Why a Former IMF Chief Sees Reasons for Optimism

John Lipsky has had a front-row seat to the global economy’s biggest shocks. As the first deputy managing director of the International Monetary Fund (IMF) during the 2007-2009 financial crisis, he helped steer policy through one of the most perilous financial storms in generations. He also helped craft IMF aid packages for Greece, Ireland and Portugal to help them deal with their budget woes.

At the annual University of Virginia Investing Conference on the Darden School of Business Grounds, hosted by the Richard A. Mayo Center for Asset Management, Lipsky along with moderator Larry Kochard, dug deep into the most pressing issues facing the global economy and markets.

John Lipsky, American economist.

The U.S. and global economies have so far shown “more resilience than had been anticipated” despite tariffs and stubborn inflation, said Lipsky, a Ph.D. economist who worked on Wall Street and had long-standing interest in public service.

“The outlook is for sluggish growth — slow, especially in the rest of the world and even in the U.S., probably a bit slower than this year,” he said. “So, not terrible, certainly not as bad as many had feared.”

What’s more, spend any time at his alma mater Stanford University and Silicon Valley, and it’s bound to turn you into an optimist. “The sense of optimism and possibility is really sensational,” Lipsky told Kochard.

AI: ‘A Bubble in Commentary on Bubbles’

Recent headlines have been filled with speculation that surging valuations in AI stocks signal the formation of a new tech bubble — a flashback, some say, to the dotcom frenzy of the late 1990s.

But Lipsky, a senior fellow at the Foreign Policy Institute of Johns Hopkins University’s School of Advanced International Studies (SAIS), pushed back against that notion.

“There’s certainly a bubble in commentary on bubbles; AI bubbles in particular,” he said.

“There is a lot of enthusiasm, and naturally enthusiastic uncertainty about just how impactful AI is going to be on the economy, and specifically on productivity.”

Lipsky is not dismissive of the technology’s potential, though. Quite the opposite. He pointed to newly revised data showing that the U.S. economy likely added nearly one million fewer jobs in 2024 and early 2025 than initially reported. The Bureau of Labor Statistics released the adjustment as part of its annual benchmarking process.

While that was disappointing, “there was no reduction in the estimation of the growth in GDP, and that means that, if that’s all correct, productivity growth was stronger, sooner than had been expected and provides a potential explanation for why corporate profitability has held up better than had been anticipated,” Lipsky said.

In other words, the market’s optimism may not be as irrational as it looks. Anticipated enhancements in productivity, at least in part, might be driving the gains.

“We’ll have to wait and see about the real payoff from AI,” he said. “But so far, there are at least some indications that it may be helping produce a positive outlook for the U.S. economy, even sooner than had been anticipated.”

Lipsky goes on to make a critical distinction between the late 1990s dotcom era and what is happening now with AI: the scale of real capital investment.

“The dotcoms didn’t involve much capital — it was really a bunch of energetic, intelligent, enthusiastic folks in Mountain View, California, who were sure that their clever new apps would produce an avalanche of profits and make them multi-millionaires in just a few years,” he said. “When the bubble burst, it didn’t have that much impact on the economy as a whole.”

There is one cautionary tale from the dotcom era: the Global Crossing telecommunications company founded in 1997. As the Washington Post wrote, the company’s “aim was to build the world’s first privately financed fiber-optic network connecting North America, Europe, Latin America and Asia” and that it “ultimately was able to deliver services to hundreds of cities in dozens of countries.”

“The company raised real money, invested in real assets,” said Lipsky.

At the peak of Global Crossing’s stock price in 1997, the company was valued at $47 billion, according to the Washington Post. In 2002, it filed for bankruptcy protection, unable to repay debts totaling about $12 billion.

“Global Crossing was a firm that raised real money, invested in real assets, and went broke, and in the process, gave us all several years of very cheap internet thanks to the investors in Global Crossing,” Lipsky said. “What we have today is much more like Global Crossing. It’s real money being raised, and being invested in real assets.”

Fast forward to today. “With AI, we see not a dotcom phenomenon, but actual raising of real funds, investing in real assets, and we’ll have to see if they are more productive and more profitable than was the case of Global Crossing,” Lipsky said.

Digitization of Finance: ‘Talked About but Underrecognized’

If AI offers cautious hope, Lipsky sees the digitization of finance as an underappreciated source of global tension and innovation.

“It’s useful to distinguish between crypto, stablecoins, tokens and central-bank digital currencies,” he explained. “They’re all different in nature and have different implications.”

For most Americans, he argued, crypto — digital assets that have no backing and trade on an open ledger — has little practical relevance.

“From the viewpoint of a U.S. resident, it’s hard to see the use-case for crypto other than a vehicle for speculation or perhaps hiding transactions,” he said.

But the bigger story, he suggested, lies in how different regions are approaching digital money.

The European Central Bank is creating a digital Euro, he noted, the Chinese central bank has already created a digital yuan, and Congress has made it clear it doesn’t want the Federal Reserve to issue its own digital currency.

“What you have is the U.S. championing stable coins and the Genius Act, which is designed to create a regulatory structure around stablecoins, and at the same time, expressing an opposition to the U.S. creating a central bank digital currency,” Lipsky said.

The result of this digitization of finance could be a fragmented system. “The U.S., Europe and China seem headed down different paths at this time and I’m not sure how that is going to work out,” he said. “It looks like we’ve set up, instead of a unified future for the international monetary system, we’re headed in different directions.”

At best, digitization could deliver “a much more flexible, reliable, cheaper, faster” global financial system. At worst, he cautioned, “we could end up adding barriers — in addition to trade barriers — we’re headed back to a world that the postwar institutions were created to prevent from happening.”

Gold: An Inflation Hedge?

 While cryptocurrencies are often referred to — some say, incorrectly — as  “digital gold,” actual gold has been a big story this year. The yellow metal has recently pulled back from a record rally but is still up roughly 50% for the year.

“Would I have expected gold to go as high as it has? No,” Lipsky said. “A key element has been the demand of central banks for gold.” Will it continue to go up? He noted that in addition to Central Bank demand, gold had become “a momentum trade of folks willing to stay with a winner until it stops being a winner.”

He cautioned: “Gold is an asset that pays no dividends.” He also said the stock of gold is “very large relative to the flows. So, I’m always a bit amused at the notion of the supply-demand relationship of gold. And the answer is, the potential supply is enormous — fantastic — relative to the actual demand. So, to have the confidence that you know where that market’s going to go is something that I don’t have.”

Gold has long enjoyed a reputation as an inflation hedge, and gold bugs often point to the metal’s ability to hold its value over time. But Lipsky isn’t in that camp.

“It always struck me, in historical perspective, that gold is not a very good hedging vehicle for inflation and not a very attractive asset over the long term. That being said, it is where it is. And as a result, you also have to ask, now that we’re here, at what level would central banks be willing to take action to try to put a floor under the current level? I don’t know. But what makes this so difficult is, again, the lack of any underlying use case other than, let’s call it speculation.”

Moving Away from the Post-WWII Benefits of Global Trade

Kochard noted the IMF was founded in 1944 to promote global financial stability through trade. Is there now cause for concern?

“If you look at the Articles of Agreement, it will tell you that the inspiration was the notion that a reliable and open financial system would support the growth of international trade, that would be an important element in restoring global growth.” Lipsky said. “And sure enough, from 1950 to 2007, virtually every year, global trade grew more rapidly than global GDP. In other words, it was working. Trade was spurring global growth through that whole period.”

Where are we today?

“We seem to be launching a period of reversal, in which trade barriers are being instituted,” he said. “So far, the U.S. has been the main instigator, and what has been notable so far has been the lack of retaliation by other countries. We’ll see if that remains the situation.”

On Sovereign Debt in the Developed World: Inflation Risk?

 Sovereign debt-to-GDP ratios have risen substantially across the developed world in recent decades and are expected to rise further in coming years. Is this the root of the next crisis? Does it lead to inflation?

“There’s been a lot of scare talk about the U.S. etcetera,” Lipsky said. “And I would say, right now think about this: Europe is running relatively high budget deficits, but they also have a current account surplus. That means their private savings are high enough that they can finance their own government deficits and still have savings left over to invest here in the U.S. So, as long as there is still a relatively favorable view about economic performance in the U.S. relative to elsewhere, then I suppose we can keep this going. But that doesn’t seem a very comforting long-term solution. And so that’s another form of potential risk with regard to sovereign debt, namely, could it be inflationary here? The answer is ‘you bet’.”

On the Fed: ‘Better the Politicians Don’t Mess with It’

With the Fed’s final 2025 meeting on the horizon and a government shutdown delaying key economic data, investors are navigating heightened uncertainty about both the economic outlook and the path of future rate cuts. On top of that, there is uncertainty over the tenure of Federal Reserve governor Lisa Cook whom President Trump sought to dismiss over allegations of mortgage fraud, which she contests.

For all the public fascination with Federal Reserve policy, Lipsky, who was First Deputy Managing Director of the International Monetary Fund from 2006-2011 and acting Managing Director May to July 2011, finds the attention “excessive.”

“There are five potential modes for policy: neutral, mildly accommodative, highly accommodative, mildly restrictive, highly restrictive,” he said. “The Fed thinks it’s policy is still mildly restrictive … The likelihood they’re going to do something highly disruptive or unexpected is almost nonexistent.”

As for whether the Fed will ease, as is widely expected, at the next meeting in December, Lipsky said: “Let’s wait and see what data comes out between now and then.”

“The chair (Jerome Powell) has made it pretty clear that he’s not making any promises, it depends on the data,” he added.  “I think it’s hard to make cases that it’s absolutely imperative, but I won’t be surprised if they do [cut rates].”

He is equally pragmatic about concerns over political interference in monetary policy. “Better the politicians don’t mess with the situation,” he said. “Loss of confidence is costly. Reputation is like having the wind at your back, or the wind in your face, and you’d probably rather have the wind at your back. Reputation is a lagging indicator, and it’s easy to lose and hard to get back.”