CBDCs are interoperable and operate with the similar financial infrastructure and rules governing them.

The retail CBDC, which has seen the most research, has only taken off in China, and even there, it hasn’t been as popular and it hasn’t gotten as much traction as was expected, and that’s not surprising because you already have the likes of Alipay and WeChat filling in for that role in that particular country. And in the developed world and even in developing countries, the introduction of retail CBDCs leads to important and difficult questions about privacy and anonymity.

Joe Kornik: Yes, absolutely. We’re going to get to privacy in just a minute. I know that’s a topic that’s near and dear to your heart, but before we do that, I just wanted to talk a little bit about some of the countries you mentioned. China, we’ve heard a lot about the yuan perhaps taking a leadership role. I’ve read a lot about the BRIC countries and a currency coming out of the BRIC countries. I’m just wondering if you had any thoughts on that, or what’s your take on those currencies potentially taking a leading role.

Swarup Gupta: Well, I have discussed this and commented on this publicly, and let me tell you that a BRIC currency at this point is a bit of a non-starter. Let me start with the status of the BRIC itself. More and more countries want to jump onto the BRIC bandwagon for reasons of their own. It might have to find a new name for itself. I’m not running it down, it’s an important agglomeration of countries. But at the same time, the BRIC itself is terribly lopsided. Any currency born out of a basket of currencies which make up the currencies of BRIC countries will be dominated overwhelmingly by the digital yuan, and definitely will satisfy China’s ambitions of internationalizing its currency, but at the same time, will other countries agree? India and China, for example, have fairly prickly relations, whereas China’s relation with other countries are perhaps better. So, that’s a bit of a non-starter even though the Brazilian president has gone on record discussing the need for a BRIC currency.

So, what is likely to happen is a diversification away from the U.S. dollar to a basket of currencies, and what is that basket going to look like? It’s going to be the euro, the yuan, and several other allied currencies. So essentially, the gap between the U.S. dollar and other currencies sort of declines to a certain extent, but the U.S. dollar overwhelmingly dominates as a share of foreign trade over the foreseeable future, which is the next five years, for instance.

Joe Kornik: Got you. Thank you for those views. It’s very interesting. I do want to dig a little deeper now into the potential impacts of digital currencies, specifically how privacy and anonymity will be affected. What’s the potential fallout from where you sit, and how does that vary by various parts of the planet, geopolitical realities, et cetera?

Swarup Gupta: Before we start this very important bit of this discussion, I’d like to try and define those terms, privacy and anonymity. Privacy is something that even the UN has guaranteed as a right. Essentially, it means that you keep your data safe and secure, and you ensure that only those whom you provide specific rights to, have the right to view that data. For example, iMessage, for long and still now has encrypted messaging, and when you send an iMessage to another person, say me, for instance, you would expect that only I would read that particular message and not any other person in your address book. So, that’s privacy.

Anonymity is a slightly more controversial concept. Anonymity means that you have a fake handle or you use an anonymous handle—let me be clear, not a fake handle but an anonymous handle—on a specific social media service. So, in this case, your identity remains secret, but your activities may or may not remain secret. So anonymity, in fact, is a more extreme form of privacy, and it’s absolutely impossible to guarantee in a digitalized world. The reason for that is any form of digital payment, whether it’s a real-time payment service run by an institution backed by the government, or it’s Venmo, or it's Apple Pay, inherently leaves a trail, an auditable trail of transactions. Not just a trail of transactions, but it also discloses interesting nuggets about your spending behavior and your life in general. That is something—complete anonymity in digital transactions is something that only cash can guarantee. But cash, as you know, is on its way out, and because of the capability of digital payments to generate this auditable trail, there are significant privacy concerns.

So, that is one aspect of it. You might argue that “Look, this is exactly why the proponents of cryptocurrency came up with Bitcoin,” right? Because in this case, not only are you, as a user, anonymous, your transactions are also perhaps anonymous. Yes, you can track that in the case of malfeasance, some protocols have now evolved, but the sender and receiver of those transactions remain inherently anonymous. Well, I would argue actually that that’s not anonymity but pseudo-anonymity because the entire distributed ledger can be viewed, especially by the concerned authorities. They reveal several identifiers which are about us. For example, our age, our gender, our race, and our location even can be tracked, and you can tie that together and then get a fair idea whether Joe or Swarup was using a particular distributed ledger chain to engage in transactions.

So, to round up what I’m trying to say here, the demise of cash has finally ended a completely anonymous form of transacting value, so money or hard cash was the only completely anonymous way of storing value over time in exchange. Digital payments have ended that, which has led to multiple concerns around privacy, who owns the data, who shares the data, who has rights to the data, and which authorities can gain access to which part of the data.

Joe Kornik: Yes, interesting. You touched on a lot there, and I think one of the things that worries people a lot about a new world or digital currency is the potential for fraud, crime, money laundering, and probably some other things that I’m not even aware of in this new, potentially unregulated future. So, how concerned should we be about that, and what can companies or countries do to protect people and data?

Swarup Gupta: I think those concerns that you raised, Joe, are extremely pertinent, and as monetary payment schemes become increasingly digitalized, digital financial crimes, the occurrence of those activities just go up, which leads also to strict anti-money laundering regulations, many of whom are now internationally prescribed to for various agencies. They need to follow them. This is exactly why the proponents of CBDCs or authorities who wish to issue CBDCs argue that if you back the issuance of CBDCs, you would enable us to crack down on money laundering activities, on financial crime of various kinds, and illegal transactions.

However, again, we circle back to those privacy concerns, especially in countries where there is greater awareness of one’s digital rights. So, it’s a bit of a chicken and egg situation. How do you guarantee at least a minimum or a maximum modicum of privacy rights? I would argue that the U.S., for example, or any other developed country could actually take the lead on this by saying, “Look, my CBDC is more private than yours.” Because it offers a greater level of privacy, to the extent of offering a level of pseudo-anonymity, you could just continue to flock into the U.S. dollar.

Joe Kornik: Swarup, thank you so much for your time today. You’ve been very generous of your time. I have just one more question. If I ask you to look out to 2030 or even 2035, how do you see all this playing out? I mean, ultimately, what do you see is the financial future, and will it be a good place, will we like it, or would we long for the good old days of the 2020s?

Swarup Gupta: Well, you definitely will long for the good old days of the 2010s and ’20s because as I’ve said, cash will probably decline to 5% of all transactions globally. But let me just bring in something which has become a bit of a watchword recently, which is AI. You will definitely see AI figure more on both the supply and demand side of money, you will have more and more people using AI as a marketing tool, including the market financial services. At the same time, you will have AI-enabled tools, both generative and predictive, managing a lot of your monetary activities. So, some of the things that we are now trying to achieve or striving to achieve in various parts of the globe, people will just take as given: automation, instant, seamless, crossborder payments, very efficient, very low transaction cost, and of course, assisted by AI, which means that it takes out a lot of the drudgery related to both financial planning and transations.

Joe Kornik: Swarup, thank you so much for your time today. I really appreciate the conversation. Fascinating.

Swarup Gupta: Thanks, Joe.

Joe Kornik: And thank you for watching the VISION by Protiviti interview. For Swarup Gupta, I’m Joe Kornik. We’ll see you next time.

Economist Peter Henry offers a roadmap for a more equitable and prosperous future

Joe Kornik: Welcome to the VISION by Protiviti Interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive board rooms worldwide. Today, we’re exploring the future of money, and I couldn’t be happier to welcome in Dr. Peter Henry, Protiviti board member, senior fellow at Stanford University’s Hoover Institution, senior fellow at Standford’s Freeman Spogli Institute for International Studies, and dean emeritus of NYU Stern School of Business. He is also the author of the very important and influential book Turnaround: Third-World Lessons for First-World Growth. Peter, thank you so much for joining me today.

Peter Henry: Great to be with you, Joe. Thank you for having me on.

Joe Kornik: Peter, it’s hard to believe it’s been 10 years since your book was published. In it, you talk about the significant progress developing countries had made and how first-world nations were in crisis, and in fact, we’re being held up largely by those emerging economies. It seems like a lot of the problems you were talking about a decade ago—income inequality, climate, hyperinflation, political uncertainty—are even greater challenges today. We’ve also witnessed developments no one would have predicted 10 years ago, financial setbacks in some of the emerging economies due to COVID, and the adoption of cryptocurrency in some developing economies to offset devaluing fiat currencies and provide a hedge to political instability. I’m curious, if you wrote a sequel to Turnaround today, what would you say are the lessons from the last 10 years and how do they shape your view of the future?

Peter Henry: Thank you for the question, Joe. It’s a great question and it is the right question. I think, when I look back, I think that what I would say is that policies really matter. Policy decisions that are made by our leaders have a dramatic impact for the lives of everyday people. That’s true in both first-world countries as well as third-world countries. In Turnaround, I was making the point that the way forward for first-world countries back in 2013, in a positive way, would look a lot like the policy recommendations that the first world had made for the third world back in the 1970s and 1980s.

What have we seen? Somewhat disappointingly, I don’t think that first-world countries have made a lot of progress on what I would call the structural policy fronts. What do I mean by that? In the aftermath of the global financial crisis, we had this narrative of central bankers as heroes. Ben Bernanke did a tremendous job of creating—and the Federal Reserve more broadly­—of creating new financial instruments, quantitative easing, and so forth, that really helped us cope with the dramatic financial crisis. But then I think what happened is that the structural changes—so things like addressing educational policy, things like focusing on reforming immigration laws in the United States, right, because we need—think about it, in order for economy to grow, we need capital, labor, and ideas. Okay. If you want to grow, you need to grow the labor force, and we know that we got an aging population and we haven’t dealt in a systemic way with our need for more skilled foreign workers in particular. So we’ve not made a lot of progress on that front. Consequently, we’ve had slowing productivity.

This is not just a US-specific story. It’s a developed, first-world country story. Europe hasn’t made much progress on these issues either. Their population is aging even more rapidly than ours. In the absence of addressing what I would call these structural issues—and I haven’t even mentioned yet the challenges of Brexit, because I’m going to say, in addition to learning that policies really matter, the second lesson, which I’ll come to in a second, is that politics matter, at least as much as policies, because the politics really drive whether policies get through. But in the absence of these structural economic reforms that we needed to see in advanced economies to continue driving productivity growth so standards of living can continue to rise, we just had central bankers doing more and more to lower interest rates, keep interest rates low, and the debate was all around how low can they stay for how long, how long can quantitative easing continue. While all this was happening, our elected officials, both in the United States and abroad, didn’t really do very much to address these underlying structural issues that are really at the heart of what drives an economy: innovation, policies to encourage capital accumulation, and the free movement of labor, particularly getting more high-skilled labor into economies like the United States that really need it.

If you think about, for instance, the inflation challenges we’re dealing with right now, one of the issues is that the demand for goods and services is outstripping the supply of goods and services. What determines the supply of goods and services? Well, a really important factor that is the quantity of labor. We know there’s a labor shortage. That gets down to, again, immigration and education to create ways to help us have a greater labor supply. Those are some of the policies, and of course, as well, the inflation challenges we’re dealing with. Emerging economies, we’re dealing with those issues front and center in the 70s and 80s and we learned that if you want to keep inflation low, you need to keep interest rates at a reasonable level and manage fiscal policy. Of course, we’ve had large and growing deficits, large expansion of the money supply coupled with some shocks, the war in Ukraine, spiking food prices, and we’re struggling to get inflation down to a 2% target.

Joe Kornik: Right. Inflation is the elephant in the room. It continues to cause a drag globally. The US at least has made some progress with inflation but still has some way to go for sure.

Peter Henry: One of the really important lessons that I think we also have not learned in the advanced world, for emerging economies, is how to deal with inflation, in the following sense. If you go back to 2022 when inflation hit its peak, it was almost 10% in the United States and it was above 10% in both the UK and the European Union. That’s what we would call, by historical standards, if you also look at emerging economies, moderate inflation, because we have double-digit inflation that’s not as high as 40% but above single-digit inflation. We haven’t seen that kind of inflation in advanced economies since the 70s.

There’s been an expectation that the Fed, the ECB, and the Bank of England were going to be able to bring down moderate inflation, rapidly get back down to the 2% target, and engineer a so-called soft landing. Well, I think people overestimated how easy that was going to be because they ignored a rich history of developing countries trying to reduce moderate inflation. Yes, some developing countries have had hyperinflation, like Argentina and Brazil, but there are at least 56 episodes between 1976 and 1994 in emerging economies of countries that had inflation that were double digit, not 40% but 15% or so, that tried to reduce moderate inflation. What you learn from looking at those 56 historical episodes, reducing moderate inflation to low single-digit inflation is very, very hard. It typically fails because it’s so hard to do. It typically takes about three years or so, and you look at the historical record for countries to do that. If we learned that lesson, I think that we’d be having a slightly different view of how costly and how long it was going to take to reduce inflation.

If you look at England right now, or the UK, they’re looking more and more like an emerging economy frankly, with their debt problems and their inflation problem really not looking like it’s going to come down where they want anytime soon. The European Union is already in recession, so odds of a soft landing there are looking tough. The US may still make it, but we’ve got core inflation still running at 4.8% with a target of 2%, and very importantly, everyone’s asking how high rates have to go and how long do they have to stay in order for us to get down to 2%, but nobody is asking the question how rapidly do we need to get down to 2%? If you look at a country like Chile in 1992 when they first announced their inflation target, they made a decision that they were going to—they were coming down from inflation around 20%, and they eventually got down to single-digit inflation, but they did it very gradually over a course of several years. I’ve not heard in the current policy debate clarity from the Fed about how much of a hurry are we in to get to that 2%? Because that actually really makes a difference in terms of the impact on the economy of getting to 2%. If you try to go really rapidly, then the risk of a hard landing is greater.

Joe Kornik: When you look at the next two, three, five years, from a macroeconomic standpoint, from a global economy, what shape do you think we’re in? How optimistic are you or how concerned should we be?

Peter Henry: The thing that gives me optimism is the dynamism and the population growth that we see in the emerging world, so sub-Saharan Africa in particular. Right? The rich world is aging, much of the emerging world, sub-Saharan Africa in particular, has a rapidly growing young population. Those are lots of potentially productive workers to help living standards continue to rise. Now the challenge there, of course, is that those workers in emerging economies are working with a deficiency of capital, so specifically, think about infrastructure. Okay. There a billion people in the world without access to electricity and another billion people who don’t live within 5 kilometers of an all-season road or a road that functions all year round. The vast majority of those people actually live in sub-Saharan Africa where the population is growing most rapidly.

What we have to do is figure out how to do a better job of having the global financial system find a way to allocate capital to those kinds of infrastructure projects that can generate economic growth. For instance, if a $1.00 invested in infrastructure in Zambia can generate $1.40 of GDP, that’s a 40% return. Right? There are reasons to believe that the rate of return on infrastructure is that high in some places in the world. I’ve done the research on it. I come up with this idea called the dual hurdle framework, which basically says if the rate of return on investing in a road in Zambia is higher than the rate of return on private capital in Zambia, then the Zambian government should want to invest in roads.

Similarly, if the rate of return on investing in a road in Zambia is higher than the rate of return on S&P 500, there ought to be some folks in the US who are trying to figure out a way to invest in roads in Zambia. In other words, if investing in infrastructure in emerging markets clears both of those hurdles, then that’s a win-win. It’s a win for Zambia because investing in Zambian roads generates more GDP and jobs for their citizens, which reduces overall immigration pressure, people want to move out of that country, but it also generates returns for asset holders in rich countries where growth is slow and the population is aging.

I’m optimistic because we’ve got tremendous population growth in the emerging world, but in order for that optimism to actually turn into a reality of higher global growth for everybody and higher asset returns in the United States and elsewhere in the rich world, we’ve got to figure out this capital allocation problem, and I think the dual hurdle framework could help us do that.

Joe Kornik: Right. I’m wondering how, just the future of money per se, the rise of cryptos, the rise of digital currencies, I think most people are in agreement that those certainly will be the wave of the future, and specifically how central banks manage monetary policy around—with the emergence of cryptos and digital currencies. How do you see that playing out and what could that mean for the economy? I mean, could there be a leveling effect from a global standpoint, from an equitable standpoint?

Peter Henry: I think it’s very exciting to talk about shiny, new things. Cryptocurrency and digital currency certainly fall in that category. I think it’s important, when thinking about where we are, to use a baseball analogy, we’re probably somewhere in the first inning, if not – I think we’re maybe past the world’s but we’re still in the first inning. What I mean by that, well, just think about order of magnitude, the value of money, broadly speaking, in circulation in the global economy is probably, it’s upwards of $100 trillion in US dollar terms. The value of crypto is probably $1 trillion. When you’re thinking about macroeconomic policy right now, I don’t think this is a major factor in how central banks are thinking about how they’re dealing with monetary policy. Having said that, of course, central banks have many jobs, one of which is to think about what role these currencies may play in the future. I suspect that digital currencies are going to be more important than crypto. It’s hard to see a world in which central banks are going to give up the role of basically being the creators of fiat money. Right? They’ve done that historically through paper money, let’s call it. They have been increasingly already doing that to some extent through digital currency by default. I don’t see a world in which central banks are not playing a major role.

The basic role of the central bank is making sure that we don’t have too much money in circulation, whether it’s digital or paper or some combination of those things, relative to the supply of goods and services, that role is not going to change. But central banks will have interesting things to think about. Right? I don’t see the dichotomy being so much first versus third world as it's going to be thinking about, well, in a world in which the central bank can issue digital currency, how do we think about the transmission of monetary policy, the role of banks for instance in open market operations? Right? Traditionally, banks and financial institutions, major financial institutions, played a major role in the conduct of open market operations. But in a world of digital currency, one could think about, “Well, why does it all have to get integrated into the banks? Can’t we let households participate directly in some of these things?”

So it’s the first inning, lots of important questions, but the reality that we now will have, I think, different means by which this principal monetary policy could get conducted, different mechanisms, may raise some interesting questions about the democracy, how flat the system is in terms of the way monetary policy is implemented. I don’t pretend to have the answers to those questions, but central banks, trust me, are thinking about these issues, or should be thinking about these issues.

Joe Kornik: Peter, any advice you’d offer for business leaders, C-suite executives, directors, boards, as they try to look out and navigate the next decade, let’s say?

Peter Henry: Yes, I think it’s important to remember, what is the role of a leader? Role of a leader is to define reality and give hope. Okay. What’s the reality? The reality is, coming out of COVID, there’s a lot of talk of deglobalization. Global trade, in the context of a stable macroenvironment—which we can’t take for granted as we now see with the inflation rounds we’re dealing with—but global trade, assuming central banks do their job and return us to low, stable, predictable inflation, global trade in that environment is probably the single biggest policy driver of prosperity. We need more global trade, not less. The idea then of deglobalization I think is overwrought, although there certainly was a reaction in the aftermath of COVID.

I think the right way to think about global trade in the aftermath of COVID is we need, in addition to the efficient distribution of supply chains and labor and capital in lots of different places around the world, which raises productivity, when you think about more resilient supply chains, right? There’s a trade-off between efficiency and resilience, meaning, as leaders think about how to build their supply chains to deliver goods and services at lower cost, they’ve also got to think about diversification, and we’re already seeing some of that, right, diversification in places like Vietnam is now booming. India has great promise, right, as do other parts in South Asia. I talked previously about sub-Saharan Africa. Right? We need more global trade, not less, and so leaders need to think very hard about, “Okay. How do we deliver for our organizations in an environment where we know that 10 years from now, 20 years from now, we’re going to need more global trade, not less? How do we advocate for the right kinds of policies in our countries to make sure that we actually do see the kinds of changes that are needed in order to ensure that we get infrastructure, right, in places that have booming populations like sub-Saharan Africa?” Because these will be the growth centers of the future. Right? Why should business leaders care about these things? Well, because that’s where the population growth is and that’s where the potential GDP growth is higher.

Joe Kornik: Right. Well, you’ve given us a lot to think about here today. My last question is just you’ve laid out a very intriguing roadmap for the future, and I just wonder if we could take that roadmap and extend it out maybe two decades, a generation even. What’s possible if we do this right? What kind of world could we be living in 2040s or even 2050?

Peter Henry: Yes. I love the question. We could be living in a world where there’s substantially less poverty. We’ll still have to deal with income distribution. Human beings have a tendency to ask, “I’ve got a good life for my family. Your life for your family is even better than my life,” so we got to figure out how to manage that challenge, and that’s an age-old challenge that goes all the way back to the Ten Commandments and not being envious of what your neighbor has. Those problems of human nature are a lot easier to solve when everyone has a lot more. So, there’s the potential to have a greener planet with far less poverty and far more dignity for more human beings and an even more prosperous world. [Music]

Joe Kornik: Right. Well, that sounds like the kind of place we would all like to end up for sure. Peter, thank you so much for your time today. I really appreciate it.

Peter Henry: Thank you, Joe. I enjoyed the conversation.

Joe Kornik: Yes, I did as well. I really enjoyed those insights. Thank you for watching the VISION by Protiviti Interview. On behalf of Dr. Peter Henry, I’m Joe Kornik. We’ll see you next time.