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FAREED ZAKARIA GPS

Interview with GM's Dan Akerson; Killing in the Name of the Knights Templar; Interview With Christine Lagarade

Aired July 31, 2011 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


FAREED ZAKARIA, HOST: This is GPS, THE GLOBAL PUBLIC SQUARE. Welcome to all our viewers in the United States and around the world. I'm Fareed Zakaria. We have a very important show for you this week, bringing you two people who you're surely going to want to meet.

First up, a unique perspective on the economy, global competition, the future of jobs and the role of government. Dan Akerson, the CEO of General Motors, the largest car manufacturer in the world, back from bankruptcy with a bang.

Then, the new head of the IMF, France's former Finance Minister, Christine Lagarde, on the fate of America, Greece, the euro and more.

Also, the Knights Templar. "Why in the World?" is an 800-year- old religious organization being cited by murderers on at least two continents?

And finally, what is this green blob attacking China?

But first, here is my take. I know you've all heard so much about the debt ceiling that you're probably exhausted, but I think it's important to point out a few facts, because this matter has been so clouded by rhetoric.

Did you know that there is only one other country in the world that even has a debt ceiling? That's Denmark. And it's a strange anomaly, because its debt ceiling is deliberately kept very high so it will never need to be raised.

Why does no one else have a debt ceiling? Because when a legislature votes to authorize spending at a certain level, but authorizes tax revenues at a lower level, it is assumed that the government will have to borrow the difference.

The vote to have higher expenditures than tax revenues is in effect a vote to borrow money to cover the difference, and in the United States, Congress, including Republicans, voted for a budget in which expenditures exceeded tax revenues. So the logical consequence of that budget, again, passed by the House Republicans and by Democrats, is that the government has to make up the difference by borrowing.

To come at it now after the budget has been passed is like getting your Visa bill and then calling up the company to say, actually, we don't want to buy all that stuff we bought. That's not how it works. First, you pay the bill, then you can change your spending habits.

So why do we have a debt ceiling anyway? Ironically, it was put in place during World War I so that Congress didn't have to authorize every new issue of debt. It was assumed it would be a formality to raise it.

Since 1960, the debt ceiling has been raised 78 times.

My basic point is that this is a crisis we have manufactured out of whole cloth. We have created the circumstances in which the world now doubts our credibility, rating agencies are thinking of downgrading our debt, and the dollar's role as the world's reserve currency could be jeopardized.

Please understand that none of these things are happening because the United States is running deficits. There was no indication, by any measure, that the United States was having difficulty borrowing money one month ago. In fact, the world has been lending money to the United States more cheaply than ever before.

We face downgrades and uncertainly and investor panic not because of our deficits, but because we are behaving like deadbeats, refusing to pay our bills, pouting while the bill collector waits at the door.

We do have a large deficit and a large debt, and we do need to get it under control. And the fact that the Tea Party has raised awareness about this issue is admirable. And I actually happen to agree with their view that the current set of entitlements - Medicare especially - have to be reformed dramatically to get our fiscal house in order. But that is not an excuse to endanger the good standing of the United States. First you pay the bills and then you figure out how to change your spending habits.

The tragedy is that the damage may already have been done. From now on, every time the debt ceiling needs to be raised, the world will wonder, will the United States stand by its promises, or will it break them? Something that was taken for granted, the credibility of the United States, is now surrounded by uncertainty.

Global markets have always had confidence in America. That confidence has been shaken, perhaps forever. And, for this erosion, we have only ourselves to blame.

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Two years and two months ago, one of the most storied American companies filed for bankruptcy protection. In its 100-year history, General Motors had once made one out of every two cars sold in the United States. It had once been the most profitable company in the world. But, in 2009, General Motors lost $4.2 billion in a single quarter, and only one out of five cars in America were made by the company. Today, General Motors is making billion dollar profits again, and it is this year going to be the world's top automaker again. And we, the taxpayers, own about a third of it.

What does the future look like for General Motors and America?

Dan Akerson is Chairman and CEO of General Motors. Welcome.

DAN AKERSON, CHAIRMAN AND CEO, GENERAL MOTORS: Thank you.

ZAKARIA: When I ask businessmen why they're not hiring more and you're sitting on lots of cash, one of the things they always say is uncertainty. Uncertainty - and uncertainty probably affects you more than anyone else, because consumer demand, if you could get up - back up to 15 million cars -

AKERSON: Right.

ZAKARIA: -- it would make a big difference.

AKERSON: Yes.

ZAKARIA: Does this incredible month or two of wrangling in Washington and the sense that we can't get our house in order and that we are so divided, do you think this hurts in a - in a measurable way?

AKERSON: Well, you're right. Nature abhors a vacuum, and markets abhor uncertainty. Uncertainty undermines consumer confidence.

Consumer spending in our country accounts for about 65 to 70 percent of the GDP, so when consumers lose confidence and they hesitate, they are not as bullish, they are not spending money, it does have an impact on the economy.

But there are all sorts of uncertainties. You name one, the oil spikes earlier in this year. We got off to a pretty good start in 2011, then oil spiked above $100 a barrel. That particularly concerned our industry.

Then, there was the tragic earthquake and tsunami in Japan. That threw a lot of uncertainty into our industry.

So there are all sorts of uncertainty, and that's what we get paid to do, is to manage through that. And it keeps me awake at night.

ZAKARIA: The - the world you're describing is one where a lot of these uncertainties are beyond any - anyone's ability to fix. I mean, you can ameliorate them a little bit. Do you think we're living in a kind of age of uncertainty?

AKERSON: I do. Some of it is self-inflicted. I mean, if it were a perfect world, I'd like to see the United States not default, technical or otherwise, because I think that throws another level of uncertainty and instability into the system. And - I mean, I've thought long and hard, and so has most of our management team and a lot smarter people than we are, about what are the implications? What are the downstream impacts of a default?

Well, you know, I'm - I'm responsible for General Motors, and I would hate to have the job of one of the policymakers in - in Washington these days. But I can focus and impact on what we're doing at General Motors.

We have about $35 billion to $40 billion of cash in our balance sheet. That's a lot. But I don't know what's going to happen.

ZAKARIA: What would you do if - if there were a default? Now, six months from now, a year from now?

AKERSON: Well, as you know, U.S. treasuries are the, quote/unquote, "gold standard." If we default, the cost of treasury will go up and all other - whether they be mortgage rates or car loan rates - will go up, and that would create an issue or a concern for us.

But, at some level, we just may have to kind of batten down the hatches and get through a tough storm. And that wouldn't be good for General Motors, and I don't think it would be good for our customers, and I don't think it would be good for our country.

ZAKARIA: The question everyone wants to know is - and the Tea Party, as you know, is animated in part by this concern. Should the United States government have bailed General Motors out?

AKERSON: Yes. Simply put, yes. And let me explain why.

When you look at the helping hand, if you will, the bailout wasn't just for General Motors specifically, but basically an industry. General Motors was so dominant, especially in the United States. Had Chrysler and GM gone down, the supply chain would have cratered, and it would have just unimaginable impacts throughout the economy.

It's estimated there were a million jobs saved in the extended automotive industry biosphere, if you will. And are we delivering on that promise today? We're profitable, very profitable. We have saved not only that million jobs in the intervening period since the restructuring of General Motors and Chrysler, we've hired 115,000 automotive workers across the nation.

So it saved an industry that is profitable today, healthy today. It's creating jobs, and it saved jobs. And we've paid back roughly $30 billion plus of the $50 billion that was put in the company. And, as you say, the taxpayers still own a third.

ZAKARIA: But a lot of people said the government shouldn't be doing this kind of thing. I mean, I was at a speech one day and some guy comes up to me - I said something about how I - I supported the - the rescue effort, and he said it's Government Motors. This is not what the government should be doing. How do you respond to that? I mean, you're - and I say this because I know you, Dan, and you're - I mean, you were - were in the Navy (ph), you were a CEO of a tech company. You then worked in private equity. You're kind of a Republican-leaning guy, I would say.

AKERSON: That's probably fair.

Well, there are certainly different points of view around the table. But, to the credit of the government, they invested and then they stood back and said run it like a corporation. They've never been in the - in the boardroom. They've never involved themselves in any operational decisions.

And so the progress and the success of the company has been in the context of a competitive company, that's owned now - we had the largest IPO in the history of the world, which we're very proud of - is the government's an owner. They're a minority owner.

And we're making great progress. And I think a company like General Motors is important in ways that are unimaginable to the industrial infrastructure of this company - country, which is something that's not to be dismissed easily.

ZAKARIA: Do you think this is something that, you know, is an inevitable emergency role the government has to play?

AKERSON: There have been cyclical instances over the last 20 or 30 years. We had the Brady bonds, basically a bail out sovereign debt around the world when commodity prices got ahead of it then collapsed, and secretary Brady came to the - to the fore. You had the Resolution Trust Corporation during the S&L crisis, and both passed, basically saved industries, if you will. And I think this was the same analogous situation.

And, at some point in time, the government - in fact, they're out of Chrysler now, and over time I believe they'll come out of General Motors as well.

ZAKARIA: What do you think of the Obama administration in terms of the - the way it structured the - the bailout, the conversations, discussions around it? You were on the board then. You were not CEO.

AKERSON: Yes. I came on the board following the bankruptcy, at the request of the - invitation of the administration.

I think the restructuring was done by, quite frankly, a bunch of private equity folks who are, I would say, expert in turnarounds and restructurings. And it was done pretty well, and I think the proof has been in the subsequent two years.

Like I said, a very successful IPO, payback of the majority of the money that was fronted by both the Canadian and American governments, and the fact that we're creating profits today, good cash flow. We're hiring people. We're designing cars that are some of the best in the world. We're building them, and we're selling them, not only in the United States. And that's important to mention for General Motors. We're a very successful competitor here in the United States. We also have the leading market share in the BRIC countries - Brazil, Russia, India and China. And that's good for America. That money comes back to the United States.

And so we - we're moving on all fronts. There's a lot of strength in the company, a lot of energy. And very proud of the progress we've made.

ZAKARIA: We're going to come right back with Dan Akerson, the CEO of General Motors. I'm going to ask him why he, the CEO of General Motors, is actually in favor of a gas tax, when we come back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with Dan Akerson, the CEO of General Motors.

So you caused some alarm or some alarm bells to go off when you said something to the effect that the most efficient thing for the government to do if it wants to encourage us to kind of move to a new generation of - of cars, wean ourselves off imported oil, would be to have a gas tax. Tell us why you think that that's a good idea.

AKERSON: Well, I think what we need, more aptly, is a pragmatic national energy policy that is market-based, and then we'll start to allocate resources more efficiently. We want to be part of the solution that helps us become less dependent on foreign oil, foreign imports.

And so, we've looked at a variety of technologies that we are starting to deploy today. We have the Volt, which was not a step forward, it was a leap forward in the electrification of the car. Soon, we'll be introducing bio fuel engines that can burn both compressed natural gas and liquid gasoline.

We're looking at hydrogen fuel cells which have no carbon emissions. Zero. They're very expensive now, but we've just in the last two years reduced the price of that technology by $100,000. The car is still too expensive and probably wouldn't be practical till the 2020-plus period. I don't know.

And then there's the issue of infrastructure.

But there are a number of different ways to attack a goal, to address an ambition, aspiration. And that aspiration should be a pragmatic national energy policy. And there are many variables, many options and alternatives. This was one of many, and it's not the only one.

ZAKARIA: What I notice right now, though, is given the - the Japanese tsunami and what it's done to the people's views of nuclear power - Germany shutting down, Switzerland shutting down - what the reality is that the world is more dependent on - on oil and natural gas perhaps than it - that it has been for a while.

AKERSON: Yes.

ZAKARIA: Can we really wean ourselves off petroleum?

AKERSON: Well, long term, I do think we can. I think we ought to - in this country, and I think it is region- and country-specific, you have to look at where - what natural resources you have.

I believe we - I've been - we've been called the Saudi Arabia of natural gas. I've heard T. Boone Pickens speak about that specifically. And so I do think we should utilize our own natural resources more so than foreign resources, if you will, for a lot of reasons that have benefit in the broader economic context, a balance of trade, dependence on maybe unreliable suppliers.

ZAKARIA: When you look at the American economy, what we see is we're back to the level - GDP levels we were at before the crisis, but with 10 million fewer people working. That's, at some level, a sign of great productivity, but for those 10 million people, it's a tragedy.

How do you get jobs back? How do you get America to be employing people and in - in large numbers again?

AKERSON: Well, I think you have to look at innovation. Great nations, and I believe we're the greatest nation on the face of the earth, we need to continue to invest in R&D, and we are. You have to look at automation.

We recently opened - we're trying to build the first compact car in the United States. No one is trying to do that today.

And in this new era of productive industrial relations between management and union, I think all parties have learned great lessons over the last couple of years. One of the things I've been advocating - and I think it's starting to get some - some traction - is that we don't want to see our structural costs go up, that the union should be on a profit sharing regime, wherein if management gets a bonus, union members get a bonus. If we do well, we all ought to share in it.

Automation and innovation is critical. Twenty years ago, the cost of manufacturing a car, the cost of labor was roughly 20, 25 percent. Today it's 10 percent.

So, yes, there's fewer jobs, but they're - they're more interesting, they're more challenging, and we can afford to pay costs, but we can't see escalating costs as far as the eye can see. We need to see costs reasonably predictable, our fixed costs, and then the variable component is - is contingent upon our success in the marketplace.

ZAKARIA: Dan Akerson, pleasure to have you on. AKERSON: Thank you.

ZAKARIA: And we will be right back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: Now, for our "What in the World?" segment, what exactly is the Knights Templar?

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): The group has come to everyone's attention because of Anders Breivik's killing spree in Norway, now just about a week ago. He claimed in his rambling manifesto to represent a modern day Knights Templar. But who are they?

The name might ring a bell, especially if you've seen ""The Da Vinci Code" -

TOM HANKS, ACTOR, "THE DA VINCI CODE": A secret brotherhood, the Priory of Sion, and their military arm, the Knights Templar.

ZAKARIA: -- or "National Treasure" -

UNIDENTIFIED MALE: They brought the treasure back to Europe, and took the name the Knights Templar.

ZAKARIA: -- or one of any number of recent films.

But these are, of course, all fictional. What are the facts?

The Knights Templar was a Christian military ordered founded in the early 12th Century. Its members were said to be elite warriors who wore distinctive white mantles with a red cross. They made their reputation by winning a series of battles in the Crusades.

Ironically, the Knights' first headquarters were in a mosque, the Al Aqsa Mosque in Jerusalem, because they believed it was built on the top of the ruins of Solomon's Temple. Their name, Templar, comes from that legendary temple.

The Knights' main job was said to be protecting Christian pilgrims from Muslims, amongst others. To this day, the site of the mosque and the Temple Mount remain one of the most heavily disputed places on earth.

The order of the Knights Templar was dissolved in 1312, but its legacy lives on. Rumors still swirl that the group exists, but in total secrecy, and guards the Holy Grail.

But what sounds like fiction back to fact, we know that Breivik saw himself as a Knights Templar. But, get this, halfway across the world from Norway, a new drug gang has recently arisen in Mexico. They call themselves the Knights Templar, and they claim to live by a religious code, a copy of which the Associated Press recently obtained.

It says that the drug dealing Knights will, quote, "Defend the values of society against materialism, injustice and tyranny," and that its members will be, "honorable, noble, courteous and honest." So they are honest drug dealers, selling marijuana, cocaine, whatever in the name of God.

Anders Breivik's fascination with the Knights is less bizarre. In fact, he's part of a larger movement. People like Breivik are trying to resurrect the idea of a modern day Crusade, a real clash of civilizations against what they see as an Islamic invasion of Europe. In fact, Muslims make up only three percent of Europe's population, and that's likely to rise to between five and eight percent by 2025, and level out at that point, but that doesn't change the reality of the anger, hatred and the violence.

Ironically in Breivik's nostalgic view of the medieval world, Knights Templar resembles nothing so much as al Qaeda, another terrorist organization that is fundamentally opposed to the modern world.

We still don't know if Breivik's boast that there are more lone Knights like him waiting to act is true, but if his depiction of the Knight as a self-sacrificing assassin on a larger holy mission sounds familiar, it is because it, too, is mirrored in Islamist terror. That's exactly what a suicide bomber is, a lone fighter often acting in the so-called interest of a larger movement and willing to kill innocence to draw attention to the cause.

While we've all focused on the dangers of radical Islam and of Islamist terror, the attack in Norway should remind us that there is actually a pretty large problem with other sources of terrorism in the west. The European Union's 2010 Terrorism Situation and Trend Report had some fascinating findings. It showed that of the 294 terror attacks committed in Europe in 2009, only one was conducted by Islamists. That's a third of one percent.

The most recent statistics show that there were 249 terror attacks in Europe in 2010. Only three of those attacks were carried out by Islamist terrors.

(END VIDEOTAPE)

ZAKARIA: Again that's about one percent. Most of the attacks in 2009 and 2010 were by separatist groups or anarchists.

So perhaps that's the lesson we can learn from the events in Norway. Islamic radicalism is a real problem and Islamist terrorism a real threat. But if we ignore other kinds of threats, we are likely to be blind-sided by another Gabby Giffords shooting or another Virginia Tech massacre. As Norway has become the most recent nation to learn the enemy can just as easily come from deep within.

And we'll be right back.

(BEGIN VIDEO CLIP) CHRISTINE LAGARDE, HEAD OF INTERNATIONAL MONETARY FUND: You're quite right, Fareed, in saying that there was a positive bias towards the United States of America, towards treasury bills. That was the case historically. I mean, it was unheard of only six months ago to imagine that the United States could be on a negative watch by the rating agencies.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

GLORIA BORGER, CNN SENIOR POLITICAL ANALYST: I'm Gloria Borger and here are today's top stories.

Earlier this hour, Senate Republican Leader Mitch McConnell told us, negotiators are very close to a deal to raise the debt limit and avoid default. McConnell said the deal would call for $3 trillion in spending cuts. He said the debt limit would be raised in two stages with some sort of mechanism to increase the ceiling again next year.

Senator Chuck Schumer grants that they're making progress, but says there's no deal until everything is agreed on. And the president's chief economist says the White House does not expect additional revenues in the next year and a half.

The attorney for the two American hikers detained in Iran says a verdict should be issued within a week. Josh Fattal and Shane Bauer were arrested two years ago while hiking near the country's border with Iraq. They're accused of entering the country illegally and spying.

Those are your top stories. Now back to FAREED ZAKARIA GPS.

(BEGIN VIDEOTAPE)

ZAKARIA: Christine Lagarde, thank you so much for joining us.

LAGARDE: My pleasure, Fareed.

ZAKARIA: The IMF just released a report in which it said that a crisis of confidence in the solvency of the U.S. government would cause a crunching global recession. How worried are you right now?

LAGARDE: I am worried because this debt ceiling issue has not been cracked. The issue is being addressed from multiple angles, but the debt ceiling is still on the table, and the United States is the largest economy in the world, one that matters, one that has spillover effects, not just around the borders, but on a complete basis globally. And it's an issue that really is - is lurking in the background of each and every economy of the world.

ZAKARIA: How do you think the world is watching the United States right now?

LAGARDE: I think the world is watching the United States with trepidation, with anxiety, with concern, but also with hope, because the United States of America is an extraordinary nation. It's an extraordinary democracy and one that, you know, doesn't necessarily travel with a straight line policy all the time. But there is hope that this issue will be addressed responsibly and with accountability, not only to the people of the United States, but also to the people of the world.

Instability is never a good idea, never a good idea. And this level of uncertainty, the trepidation arising from August the 2nd is bringing about a lot of instability.

ZAKARIA: Do you think that the dangers that people speak of could happen anyway, that is, watching this process, markets might lose that kind of unshakable confidence they had that U.S. treasury bills were the bedrock of the international financial system and that they were the cheapest debt - it was the place where people went as a flight to safety? Has all that already been jeopardized? Or, you know, is there a danger that that is being undermined?

LAGARDE: You're quite right, Fareed, in saying there was a positive bias towards the United States of America, towards treasury bills. That was the case historically. And the current crisis is probably chipping into that very positive bias. That very strong confidence that generally led to flight equality in investment in treasury bonds is slightly eroded at the moment.

I mean, it was unheard of only six months ago to imagine that the United States could be under negative watch by the rating agencies.

ZAKARIA: Does that mean that the dollars roll as the reserve currency of the world which provides the United States with enormous privileges, basically again, lowering its interest rates? Is that also you think potentially in danger?

LAGARDE: It has been one of the assets of the United States of America, what the former president of a European country called the exorbitant privilege of the U.S. dollar. Well, that's what is at stake. I'm not suggesting that it is going to change overnight because those currency evolutions take a lot of time. If you observe the evolution of the sterling, for instance, at the time when, you know, the Industrial Revolution was over and Europe had gone through massive wars, that took time, but gradually it's eroded.

ZAKARIA: And in 1945 -

LAGARDE: Those things can happen.

ZAKARIA: And in 1945 one day suddenly it was over for the sterling and the dollar replaced it.

LAGARDE: Yes.

ZAKARIA: If that were to happen, would it be the Euro or the Yuan that would replace it?

LAGARDE: No idea. As I said, those are long-term movements. It does not - unless there are very, very harsh circumstances of the kind you referred to, the Second World War. It happens over time. And we need to make sure that it does happen over time so that there is the level of stability and not the excessive volatility that is not good for - for markets.

ZAKARIA: You spoke in a - in a speech at the Council on Foreign Relations this week about the United States and its economic problems. And you point out that the United States is going through a jobless recovery. In fact, you pointed out that this is another jobless recovery, because the last one most people don't realize, the one in the early 2000s -

LAGARDE: Yes.

ZAKARIA: -- was also a jobless recovery. Do you have a sense as to why America seems to have gotten onto this new model of the economy comes back, but the jobs don't?

LAGARDE: Well, first of all, I did not say that it was going through a jobless recovery. I was saying that the recovery needs to add jobs to the economic equation of the United States of America.

ZAKARIA: It's a more diplomatic way of saying it, but it's the same.

LAGARDE: No, no, no. I think you're right about the, you know, the high tech and information technology and communication significant breakthrough in the late '90s, early 2000, did not bring about so many jobs because there was a massive increase of - of productivity that was fueled as a result of these investments and the ability to move data around and to - and to increase the velocity of the - of the economic factors.

Now, we don't see that sort of technology called breakthrough as we did in the - at the beginning of the century. So where is the growth going to come from? And you've got multiple sectors where - where it could come from, but it requires confidence. It requires investment and it requires a focus on those areas that will be strategic going forward.

ZAKARIA: You focus again and again on investment. But the U.S. is not investing right now. Is that a danger to its future growth?

LAGARDE: Failure to invest is clearly a danger to the - to future growth. But confidence is - is the key. And for a private investor, for an entrepreneur or for local authorities to decide to invest, they have to have confidence in the future. And clearly the issue of the sovereign debt of the United States has to be addressed in a sensible way for the long term and the fiscal consolidation needs to take place.

It's a complicated balancing act, because it's a combination of, number one, taking the appropriate fiscal consolidation measures and, on the one hand - on the other hand, making sure that the components necessary for growth are preserved.

ZAKARIA: You've worked with Secretary Geithner. Do you have confidence that he will be able to handle this debt crisis?

LAGARDE: Well, I have every confidence that he's going to put all his energy and he's not short of that, and all his determination, he's not short of that either, to try to resolve the issue. He's - I think he's fully aware of the implications and the necessity to do so. So I really - I wish him the best of luck and courage.

ZAKARIA: And we will be back with Christine Lagarde. We're going to talk about Europe and what the next possible crisis in the Euro zone will be, when we come back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with Christine Lagarde, the new head of the International Monetary Fund, to talk about economic crisis which seems to pop up all over the world.

Let's talk about the underlying issue behind the Greek crisis, because it actually has implications for the United States. The strategy that was adopted for the last few years has been that countries that have these huge debt and deficit problems, need to consolidate their balance sheets, need to in effect raise taxes and cut spending so they close their budget deficits.

But the result of this in almost every country has been that the economy has suffered, has taken a hit because you are taking money out of the economy or the government isn't spending, you know, it means there's less economic activity. If the government fires government workers, well, those people don't go out and buy things.

Is it possible that the IMF - the received economic wisdom on this issue simply has it wrong, that at a moment where you have, you know, deflationary circumstances or liquidity crisis, whatever jargon you want to use in current, somewhat unusual, depressed economic circumstances, you should not be forcing these countries to cut, cut, cut?

LAGARDE: There is the short term and there is the long term. And, unfortunately, you have to start somewhere. In the medium and long term, there is no question that fiscal consolidation, reduction of deficit, restoring the debt pattern to something that is sensible and not outrageously high, actually is positive for the economy.

In the immediate short term - and I'm not hiding behind numbers - there is a downside effect. But it's a measure that has to be taken. It's a question of doing it gradually, making sure that the less privileged, the most exposed people are not taking a big hit, are not suffering most. But if you don't begin somewhere, you never consolidate. So that's a balancing act.

ZAKARIA: What you're describing sounds a lot like the Obama plan in terms of a gradual process that - that doesn't hit people who are most exposed too hard?

LAGARDE: It has to be gradual, but it has to be determined. And there has to be very strong political resolution, determination, drive to actually make it happen because countries cannot run with massive deficit.

ZAKARIA: Is there a kind of broader crisis here in Europe - particularly in Europe but in the western world in general? If you look at the percentage of GDP that government took up in a place like France in 1950, it was 30 percent. It's now 55 percent roughly. The share of government to GDP has grown so much in western countries as they have become more generous with their welfare states. And these are wonderful social policies, but is there a problem here that ultimately you simply cannot grow at the rates that - that perhaps were historically true if you have this large a role for - for government?

LAGARDE: Well, there are things that, you know, used not to be expected which are expected today. You know, whether you look at social security, at pension entitlements, at expectations from the health system, and so on and so forth. And all of that has a cost.

Now, the real question is, is it well-spent when it's under the management of - of the state, of the local authorities, in the states or in the localities is at issue. And there is clearly a need for those public authorities to, you know, not only stick to their knitting, but also use public money wisely and efficiently.

ZAKARIA: You, the IMF has once again come out with a report saying that the Chinese currency is undervalued, somewhere between three and 23 percent. Is it important that China step up to the plate and do something about this?

LAGARDE: Fareed, it's a constant evolution. You refer to that exchange rate range. For the first time, China has accepted that it be published, made public, communicated to the rest of the - of the world. This is a change, and we are all interlocked, and what happens in China will have an effect in the United States and vice versa.

What happens in some of the low-income countries will have an effect on what happens in the advanced countries. China will always need to have good and solid clients. It is not, you know, an exporting country in the middle of nowhere. We depend on each other, all of us.

ZAKARIA: (INAUDIBLE) gave a famous speech about the IMF. He recommended that the head of the IMF have a coat of many colors to reflect the many parts of the world that he or she was meant to represent.

But I look at you. You're wearing this very, very conservative gray. Are you going to buy a new coat?

LAGARDE: That's because I came to New York. But I'll have some, you know, this very sort of sparkling and animated brooch to indicate the colors. ZAKARIA: Christine Lagarde, pleasure to have you on.

LAGARDE: Thank you.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: The United Nations doesn't just host world leaders, send out peacekeepers in blue helmets and feed the hungry. I bet you didn't know this, but it also keeps track of how many livestock walk the earth, which brings me to the "Question of the Week."

According to the United Nations, approximately how many chickens are there around the globe? Is it A) 190 million; B) 1.9 billion; C) 19 billion; or D) 190 billion?

Stay tuned and we'll tell you the correct answer. Make sure you go to CNN.com/GPS for 10 more challenging and interesting questions. And while you're there, check out our website, the Global Public Square. You'll find smart interviews and takes from some of our favorite experts. You'll also find all our shows. So if you've missed one, you can click and watch. And don't forget you can follow us on Twitter and Facebook.

This week's "Book of the Week" is the latest by Nobel Prize- winning economist Michael Spence. It's called "The Next Convergence: The Future of Economic Growth in a Multi-speed World." It is a smart, sensible, tour de raison of the global economy from one of the best and most unbiased economists in the world.

And now for "The Last Look," it isn't the latest Hollywood blockbuster, nor a new Japanese monster movie. Green blob attacks China is something that is actually happening as evidenced by this and this and this. Disgusting, right?

It's an algae bloom that has spread across more than 7,000 square miles of the Yellow Sea. It's gotten so bad, they've called in the Military to help. This is number one beach in Qingdao, once regarded as the best beach city in China. Best beach? Maybe not anymore. Luckily for these seemingly unconcerned swimmers, it's not harmful to human but it could kill off marine life.

The correct answer to our "GPS Challenge Question" was C, there are 19 billion chickens on the planet according to the United Nations. The Nation with the highest chicken to human ratio is Bahrain. The gulf nation apparently has 40 chickens for every person, much more than a chicken in every pot. I wonder how they figure this stuff out. Go to our website for more.

Thanks to all of you for being part of my program this week. I will see you next week.