Article by Eric Levitz for the New York "Intelligencer":
In
September 2006, Nouriel Roubini told the International Monetary Fund
what it didn’t want to hear. Standing before an audience of economists
at the organization’s headquarters, the New York University professor warned
that the U.S. housing market would soon collapse — and, quite possibly,
bring the global financial system down with it. Real-estate values had
been propped up by unsustainably shady lending practices, Roubini
explained. Once those prices came back to earth, millions of underwater
homeowners would default on their mortgages, trillions of dollars worth
of mortgage-backed securities would unravel, and hedge funds, investment
banks, and lenders like Fannie Mae and Freddie Mac could sink into
insolvency.
At
the time, the global economy had just recorded its fastest half-decade
of growth in 30 years. And Nouriel Roubini was just some obscure
academic. Thus, in the IMF’s cozy confines, his remarks roused less
alarm over America’s housing bubble than concern for the professor’s
psychological well-being.
Of
course, the ensuing two years turned Roubini’s prophecy into history,
and the little-known scholar of emerging markets into a Wall Street
celebrity.
A decade later, “Dr. Doom” is a bear once again. While many investors bet on a “V-shaped recovery,” Roubini is staking his reputation on an L-shaped depression. The economist (and host of a biweekly economic news broadcast) does
expect things to get better before they get worse: He foresees a slow,
lackluster (i.e., “U-shaped”) economic rebound in the pandemic’s
immediate aftermath. But he insists that this recovery will quickly
collapse beneath the weight of the global economy’s accumulated debts. Specifically, Roubini argues that the massive private debts accrued
during both the 2008 crash and COVID-19 crisis will durably depress
consumption and weaken the short-lived recovery. Meanwhile, the aging of
populations across the West will further undermine growth while
increasing the fiscal burdens of states already saddled with hazardous
debt loads. Although deficit spending is necessary in the present
crisis, and will appear benign at the onset of recovery, it is laying
the kindling for an inflationary conflagration by mid-decade. As the
deepening geopolitical rift between the United States and China triggers
a wave of deglobalization, negative supply shocks akin those of the
1970s are going to raise the cost of real resources, even as
hyperexploited workers suffer perpetual wage and benefit declines.
Prices will rise, but growth will peter out, since ordinary people will
be forced to pare back their consumption more and more. Stagflation will
beget depression. And through it all, humanity will be beset by
unnatural disasters, from extreme weather events wrought by man-made
climate change to pandemics induced by our disruption of natural
ecosystems.
Roubini allows that, after a decade of misery, we may get around to developing a
“more inclusive, cooperative, and stable international order.” But, he
hastens to add, “any happy ending assumes that we find a way to survive”
the hard times to come.
Intelligencer recently spoke with Roubini about our impending doom.
You
predict that the coronavirus recession will be followed by a lackluster
recovery and global depression. The financial markets ostensibly see a much brighter future. What are they missing and why?
Well, first of all, my prediction is not for 2020. It’s a prediction that these ten major forces
will, by the middle of the coming decade, lead us into a “Greater
Depression.” Markets, of course, have a shorter horizon. In the short
run, I expect a U-shaped recovery while the markets seem to be pricing
in a V-shape recovery.
Of
course the markets are going higher because there’s a massive monetary
stimulus, there’s a massive fiscal stimulus. People expect that the news
about the contagion will improve, and that there’s going to be a
vaccine at some point down the line. And there is an element “FOMO”
[fear of missing out]; there are millions of new online accounts —
unemployed people sitting at home doing day-trading — and they’re
essentially playing the market based on pure sentiment. My view is that
there’s going to be a meaningful correction once people realize this is
going to be a U-shaped recovery. If you listen carefully to what Fed
officials are saying — or even what JPMorgan and Goldman Sachs are
saying — initially they were all in the V camp, but now they’re all
saying, well, maybe it’s going to be more of a U. The consensus is
moving in a different direction.
Your
prediction of a weak recovery seems predicated on there being a
persistent shortfall in consumer demand due to income lost during the
pandemic. A bullish investor might counter that the Cares Act has left
the bulk of laid-off workers with as much — if not more — income than
they had been earning at their former jobs. Meanwhile, white-collar
workers who’ve remained employed are typically earning as much as they
used to, but spending far less. Together, this might augur a surge in
post-pandemic spending that powers a V-shaped recovery. What does the
bullish story get wrong?
Yes,
there are unemployment benefits. And some unemployed people may be
making more money than when they were working. But those unemployment
benefits are going to run out in July.
The consensus says the unemployment rate is headed to 25 percent. Maybe
we get lucky. Maybe there’s an early recovery, and it only goes to 16
percent. Either way, tons of people are going to lose unemployment
benefits in July. And if they’re rehired, it’s not going to be like
before — formal employment, full benefits. You want to come back to work
at my restaurant? Tough luck. I can hire you only on an hourly basis
with no benefits and a low wage. That’s what every business is going to
be offering. Meanwhile, many, many people are going to be without jobs
of any kind. It took us ten years — between 2009 and 2019 — to create 22
million jobs. And we’ve lost 30 million jobs in two months.
So
when unemployment benefits expire, lots of people aren’t going to have
any income. Those who do get jobs are going to work under more miserable
conditions than before. And people, even middle-income people, given
the shock that has just occurred — which could happen again in the
summer, could happen again in the winter — you are going to want more
precautionary savings. You are going to cut back on discretionary
spending. Your credit score is going to be worse. Are you going to go
buy a home? Are you gonna buy a car? Are you going to dine out? In
Germany and China, they already reopened all the stores a month ago. You
look at any survey, the restaurants are totally empty. Almost nobody’s
buying anything. Everybody’s worried and cautious. And this is in
Germany, where unemployment is up by only one percent. Forty percent of
Americans have less than $400 in liquid cash saved for an emergency. You think they are going to spend?
Graphic: Financial Times
Graphic: Financial Times
You’re
going to start having food riots soon enough. Look at the luxury stores
in New York. They’ve either boarded them up or emptied their shelves,
because they’re worried people are going to steal the Chanel bags. The
few stores that are open, like my Whole Foods, have security guards both
inside and outside. We are one step away from food riots. There are
lines three miles long at food banks. That’s what’s happening in
America. You’re telling me everything’s going to become normal in three
months? That’s lunacy.
Your
projection of a “Greater Depression” is premised on deglobalization
sparking negative supply shocks. And that prediction of deglobalization
is itself rooted in the notion that the U.S. and China are locked in a
so-called Thucydides trap,
in which the geopolitical tensions between a dominant and rising power
will overwhelm mutual financial self-interest. But given the deep
interconnections between the American and Chinese economies — and warm
relations between much of the U.S. and Chinese financial elite — isn’t
it possible that class solidarity
will take precedence over Great Power rivalry? In other words, don’t
the most powerful people in both countries understand they have a lot to
lose financially and economically from decoupling? And if so, why
shouldn’t we see the uptick in jingoistic rhetoric on both sides as mere posturing for a domestic audience?
First
of all, my argument for why inflation will eventually come back is not
just based on U.S.-China relations. I actually have 14 separate
arguments for why this will happen. That said, everybody agrees that
there is the beginning of a Cold War between the U.S. and China. I was
in Beijing in November of 2015, with a delegation that met with Xi
Jinping in the Great Hall of the People. And he spent the first 15
minutes of his remarks speaking, unprompted, about why the U.S. and
China will not get caught in a Thucydides trap, and why there will
actually be a peaceful rise of China.
Since
then, Trump got elected. Now, we have a full-scale trade war,
technology war, financial war, monetary war, technology, information,
data, investment, pretty much anything across the board. Look at tech —
there is complete decoupling. They just decided Huawei isn’t going to
have any access to U.S.
semiconductors and technology. We’re imposing
total restrictions on the transfer of technology from the U.S. to China
and China to the U.S. And if the United States argues that 5G or Huawei
is a backdoor to the Chinese government, the tech war will become a
trade war. Because tomorrow, every piece of consumer electronics, even
your lowly coffee machine or microwave or toaster, is going to have a 5G
chip. That’s what the internet of things is about. If the Chinese can
listen to you through your smartphone, they can listen to you through
your toaster. Once we declare that 5G is going to allow China to listen
to our communication, we will also have to ban all household electronics
made in China. So, the decoupling is happening. We’re going to have a
“splinternet.” It’s only a matter of how much and how fast.
And
there is going to be a cold war between the U.S. and China. Even the
foreign policy Establishment — Democrats and Republicans — that had been
in favor of better relations with China has become skeptical in the
last few years. They say, “You know, we thought that China was going to
become more open if we let them into the WTO. We thought they’d become
less authoritarian.” Instead, under Xi Jinping, China has become more
state capitalist, more authoritarian, and instead of biding its time and
hiding its strength, like Deng Xiaoping wanted it to do, it’s flexing
its geopolitical muscle. And the U.S., rightly or wrongly, feels
threatened. I’m not making a normative statement. I’m just saying, as a
matter of fact, we are in a Thucydides trap. The only debate is about
whether there will be a cold war or a hot one. Historically, these
things have led to a hot war in 12 out of 16 episodes in 2,000 years of
history. So we’ll be lucky if we just get a cold war.
Some
Trumpian nationalists and labor-aligned progressives might see an
upside in your prediction that America is going to bring manufacturing
back “onshore.” But you insist that ordinary Americans will suffer from
the downsides of reshoring (higher consumer prices) without enjoying the
ostensible benefits (more job opportunities and higher wages). In your
telling, onshoring won’t actually bring back jobs, only accelerate
automation. And then, again with automation, you insist that Americans
will suffer from the downside (unemployment, lower wages from
competition with robots) but enjoy none of the upside from the
productivity gains that robotization will ostensibly produce. So, what
do you say to someone who looks at your forecast and decides that you
are indeed “Dr. Doom” — not a realist, as you claim to be, but a
pessimist, who ignores the bright side of every subject?
When
you reshore, you are moving production from regions of the world like
China, and other parts of Asia, that have low labor costs, to parts of
the world like the U.S. and Europe that have higher labor costs. That is
a fact. How is the corporate sector going respond to that? It’s going
to respond by replacing labor with robots, automation, and AI.
I
was recently in South Korea. I met the head of Hyundai, the
third-largest automaker in the world. He told me that tomorrow, they
could convert their factories to run with all robots and no workers. Why
don’t they do it? Because they have unions that are powerful. In Korea,
you cannot fire these workers, they have lifetime employment.
But
suppose you take production from a labor-intensive factory in China —
in any industry — and move it into a brand-new factory in the United
States. You don’t have any legacy workers, any entrenched union. You are
going to design that factory to use as few workers as you can. Any new
factory in the U.S. is going to be capital-intensive and labor-saving.
It’s been happening for the last ten years and it’s going to happen more
when we reshore. So reshoring means increasing production in the United
States but not increasing employment. Yes, there will be productivity
increases. And the profits of those firms that relocate production may
be slightly higher than they were in China (though that isn’t certain
since automation requires a lot of expensive capital investment).
But
you’re not going to get many jobs. The factory of the future is going
to be one person manning 1,000 robots and a second person cleaning the
floor. And eventually the guy cleaning the floor is going to be replaced
by a Roomba because a Roomba doesn’t ask for benefits or bathroom
breaks or get sick and can work 24-7.
The
fundamental problem today is that people think there is a correlation
between what’s good for Wall Street and what’s good for Main Street.
That wasn’t even true during the global financial crisis when we were
saying, “We’ve got to bail out Wall Street because if we don’t, Main
Street is going to collapse.” How did Wall Street react to the crisis?
They fired workers. And when they rehired them, they were all gig
workers, contractors, freelancers, and so on. That’s what happened last
time. This time is going to be more of the same. Thirty-five to 40
million people have already been fired. When they start slowly rehiring
some of them (not all of them), those workers are going to get
part-time jobs, without benefits, without high wages. That’s the only
way for the corporates to survive. Because they’re so highly leveraged
today, they’re going to need to cut costs, and the first cost you cut is
labor. But of course, your labor cost is my consumption. So in an
equilibrium where everyone’s slashing labor costs, households are going
to have less income. And they’re going to save more to protect
themselves from another coronavirus crisis. And so consumption is going
to be weak. That’s why you get the U-shaped recovery.
There’s
a conflict between workers and capital. For a decade, workers have been
screwed. Now, they’re going to be screwed more. There’s a conflict
between small business and large business.
Millions
of these small businesses are going to go bankrupt. Half of the
restaurants in New York are never going to reopen. How can they survive?
They have such tiny margins. Who’s going to survive? The big chains.
Retailers. Fast food. The small businesses are going to disappear in the
post-coronavirus economy. So there is a fundamental conflict between
Wall Street (big banks and big firms) and Main Street (workers and small
businesses). And Wall Street is going to win.
Clearly,
you’re bearish on the potential of existing governments intervening in
that conflict on Main Street’s behalf. But if we made you dictator of
the United States tomorrow, what policies would you enact to strengthen
labor, and avert (or at least mitigate) the Greater Depression?
The
market, as currently ordered, is going to make capital stronger and
labor weaker. So, to change this, you need to invest in your workers.
Give them education, a social safety net — so if they lose their jobs to
an economic or technological shock, they get job training, unemployment
benefits, social welfare, health care for free. Otherwise, the trends
of the market are going to imply more income and wealth inequality.
There’s a lot we can do to rebalance it. But I don’t think it’s going to
happen anytime soon. If Bernie Sanders had become president, maybe
we could’ve had policies of that sort. Of course, Bernie Sanders is to
the right of the CDU party in Germany. I mean, Angela Merkel is to the
left of Bernie Sanders. Boris Johnson is to the left of Bernie Sanders,
in terms of social democratic politics. Only by U.S. standards does
Bernie Sanders look like a Bolshevik.
In
Germany, the unemployment rate has gone up by one percent. In the U.S.,
the unemployment rate has gone from 4 percent to 20 percent (correctly
measured) in two months. We lost 30 million jobs. Germany lost 200,000.
Why is that the case? You have different economic institutions. Workers
sit on the boards of German companies. So you share the costs of the
shock between the workers, the firms, and the government.
In 2009, you argued
that if deficit spending to combat high unemployment continued
indefinitely, “it will fuel persistent, large budget deficits and lead
to inflation.” You were right on the first count obviously. And yet, a
decade of fiscal expansion not only failed to produce high inflation,
but was insufficient to reach the Fed’s 2 percent inflation goal. Is it
fair to say that you underestimated America’s fiscal capacity back then?
And if you overestimated the harms of America’s large public debts in
the past, what makes you confident you aren’t doing so in the present?
First
of all, in 2009, I was in favor of a bigger stimulus than the one that
we got. I was not in favor of fiscal consolidation. There’s a huge
difference between the global financial crisis and the coronavirus
crisis because the former was a crisis of aggregate demand, given the
housing bust. And so monetary policy alone was insufficient and you
needed fiscal stimulus. And the fiscal stimulus that Obama passed was
smaller than justified. So stimulus was the right response, at least for
a while. And then you do consolidation.
What I have argued this
time around is that in the short run, this is both a supply shock and a
demand shock. And, of course, in the short run, if you want to avoid a
depression, you need to do monetary and fiscal stimulus. What I’m saying
is that once you run a budget deficit of not 3, not 5, not 8, but 15 or
20 percent of GDP — and you’re going to fully monetize it (because
that’s what the Fed has been doing)
— you still won’t have inflation in the short run, not this year or
next year, because you have slack in goods markets, slack in labor
markets, slack in commodities markets, etc. But there will be inflation
in the post-coronavirus world. This is because we’re going to see two
big negative supply shocks. For the last decade, prices have been
constrained by two positive supply shocks — globalization and
technology. Well, globalization is going to become deglobalization
thanks to decoupling, protectionism, fragmentation, and so on. So that’s
going to be a negative supply shock. And technology is not going to be
the same as before. The 5G of Erickson and Nokia costs 30 percent more
than the one of Huawei, and is 20 percent less productive. So to install
non-Chinese 5G networks, we’re going to pay 50 percent more. So
technology is going to gradually become a negative supply shock. So you
have two major forces that had been exerting downward pressure on prices
moving in the opposite direction, and you have a massive monetization
of fiscal deficits. Remember the 1970s? You had two negative supply
shocks — ’73 and ’79, the Yom Kippur War and the Iranian Revolution.
What did you get?
Stagflation.
Now,
I’m not talking about hyperinflation — not Zimbabwe or Argentina. I’m
not even talking about 10 percent inflation. It’s enough for inflation
to go from one to 4 percent. Then, ten-year Treasury bonds — which today
have interest rates close to zero percent — will need to have an
inflation premium. So, think about a ten-year Treasury, five years from
now, going from one percent to 5 percent, while inflation goes from near
zero to 4 percent. And ask yourself, what’s going to happen to the real
economy? Well, in the fourth quarter of 2018, when the Federal Reserve
tried to raise rates above 2 percent, the market couldn’t take it. So we
don’t need hyperinflation to have a disaster.
In
other words, you’re saying that because of structural weaknesses in the
economy, even modest inflation would be crisis-inducing because key
economic actors are dependent on near-zero interest rates?
For
the last decade, debt-to-GDP ratios in the U.S. and globally have been
rising. And debts were rising for corporations and households as well.
But we survived this, because, while debt ratios were high, debt-servicing
ratios were low, since we had zero percent policy rates and long rates
close to zero — or, in Europe and Japan, negative. But the second the
Fed started to hike rates, there was panic.
In
December 2018, Jay Powell said, “You know what. I’m at 2.5 percent. I’m
going to go to 3.25. And I’m going to continue running down my balance
sheet.” And the market totally crashed. And then, literally on January
2, 2019, Powell comes back and says, “Sorry, I was kidding. I’m not
going to do quantitative tightening. I’m not going to raise rates.” So
the economy couldn’t take a Fed funds rate of 2.5 percent. In the
strongest economy in the world. There is so much debt, if long-term
rates go from zero to 3 percent, the economy is going to crash.
You’ve
written a lot about negative supply shocks from deglobalization.
Another potential source of such shocks is climate change. Many
scientists believe that rising temperatures threaten the supply of our
most precious commodities — food and water. How does climate figure into
your analysis?
I
am not an expert on global climate change. But one of the ten forces
that I believe will bring a Greater Depression is man-made disasters.
And global climate change, which is producing more extreme weather
phenomena — on one side, hurricanes, typhoons, and floods; on the other
side, fires, desertification, and agricultural collapse — is not a
natural disaster. The science says these extreme events are becoming
more frequent, are coming farther inland, and are doing more damage. And
they are doing this now, not 30 years from now.
So there is climate change. And its economic costs are becoming quite extreme. In Indonesia, they’ve decided to move the capital out of Jakarta
to somewhere inland because they know that their capital is going to be
fully flooded. In New York, there are plans to build a wall all around
Manhattan at the cost of $120 billion. And then they said, “Oh no, that
wall is going to be so ugly, it’s going to feel like we’re in a prison.”
So they want to do something near the Verrazzano Bridge that’s going to cost another $120 billion. And it’s not even going to work.
The
Paris Accord said 1.5 degrees. Then they say two. Now, every scientist
says, “Look, this is a voluntary agreement, we’ll be lucky if we get
three — and more likely, it will be four — degree Celsius increases by
the end of the century.” How are we going to live in a world where
temperatures are four degrees higher? And we’re not doing anything about
it. The Paris Accord is just a joke. And it’s not just the U.S. and
Trump. China’s not doing anything. The Europeans aren’t doing anything.
It’s only talk.
And
then there’s the pandemics. These are also man-made disasters. You’re
destroying the ecosystems of animals. You are putting them into cages —
the bats and pangolins and all the other wildlife — and they interact
and create viruses and then spread to humans. First, we had HIV. Then we
had SARS. Then MERS, then swine flu, then Zika, then Ebola, now this
one. And there’s a connection between global climate change and
pandemics. Suppose the permafrost in Siberia melts. There are probably
viruses that have been in there since the Stone Age. We don’t know what
kind of nasty stuff is going to get out. We don’t even know what’s
coming.