Renowned economist Nouriel Roubini was nicknamed “Dr. Doom,” until his prediction of the 2008 housing crisis and Great Recession came true – when it was too late. Now he is back with a much scarier prediction, one that we ignore at our peril. There are no fewer than ten overlapping, interconnected threats that are so serious, he calls them Megathreats. From the worst debt crisis the world has ever seen, to governments pumping out too much money, to borders that are blocked to workers and to many shipments of goods, to the rise of a new superpower competition between China and the U.S., to climate change that strikes directly at our most populated cities, we are facing not one, not two, but ten causes of disaster. There is a slight chance we can avoid them if we come to our senses – but we must act now.
In this interview, I speak to Professor Nouriel Roubini. We speak about how we are heading towards the worst economic catastrophe of our lifetimes – unless we can defend against ten terrifying threats.
[bios]Nouriel Roubini is CEO of Roubini Macro Associates, LLC, a global macroeconomic consultancy firm in New York. He is also Chief Economist for Atlas Capital Team LP, as well as Co-Founder of Rosa & Roubini Associates. At a 2006 address to the International Monetary Fund, Roubini warned of the impending recession due to the credit and housing market bubble. His predictions of these upside-down balance sheets became a reality in 2008, with the bubble bursting and reverberating around the world into a global financial crisis lasting well into the next decade. Dr. Roubini has extensive policy experience as well as broad academic credentials. He is Professor Emeritus (2021-present), Professor of Economics (1995-2021), Stern School of Business, New York University. He was Co- Founder and Chairman of Roubini Global Economics from 2005 to 2016 – a firm whose website was named one of the best economics web resources by BusinessWeek, Forbes, the Wall Street Journal and the Economist. From 1998 to 2000, he served as the senior economist for international affairs on the White House Council of Economic Advisors and then the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department, helping to resolve the Asian and global financial crises, among other issues. The International Monetary Fund, the World Bank and numerous other prominent public and private institutions have drawn upon his consulting expertise. He has published numerous theoretical, empirical and policy papers on international macroeconomic issues and coauthored the books “Political Cycles: Theory and Evidence” (MIT Press, 1997) and “Bailouts or Bail-ins? Responding to Financial Crises in Emerging Markets” (Institute for International Economics, 2004) and “Crisis Economics: A Crash Course in the Future of Finance” (Penguin Press, 2010). His new book (forthcoming in October 2022) is “Megathreats: Ten Dangerous Trends That Imperil Our Future And How To Survive Them” (Little Brown). Dr. Roubini’s views on global economic issues are widely cited by the media, and he is a frequent commentator on various business news programs. He has been the subject of extended profiles in the New York Times Magazine, The Financial Times, among other leading current-affairs publications. He is published monthly as a columnist with Project Syndicate. He also hosted www.NourielToday.com where is perspectives can be found and co-runs the site www.theboombust.com, an economic indicator research service. Dr. Roubini received an undergraduate degree at Bocconi University in Milan, Italy, and a doctorate in economics at Harvard University. Prior to joining Stern, he was on the faculty of Yale University’s department of economics.[/bios]
Q: What are ‘mega threats’?
[Nouriel Roubini]: Mega threats are the big, huge, risks that could rapidly change the course of the global economy and the world at large, for example, the risk of war among great powers could eventually spark a third world war.
They are significant risks with huge economic, social, political, geopolitical, financial, monetary impact. That’s the way I define them.
Q: What are the risks posed by the levels of debt in our world?
[Nouriel Roubini]: We are facing the mother of all debt crises. When you look at the data on private and public debt (private being households, corporates, and the financial sector), the debt to GDP ratio was near 200% of global GDP in 1999, today it’s more like 350% and risks. In advanced economies, it’s over 420% and in China, 330% and rising. By comparison, the ratio in emerging markets is around 250%, but a lot of that is held in foreign, rather than local currencies. In the US alone, the debt to GDP ratio is higher today than after that great depression and World War 2. We’re not coming out of a depression or a global war, so the numbers are staggering, and they’re growing. We didn’t really care until quite recently because while debt ratios were unsustainably high, the debt servicing (the rate you pay on the debt, and the principle you have to lock or roll-over) was close to zero or negative. Quantitative easing kept that debt servicing ratio low, and credit easing kept spreads on everything from mortgages to high-yield high-grade commercial paper low. The high debt ratios also masked the zombie households, zombie corporates, zombie businesses, zombie banks, zombie shadow banks, zombie governments and zombie countries. They never went bankrupt. The global financial crisis caused by COVID created even more easing than before, it made money even cheaper and meant that the zombies didn’t crash (as they should in a recession) they survived and were bailed out. During covid, everyone got a cheque – households, corporates, banks, non-banks, commercial paper, the money market, high grade, high yield – everyone. We could do that because in the previous crises, we were left with a negative aggregate demand shock, and so we had low inflation (even deflation) initially and so printing money and running budget deficit was the right thing to do. This time, instead, we have to raise interest rates because inflation is high- and rising. The zombies are going to metaphorically die… we will see who swimming was naked. In the UK, there will be a double shock for many people – mortgage rates may double because of the reckless fiscal policy and debt build-up forgetting even the corporate and private sectors. Households don’t just have mortgages, they have credit cards, loans, and more – it’s a time bomb. Until now, we had an insolvency problem – but we didn’t have a liquidity problem that could trigger that insolvency because interest rates were so low. Now they’re rising, and the mother of all debt crises is going to occur.
Q: Are we running the risk of global stagflation, and an economy where there are no levers to pull?
[Nouriel Roubini]: In the 70s, we had a stagflation shock- there was a spike in oil prices in 1979, the Iranian revolution and a massive reduction in oil, it was a major oil shock. In the 1970s, debt-ratios were much lower for the advanced economies, around 100% of GDP. Today that ratio is 420% and rising. We had a negative stagflationary shock, we had inflation and then recession. The 1970s were ugly from ’73 to ’82. We had a double dip recession on the back of inflation expectations from The Volcker Rule. At this time, we also had a debt crisis in Latin America (they’d borrowed like crazy in the 1970s and then rates jacked up to 20%) – Argentina, Mexico and Brazil almost went bankrupt. After the global financial crisis, we had a debt problem, but we had a negative demand shock, not a negative supply shock. It was a credit crunch, we had the recession, low inflation, and deflation. We were able to deploy massive monetary and fiscal stimulus to prevent deflation and slow the recession.
Today, we have the worst of the 1970s, with multiple different types of negative supply shocks and not just the obvious ones from Russia, Ukraine, COVID-19 or the zero-covid policies of China. We’re going to have a negative supply shock which will lead to stagflation, but we also have debt ratios like we’ve never seen before. Not only will we have inflation, recession, and stagflation – but on top, a stagflation-debt crisis which will cause many people to go bankrupt. If people hold debt in local currency – over long durations with fixed interest rates – a bout of unexpected depression can wipe out the real value of debt for years. On the supply side of negative supply shocks you have a game of chicken between fiscal and monetary authorities. Banks will raise rates to fight inflation, and we’ll have an economic crash with a hard landing along with a financial crash. Central banks, starting with the Bank of England have already started to blink, they’re going to wimp out, and it will cause inflation to go above 2% and that will wipe out debt for people who’ve borrowed currency on long duration, but those on short term will be reprised because we’re not willing to raise taxes or cut spending to deal with a debt problem.
As soon as inflation gets de-anchored, it can go from 2+ to 4+ or even 5+. I’m not expecting hyperinflation or even double-digit inflation for the advanced economies as you’ve seen in the Weimar Republic, Zimbabwe and Argentina, but if the inflation rate goes from 2 to 6%, 10 year treasury yields go up to 8% (6+2). Today’s rates are closer to 3-4%.
Another worry is volatility – when volatility gets higher, real rates get higher, and then you have interest rates like you’ve never seen in 40+ years, that’s when the zombies bankrupt.
Q: Have we seen this before?
[Nouriel Roubini]: Today, there is uncertainty like we’ve never seen before. We are not only facing economic risks, but real social, political, geopolitical, technological, and environmental risks too.
I have grey hair, I’m 64. I grew up in Italy in the 1960s, 70s and early 80s. I came to the US in 1983. When I grew-up, I never worried about nuclear war…. I’d never heard the term global pandemic… the closest we got was Spanish Flu in 1917, and then HIV, SARS, and MERS. I never worried about technology destroying jobs, or an AI winter. I never worried about climate change destroying the world. I never worried about stable democracies being taken over by authoritarian, aggressive, nationalist and extremists parties on the left on the right. Polarization was limited, there was bipartisanship. Never worried about public or private debt, ratios were low. I also never worried about implicit debt because we didn’t have the pension and healthcare traps we have now. The biggest concern we had was Malthusian – it was running out of resources. We had 40 years from 1945-85 where these things weren’t even on radar, we had the 1970s stagflation, but it was not a debt crisis, and we did not have a geopolitical depression.
Today, all these things are real threats for our future and things are starting to look more like the period between 1918-45 when we had World War 1, the Spanish Flu, the Great Depression, the stock market crash, trade wars, financial oppression, inflation, deflation, hyper-inflation and eventually militaristic powers in Germany, Italy, Spain, and Japan coming to war. We then had World War II, the holocaust, Korean War and so on – it was a nightmare. Relatively speaking the past 75 years have been peaceful, and billions of people have been lifted from poverty, things have improved a lot, but we run the very real risk now, not of going back to the 1970s, but of going back to the 1930s or 40s with economic and financial collapse, massive pandemic, and real-world wars.
Q: How worried are you about today’s conflicts escalating into world-wars, or indeed, triggering the use of weapons of mass destruction?
[Nouriel Roubini]: We may be able to avoid World War 3, but everything I monitor suggests that in the next decade, we may have a global conflict. Some argue this has already started with Russia/Ukraine- a conflict that under some scenarios, could pull NATO into a conventional or unconventional war. We also see the potential for conflict coming from the situation between the US, Iran and Israel. Israel cannot accept that Iran may have nuclear weapons, an existential threat, and Iran is becoming nuclear. Everyone also agrees that it is only a matter of time before there will be a collision course between the US and China over Taiwan, or wider-still, over the East China Sea and South China Sea which encompasses conflicts between Japan, China, Indonesia, Malaysia, Vietnam, Singapore, and the Philippines.
No-one can underestimate how there could be conflict between global powers. You have at least 4 revisionist powers in the world: China, Russia, Iran, and North Korea. They have allies in Cambodia, Pakistan and others who are rejecting the economic, social, political and financial orthodoxy of the international order created after World War II.
We have had very close shaves. There was a risk of major war between the US and UK after the war of independence, the Brits didn’t’ want their declining power taken over by the Americans. There were also potential risks from the Soviet Union (which imploded economically and politically and thus, was not a rising power). China is not a declining power like the Soviet Union – they have an authoritarian regime built around state capital. They are flexing their muscle – they have power and influence on foreign affairs, geopolitical affairs, military affairs, everything. It’s a different world now. We are experiencing asymmetric war already – on the cyber front – with China, Russia, and Korea. This includes a war around misinformation, and cyber-attacks every single day.
Q: How interconnected are the threats we face?
[Nouriel Roubini]: Climate change causes zoonotic disease and pandemics are due to our destruction of the animal ecosystem, causing animal pathogens to touch livestock and humans. It’s not the interconnectedness that’s the issue – some people say that this is stuff that’s only going to happen 10-20 years for now… but many of these mega threats are materialising now, they are materialising today.
Q: What can civil society do?
[Nouriel Roubini]: For every solution there are pros and cons, there’s no such thing as a free lunch. You must trade something off against something else. Economics is a trade-off between goals and scarce resources. If you have a debt problem, are you going to inflate it away? Are you going to default? Are you going to expropriate capital? Are you going to tax labour? Are you going to use financial oppression (austerity) or any combination of those things? Each lever has a benefit and a cost.
The dystopia is a situation where civilisation ends through a simultaneous materialisation of all these threats – war, AI, climate change, pandemic, political collapse, economic collapse and financial collapse. The utopia is where we collectively, and individually, do stuff such that each of these threats is managed domestically and internationally. Some threats are collective – we can’t do anything about pandemics, rogue AI or war between great nations, but we can do something about climate change. Each one of us has a climate footprint – each of us impacts the climate and generates greenhouse gas emissions. To give you one simple example, 25% of global greenhouse has emissions come from livestock- but we like to eat meat or chicken (apart from those of us who are vegetarian or vegan). Even being vegetarian isn’t enough because you may have milk, or eggs. You could also use solar power, not waste plastic…. And so on. It’s hard work, and you have to actively figure it out. Individuals, private sector firms, banks, non banks, firms, corporations and governments can all work together.
The good news is the new generation of young people – they care about the future, and I hope they care, get organised and do something. In most of our societies however, it’s the elderley who vote, and the young don’t vote as much, so the political choices are biased toward the interests of those who don’t’ want to make sacrifices today for common good in the future.
Q: How worried should we be about climate and war?
[Nouriel Roubini]: Take climate change, there are 4 sets of problems. At the national level, some people deny climate change is due to human activity. There’s also then the conflict between young and old, the old don’t care as much as the young, and the young cannot affect their decisions and have a scant hope that technology will somehow resolve this crisis. The third problem is international, the tragedy of the commons. If a country reduces its greenhouse gas emissions to zero, and no other country does it, there’s no benefit for that country. They bear the cost for nothing. Unless everybody commits, it’s not going to reduce the problem. Number 4, emerging markets are telling the advanced economies that they (the advanced economies) created this problem, accounting for 90% of the emissions for the last 200 years. Why should the emerging economies take a hit now, reduce emissions and get negative growth when they’re barely reaching middle class. There’s so much greenwashing around this – ESG – everything, people are putting green on everything. COP in Glasgow was a disaster, honestly, if temperatures rise 2.5C relative to the pre-industrial era, it would be a disaster. 2C is bad enough, 3 is a catastrophe, and we’re heading towards it.
There’s a point of no return. When the ice sheet in Greenland or Antarctica cracks, sea levels will increase by 10 feet – not in 40 years, but in 4 months. That could literally happen in 4 months if the ice sheet cracks. That’s a point of no return, a discontinuity, where the damage becomes huge, with no real way to fix it.
I’m obviously worried about major wars among global powers- a nuclear winter could extinguish all but the most remote members of our species. That is a potential threat in the next 10 years, and climate destruction is a threat in the next 30-40. Over the longer time-frame, AI is going to make our species almost completely obsolete.
People call me Dr. Doom, but the whole objective of my work is to warn people about the problems we face. Let’s stop putting our heads in the sand while the clock counts down. Let’s realise that major threats are manifesting sooner than we expected. If we don’t act on these threats in the next decade, we will face a point of no return, we have a window of a decade – at most – to address these problems.