Famed economist Dr. Nouriel Roubini sits down with Real Vision’s Ash Bennington to discuss the outlook for markets and the global economy in 2020 — including his prescient insight on the risks of war with Iran and the potential for a worldwide energy shock caused by conflict in the Middle East. Roubini also explores global growth, US equities & fixed income, The Fed and global central banks, and the tail risks of China trade, politics, and AI. Filmed on December 10, 2019 in New York.
ASH BENNINGTON: Full disclosure.
I used to run your macro economics blog, EconoMonitor.
We’ve known each other for many years.
It’s a great pleasure to be here with Dr. Nouriel Roubini.
NOURIEL ROUBINI: A pleasure being here with you today.
ASH BENNINGTON: Most of our viewers will already know you from your incredible call in 2006
at the conference in September predicting the great financial crisis effectively.
And not just predicting the crisis, but predicting the specific mechanisms that were going to
trigger that crisis.
You talked about mortgage defaults, the problems with the securities that were built around
But you’ve actually been very constructive for many years since the crisis on US equities.
Could you tell us a little bit about how you thought about the recovery, and how you’ve
gotten to kind of where we are right now?
NOURIEL ROUBINI: Well, yeah, the recovery after the global financial crisis was bumpy.
Of course, it was a u-shaped recovery.
It was not your typical v-shaped recovery, because this was not a regular recession.
It was a recession caused by financial crises, and a financial crisis was caused initially
by too much debt in the private sector and then a build up of public debt.
And as we know, whenever you have a financial crises, you have a painful process of deleveraging.
And for a while, you have to spend less and save more in order to reduce that over time.
And that great deleveraging implied that the recovery was anemic and was bumpy in many
But there’s been a recovery that in the US has lasted over 10 years now, the longest
US economic recovery.
And in the rest of the world, the recovery was stronger in emerging markets.
Then there were shocks in the emerging markets.
Europe was more fragile.
It was a double dip recession in some parts of Europe, even a triple dip recession.
But I would say for financial markets, what has happened has been that for the last decade,
there have been a number of the risk off episodes.
And these risk off episodes were triggered by a variety of factors, concerns about the
eurozone, concerns about the hard landing in China, concerns about what the Fed, concerned
about oil prices, and you name it.
But in each one of these episodes, that correction say correction of 10% plus in US and global
equity has been followed by a recovery and then go into higher highs.
My explanation of it is that, one, those concerns that the world economy is going to end up
into another recession turned out to be wrong.
And secondly, in each one of these risk off episodes, the policy reaction of Central Bank
has been to ease more in a conventional and or unconventional way.
And therefore, where there was the Fed, the ECB, the POJ, the BOE, the PBOC.
Central Bank have come to the rescue of economies and markets.
So some of those tail risks turned out to be less severe than thought, and the Central
Bank came to helping economies and markets.
And therefore, we have had this sustained recovery of asset prices that has lasted for
ASH BENNINGTON: Right, and that brings us to US equity markets.
And US equity markets, obviously, we’re sitting here in December of 2019 have had a very good
Could you talk a little bit about how you view that in the context of the broader macroeconomic
NOURIEL ROUBINI: Yes, I mean, I would say that to think ahead about what’s going to
happen to you and even in global equities.
One is the first to start with what’s going to be the economic outlook for next year and
And as you know, we’re in the middle of what’s called the synchronized economic slowdown,
a slowdown that implies that growth is still positive.
But it’s slower than before.
You know, global growth two years ago was 3.8%.
Last year was 3.4%.
This year, the estimate is going to be only 3%.
In spite of that slowdown in growth, this year, US equities have turned out to do very
In part, because some of the tail risk that people are worried about during the year,
where there was a risk of a full scale trade war between US and China, or a hard Brexit,
or a war between the US and Iran in the Middle East.
Those stories have turned out to be milder than previously expected, first point.
Then secondly, again, the Fed, the ECB, and other central banks, once they were aware
of this, kind of a global headwinds came to the rescue of the markets.
So yeah, it started with a Q4 last year that was very bad.
But then given the change in stance of the Fed around the Central Bank and the attenuation
of these tail risk, the market has done so far very well.
Now the first question you probably have to ask yourself is, what’s going to happen to
the global economy next year?
Because it effects then market and policies.
ASH BENNINGTON: That was my next question.
NOURIEL ROUBINI: Yeah, so in order to speak about US equities probably, you have to start
with the real economy.
I would say there are three scenarios.
Scenario number one is the more optimistic one is the one that is being pushed by a number
of say sell side firms on Wall Street.
That says, well, a slowdown, but now some of these tail risks are disappearing.
Financial conditions have eased because of what the Fed, ECB, and other central banks
So we’re going to go back to a economic expansion.
Not very robust.
Instead of having 3% growth like this year, you’re going to go back to 3.4%.
That is OK, but it’s not as strong as it was in 2017, 3.8, for the global economy.
And slight capping growth in US, and Europe, and Japan, and then other advanced economies,
that’s one scenario.
And that scenario is part of a pickup in growth.
The argument goes that inflation has got to maintain.
Because there are global forces that keep wage inflation and price inflation low.
And therefore, central banks with ease are going to stay on hold.
And that might be an ideal scenario for US and global equities.
You get reflation, trade.
You got a pickup in growth.
Earnings keep on doing well.
Monetary policy remain accommodative, and then US and global equity could have, say,
something close to double digit returns in spite of a valuation being very high.
That’s one scenario.
I’m skeptical of it for a few reasons.
Second scenario– ASH BENNINGTON: What are your skeptical points when you think about
NOURIEL ROUBINI: Well, you know, my view of the world today is that rather than that scenario,
we may have a continuation of this global slowdown.
Where growth next year is going to be, say, slightly above 3%, but not as strong as 3.4%.
And it’s going to remain at current levels in the US, and Europe, and other advanced
Maybe slightly pick up in growth in some emerging markets, like Russia or Brazil, that did thoroughly
poorly in the last couple of years.
But I expect a continuation of that slowdown.
That’s the bad news.
The good news is there are more extreme negative scenario.
That will be my third scenario would be of a global recession.
And it would say, as long as US and China have a trade deal, as long as Brexit is solved,
as long as we don’t have a war in the Middle East between the US and Iran, and as long
as Central Bank remain on hold, and accommodative policies probably currently the risk of a
outright recession is right to be a lot.
So then the question is why not to be more optimistic about the global economy, like
scenario one, and instead, believing in the scenario two of continuation of that global
My view is based on a number of argument.
First of all, these argument that were at the bottom of this slowdown doesn’t to be
borne by the data.
If you look at the data for Europe, for Germany, for China, for many emerging markets, yeah,
things are not becoming worse.
But they’re not improving, and the US, maybe things are bottoming out.
ASH BENNINGTON: What are the key data sets you look at, Nouriel, when you talk about
not seeing those decelerations?
NOURIEL ROUBINI: You know, there are, first of all, coincident indicators of economic
activity, like current of the measures of employment, industrial production, retail
But forward looking data in the various PMIs, ISMs, and so on give you a sense of what’s
And one other characteristic of 2019 was the significant collapse in global capital spending.
Banks were very sharply down.
And of course, the reason for it was that there was a option evaluating given that you
didn’t know whether the trade wars with the US and China and other ones are going to escalate
If you have to make major investments of billions of dollars in your factories, and you don’t
know whether things are going to be improving or worsening.
Then you’re going to wait and see.
And while a trade deal between US and China is likely, I think that’s going to be a truce
in a medium long term trade, currency, technology, and even Cold War between the US and China.
And therefore, the sources of uncertainty that keep Capex down maybe are going to remain
I think that’s an important part of this story, I say.
Second part of this story, my view is, as I pointed out, if you look at the data around
the world, we’re not yet seeing a bottoming out of this economic slowdown.
It may be happening in the United States, but the data from any advanced economy emerging
markets are not consistent with that.
There may be a truce between US and China.
But we have a geopolitical situation that might be having an adverse effect on a trade
deal with the US and China.
We don’t know whether there’ll be a media crackdown in Hong Kong.
We don’t know whether China is going to react in a violent way to say a pro-Independence
candidate winning the Taiwan election and so on.
So there are lots of geopolitical uncertainties are going to be weighing on the market, and
the problems of Europe are not just problems related to Brexit.
It now looks like Brexit are going to be solved.
You’re running out of monetary stimulus option for the ECB, the country where fiscal space,
like the Netherlands, could do more by not doing more.
There are fundamental problems of populism in Europe.
There is plenty of fragility in four of the key economies.
Germany, France, Italy, and Spain for different reasons have political uncertainties.
There is a risk of auto tariffs, and there is a glut of capacity in the auto sector.
And the economic reforms in Europe are occurring much more slowly than desirable and optimal.
And therefore, potential growth also with a aging population remains limited.
So I see a world in which while things are not going to get worse, there are going to
strengthen significantly in 2020.
Now the good news, there’s not going to be a recession.
The bad news, we’re going to stay in a slowdown.
The other good news is that Central Bank, of course, are going to stay on hold.
They’re not going to hike.
They’re not going to ease more, most likely.
And therefore, in that scenario, in a situation in which there is still a lot of debt in the
world, public debt, private debt in US, in Europe, in China, in the case of the US, I’m
very concerned about the build-up of corporate debt, whether it’s leveraged loans, C loans,
fallen angel in the high grade, or the spreads on highyield being so compressed in spite
of a build-up of leverage.
I think there are fragility coming.
We have excessive debt ratios that could also imply something of a surprise, negatively,
that leads to a risk of episode and a correction of US and global equities.
So my best scenario for 2020 for US equity would be that if you have positive returns,
they’re going to be in the low single digits, as opposed to high single digits or double
Valuations, of course, are stretched, if you’re looking at Shiller CAPE, seasonally adjusted
And there’s also a wide range of political uncertainty related to the United States.
We’ll see how this impeachment is going to go.
It’s going to be probably noise.
Markets are discounting it.
But that could be a source of.
Tension we’ll see what happens with their nomination for the Democratic Party.
It’s possible that a progressive candidate might be nominated.
And if that’s the case, and if there is a chance that he or she may win elections, then
most of these progressive candidates are coming with proposals for taxing more wealth, taxing
more income, taxing more capital, or taxing more the rich, and you could see that the
nomination of such a candidate may also be a trigger for a risk-off episode and a correction
in US equities as well.
So I would say the year is going to be an OK year, and a year probably in which after
20%-plus returns for US equity this past year, next year if you get low single digits, you’ll
And there are plenty of triggers of a potential risk-off episode that could lead to a 10%
correction at some point during the year.
ASH BENNINGTON: So now that we have the base case and the way you see the world, I’m curious
if we could go and unpack some of those things that you mentioned, so for example, central
banks being on hold.
Policy has been remarkably accommodative for many, many years now.
If you think about where we are with the federal funds rate, hundreds of basis points below
the historical average.
We have balance sheets all over the world at central banks.
Whether we’re talking about the Fed, the ECB, there’s a lot that they own.
So it’s interesting when you say that they’re on hold.
What does it mean, effectively, to stay accommodative at the level that they’re at, and what influence
can that have on asset prices and also on things like aggregate demand and potential
for mis-pricing of assets?
NOURIEL ROUBINI: Well, accommodative has to do with the fact that there has been a global
slowdown, and there is a risk that things will get even worse.
And I think the easing of financial conditions, that additional accommodation is provided,
helps avoid the tail risk of a global recession.
It’s also the source of some of the asset inflation we’ve seen this year.
I think that central banks, most likely, in my baseline scenario, even of a continued
slowdown– they’re not going to do more.
Some of them actually cannot do much more.
ECB and BOJ and other central banks in the smaller parts of Europe already with negative
policy rates– they’re reaching the limits of how negative they can go.
They are doing various versions of quantitative and credit easing.
They cannot do much more, unless there is a severe recession.
And of course, the Fed, with the economy doing OK, growing around 2%, is going to stay on
Of course, the risk is that while the real economy, with low growth and low inflation,
justifies this accommodative monetary policy, that then you’re going to create frothiness
in financial markets.
And by some standards, US and some other risky assets– for example, real estate is very
expensive in many parts of the world.
Credit, of course, is very expensive, with credit spreads being so low.
Government bond yields are very low, and you could say government debt is also expensive.
So we live in the world in which many risky assets, whether it’s public equities, private
equities, real estate, credit, government bonds, are expensive.
Of course, you need a major macro shock to trigger a significant not just correction,
but something worse than that.
And of course, some risk-off episodes may be occurring in the coming year, tensions
related to the US and China, something to do with wars, about geopolitical tensions
around the world, the Issue of all these excesses of corporate debt and re-leveraging and this
So I don’t say we are in a bubble, but certainly we are in a period in which asset markets
are frothy, valuations are stretched, and therefore, any macro shock can lead to a risk-off
episode, can lead to a correction, and that correction may remain persistent, as opposed
to being reversed.
That’s the risk we’re facing right now.
To have a recession, of course, you need a severe macro shock that is going to be persistent
ASH BENNINGTON: One of the things I’m curious about– do you think, in addition to the potential
risk asset bubble, is it possible that we’re seeing distortions, for example, in the financial
system due to the fact that interest rates have been priced far away from where a Taylor
rule would suggest they should be? we see things like compression of net interest margins
Does that have the potential to have some sort of impact throughout the economy as well?
NOURIEL ROUBINI: Well, the distortion is that, of course, some of these valuations are excessive
because interest rates are so low, both on the short end of the yield curve and on the
longer end of the yield curve.
And you have negative not only policy rates, but up to maturity of 10 years.
You have about, depending on the week, $10, $12, $13 trillion equivalent of government
bonds, and even some corporate debt not in the US but outside the US and Europe and Japan
that have a negative yield.
So I think that we live in this dilemma that on one side, the real economy, we have a low
growth and low inflation that justifies this very easy monetary policy.
But on the other side, instead of goods inflation, we’re having asset inflation.
We might not be in a full-scale bubble, but we’re certainly in a situation which is up
on the doubt for a wide range of asset classes.
Asset prices are too high, valuations are been stretched, and therefore, the risk of
a meaningful correction is there as well.
But the dilemma is that the real economy justifies this accommodative monetary policy, including
But then the side effects and then the consequences of it might be asset inflation that eventually
becomes asset frothiness, and asset, then, eventually, credit bubble.
And we are building up the seeds of the next financial crisis with this build up of excessive
leverage, excessive risk-taking, and excessive debt.
As I pointed out, in the US, it’s really concentrated, one in the corporate sector, in the shadow
The official regulated banks now, because of the global financial crisis, have more
capital, less leverage, less risk-taking, more liquidity.
So they are OK.
There has been some de-leveraging, also of their housing sector.
But I would say the two sore points are corporate debt in the US, and also public debt, of course.
The $1 trillion budget deficit is on a trajectory that eventually, of course, is not sustainable.
ASH BENNINGTON: Let’s talk a little bit about corporate debt, because that’s something that’s
been getting a little bit of press over the last six months.
There have been people who have been speculating and worrying about this build-up in the corporate
sector, especially in triple-C and leveraged loans and CLOs and things like that.
What’s your take on that?
How do you think about it?
NOURIEL ROUBINI: Well, if you look at the measures of corporate debt as a share of GDP–
are now back to all-time highs.
That’s a signal.
Secondly, issuance of lots of types of dangerous debt has been increasing.
And it’s not just, of course, junk bonds or C-loans or leveraged loans, but you have about
half $1 trillion of corporate debt in the high-grade– these fallen angels, essentially.
Those were really high-grade.
They’re now one step away from being downgraded to junk bonds, given that there’s been fragility
It’s true that corporate profits have been quite robust.
Earnings have been growing, still fine.
Profit margins have been high.
And if you take a measure of debt of the corporate sector relative not to GDP but earnings, things
And of course, in a world in which short rates are low and long rates are low, while the
debt ratio may be high for the corporate sector, debt Servicing ratios are also low.
And therefore, it allows even highly indebted firms to keep on borrowing more or to roll
over their debt.
However, even in a world in which, say, treasury yields are below 2%, what can happen is that
if there are concerns about the real economy, solid growth, and so on, then you could have
a spike in credit spreads.
We’ve had at least three major episodes of that happening in the last two or three years.
You had the risk-off episode in August-September of 2015.
There were worries about a hard landing in China.
There was another episode in January-February of 2016, where there were worries both about
Chinese and US hard landing, about the collapse of oil prices, about the Fed tightening too
And there was a third risk-off episode in the fourth quarter of last year, Q4 of 2018.
Now, in each one of those episodes, while bond yields on US treasuries were going lower
and lower because people were moving away from risky assets like equities into safe
bonds, credit spreads were widening sharply.
In the January-February of 2016 episode, high-yield spreads went from 300 basis points over treasury
And if debt stayed at 900 for six months, that could have killed the economy and led
to a recession.
Luckily, the Fed came to the– saving the markets.
The worries about the hard landing of the US and China turned out to be wrong, and those
spreads narrowed again.
Or in Q4 of 2018, again, you had total seizure of the C-loan, leveraged loan market, and
So even if interest rates on safe assets may be low and falling more in a risk-off, credit
spreads for the private sector or for risky solvents, like in some parts of the world,
can blow up.
And therefore, you could have the condition for that crisis.
Of course, you need a macro trigger like a sharp slowdown of growth that then leads to
worries that there is a stall in profitability, and that those corporates and other agents
have high debt, cannot more easily roll over their debts or borrow more.
And then that’s a trigger over the repricing of a risk premium.
But we’ve seen those credit spreads widening sharply and suddenly in a number of these
And I think that whenever there is going to be another global macro shock, we’re going
to see a repeat of the same.
ASH BENNINGTON: So talking about central bank policy action, you are, of course, a keen
watcher of the Fed and other central banks.
What do you see right now when you look forward at what’s been happening over the last several
NOURIEL ROUBINI: Well, 2019 was a year where central banks, given the global headwinds,
they decided to ease more.
The Fed cut cumulatively three times by 75 basis points.
The ECB went slightly more negative and restarted QE. Japan has not formally changed policy,
but they’re already at negative policy rates.
They do QE.
They have a yield curve control.
And other smaller European countries have been either easing or signaling, further easing.
I think the question mark is not for 2020, because in the baseline scenario, which there
is not a global recession, central banks are going to stay on hold, and the Fed most likely
is going to stay on hold through elections, and other central banks cannot ease much more.
The ECB can go from minus 50 to minus 60, but then you reach a reversal rate.
You are already doing QE I don’t think you can buy much more than 20 billion euro per
month of bonds without eventually having a scarcity of bonds.
The BOJ could go slightly more negative, from minus 10 to minus 20.
They’re already doing YCC.
They’re already doing massive QE and so on.
The question is, what happens when you have the next recession, and all the central banks
are doing a review of their strategies, the Fed is doing it, the ECB is doing it, and
Now, the attitude of the Fed so far is to say, if we have another recession, we’re going
to hit the zero bound.
And if we’re going to hit the zero bound, then we have to do other things.
And what they’re going to do– they’re comfortable with going back to forward guidance.
They’re comfortable with going back to quantitative easing and credit easing, save buying, again,
So far, they’re not comfortable about things that are slightly more heterodox, like going
negative with a policy rate or having a control on the yield curve by targeting zero bounds
on their longer end, and so on.
ASH BENNINGTON: We spoke about that a couple of weeks ago.
NOURIEL ROUBINI: Yes, exactly.
But so far, the review doesn’t include those more unconventional tools as being part of
I think that what’s going to be happening when the next recession occurs is that the
room, the headroom, is going to be limited.
The Fed has only, now, 150 basis points of headroom.
ECB and BOJ are already deeply in negative territory.
And therefore doing, what has been done in the past, that is, the usual unconventional
quantitative easing with negative rates is not going to be sufficient.
And that’s why I think that policies are going to become even more unconventional, and some
variants of either modern monetary theory– some people call it MMT, some people call
it enhanced quantitative easing or People’s QE or permanent monetization of debt and deficits–
is what we’re going to be seeing.
First of all– ASH BENNINGTON: This is very much a hot topic now, especially on the political
left, where you see people talking about these mechanisms that are meant to effectively monetize
What are your feelings about that?
What are the implications?
What are the risks?
NOURIEL ROUBINI: Yeah, the ideas came from the left, of course.
But what has been happening is that actually in recent years, even mainstream people–
Ben Bernanke spoke and was potentially positive about– helicopter drop of money is another
way of speaking about the MMT.
Adair Turner was the head of the Financial Stability Authority In the UK.
Or even Stan Fischer and his colleagues at BlackRock a few months ago have come up with
an idea about monetizing– ASH BENNINGTON: Former vice chair of the Fed.
NOURIEL ROUBINI: Former vice chair to the Fed came out with idea on a temporary monetization
of fiscal deficits.
I think people recognize, first of all, that fiscal policy is going to be necessary when
there is the next economic downturn, because we are reaching the limit of what you can
do with monetary policy.
And secondly, if you issue more public debt and you don’t monetize it, then long rates
can go higher, and therefore there’s some crowding out.
And therefore, that monetary fiscal easing has to be accompanied by monetary easing,
whether it’s fully coordinated MMT or whether it’s informally coordinated, essentially,
if you combine on a fiscal stimulus with monetization of those deficits.
And then, effectively, you have some variant of MMT or helicopter drop or people’s QE or
[INAUDIBLE] that Stan Fischer and others are speaking about.
Now, it’s controversial, because on one side, some people have been critical, saying, if
you are doing monetization of fiscal debt, you’re going to end up into massive high inflation
and the basement of their currency and the valuation.
But if there is a slack in the economy during the recession, the slack’s in goods and labor
market, then all that extra money is not going to lead to inflation.
So under those conditions over the price economic activity, of course you can do variants of
MMT, and it boosts economic activity and aggregate demand.
ASH BENNINGTON: Well, it’s interesting, because on the other side of the coin, we heard about
the risks of inflation prior to QE, prior to incredibly low interest rates.
And the velocity of money collapsed, and there was never the inflation that was expected
So you do wonder, will it really come now or not?
NOURIEL ROUBINI: Yeah, as I said, if we’re in a situation in which there is slack, like
a next recession, I think inflation is unlikely to come back.
If anything, you’ll have worries about deflation or lowflation.
Inflation has been low for a number of reasons.
For a while, of course, there was significant slack in goods and labor market.
There was this collapse, of course, of velocity, and therefore all that extra base money created
by central bank was being hoarded in the form of excess reserves, rather than putting being
put back at work, and therefore money did not cause inflation.
But even now, where in the US and some other parts of the world have reached something
closer to full employment, and there’s not much slack in goods market, we’re still seeing
So probably, there are also more structural reasons why inflation is low, whether it’s
trade, migration, globalization.
That could be part of the story.
Whether it is workers are weaker and unions are also weak, in a world in unions have less
power, and there’s been a shift in power from labor to capital for a number of reasons.
Whether it’s the gig economy, whether it is an Amazon– effect that implies that there
is less pricing power of traditional retailers.
So there are a whole bunch of reasons why the Phillips curve, both for wages and for
prices, have become flatter and flatter, not on a temporary basis, but more of a permanent
So we live in a world in which actually, inflation is likely to stay low.
And therefore, when the next recession is going to hit, we’ll have a tough choice on
what to do.
We’ll have to go all even more unconventional.
ASH BENNINGTON: One of the things that’s interesting is, I regularly read your Project Syndicate
column, and you’ve made the distinction between a depression in aggregate demand and a negative
exogenous supply-side shock as a cause of recession, and the different policy mechanisms
that are required to address each of those.
Could you talk a little bit about those distinctions and why they’re so important in understanding
NOURIEL ROUBINI: Well, they are important because the global financial crisis– you
can think of it as being a major global aggregate demand shock, and a collapse of animal spirits.
Therefore, the policy response of easing monetary policies in fiscal policy, bailing out illiquid
but solvent agents, was the right one.
ASH BENNINGTON: Traditional Keynesian economics.
NOURIEL ROUBINI: Yeah, traditional Keynesian economics.
What I have noticed, however, is that some of the tail risks that may hit the global
economy in the next few years may not be aggregate demand shock, but negative aggregate supply
If we’re going to have restriction to trade because of US-China or other protectionist
policies by US or another country, that’s a shock that reduces economic activity while
increases, also, inflation because of protection.
It leads to higher cost of importing a variety of goods and services.
If you’re going to have Brexit or other shocks that reduce potential growth, you have lower
potential growth, and you’re going to have a potentially higher costs, because of the
Of course, if there was another oil shock, because we’d go to war with Iran in the Middle
East, like ’73, like ’79, like ’99, there were global stagflationary shocks, growth
is going to be lower, and inflation is going to be higher.
And of course, in a world in which there is a populist backlash against trade, migration,
and globalization and technology, economic policies are becoming more nationalistic,
more inward, restricting migration or restricting trade or restricting FDI.
And all these frictions are essentially equivalent to negative supply shocks that reduce all
growth and rising inflation.
ASH BENNINGTON: That’s very interesting, because you’ve just talked about the stagflation scenario,
which is something that we haven’t heard about for a very long time.
In fact, our younger viewers probably won’t remember this.
You’ve had a great deal of history thinking about crisis.
You wrote a great book called Crisis Economics with Stephen Mihm, where you looked at crises
going back to the South Sea bubble, the Mississippi Company.
And when people think about these supply-side shocks– you think about things like the Suez
Crisis, the Yom Kippur War in ’73, the 79 Revolution– we haven’t experienced anything
even remotely like that causing stagflation in the US.
Is that really a risk if these scenarios play out?
NOURIEL ROUBINI: Well, if some of these negative supply shocks were to materialize, certainly
it will have a negative impact on growth.
Certainly, the globalization or fragmentation of the global economy or balkanization is
going to imply that, say, a global supply chain in tech, in manufacturing industry,
is going to be creating frictions, going to increase cost.
And therefore, you’ll have a negative supply shock that increases prices and reduces growth.
Now, the short-term response to this risk of central bank and also fiscal policy has
been easing for a number of reasons.
Reason number one is that, compared to the ’70s, inflation and inflation expectations
So the risk of an un-anchoring upward is still relatively low.
Two, some of the shocks might lead to a price-level effect, rather than a sustained increase in
So some central banks can look through it.
And three, while they are aggregate supply shocks, they’re also aggregate demand shocks
at the same time.
The collapse of Capex because of, say, the option value of waiting.
Or if there is going to be protectionists, import prices go higher, and consumers are
going to have a reduction in real disposable income and are going to consume less.
And therefore, in the short run, the right policy response, of course, is to have monetary
and fiscal easing.
What I point out is that if these shocks are not transitory, but they’re permanent, they’re
going to permanently reduce growth and increase potentially, prices, then the right response
is not monetary and fiscal easing.
Because if you do monetary and fiscal easing, like in the ’70s, you may end up, eventually,
with runaway inflation, and with unsustainable fiscal deficit and debt.
Instead, the right policy would be to not accommodate them, but to adjust.
If Brexit occurs, potential growth in the UK is lower.
And with potential growth, you cannot stimulate the economy as much.
If we’re going to have a full-scale trade and tech war with the US and China, global
growth is going to be lower, potentially.
And if you ease monetary policy, you’re not going to be able to resolve a negative permanent
supply shock with monetary and fiscal stimulus.
And if you try to do so eventually, not in the short run, you might have, also, upward
inflationary pressure, in spite of these structural factors that are keeping inflation low in
the short run.
ASH BENNINGTON: I mean, talking about structural factors, we’ve also had a dramatic increase
in domestic energy production here in the US that may offset it.
And as prices rise, it will become more economical to extract here in the US at higher price
Does that have an impact on the ability to weather a shock, effectively an energy shock
NOURIEL ROUBINI: Well, it’s true that compared to the ’70s, our reliance on energy production
and consumption is lower structurally.
And we have, now, shale gas and oil that effectively reduces the impact of a negative supply shock.
But I would make the following caveats.
First of all, many other parts of the world are net oil importers, in Europe, and Turkey,
in India and China and many emerging markets, in Japan.
So a shock that increases all prices above $100 per barrel is going to negatively impact
the rest of the world.
Secondly, even in the United States, we’re a net steel and net energy importer.
We’re not yet a net energy exporter.
So the overall impact of an oil shock is negative.
And there’s a distributional effects.
Oil producers or energy producers are going to be better off.
Their profits are going to go higher.
But they’re not going to do much more production or investment, while the impacts are going
to be very negative on the consumers of oil, starting with households.
If you have oil above $100 a barrel because a geopolitical risk in the Middle East, and
you have gasoline prices at $4 to $6 a gallon, then the impact negatively on real disposable
income and consumption is bigger than any positive impact that comes on oil producers
from that oil shock.
So the distribution.
effect is that there’s still a negative aggregate demand shock for the US economy.
So we cannot be so blase about it and say, because we produce so much oil, it’s not going
to impact us.
The distributional effects could be significant.
Households are going to be worse off, and that could be a tipping point for a slowdown
in consumption, because the only thing that’s been holding the economy going with Capex
being so weak has been private consumption.
So either an oil shock or a protectionits shock may be the tipping point for private
ASH BENNINGTON: And potentially another collapse in demand.
NOURIEL ROUBINI: Yeah, that’s a risk.
ASH BENNINGTON: Shift gears a little bit.
One of the things that caught my attention in September was the dislocations in the repo
Could you talk a little bit about the importance of the repo market, what function it serves,
and what you think might have caused those massive spikes in rates?
NOURIEL ROUBINI: Yeah, I mean, what does that mean?
Of course, the repo market is important, because effectively, more than the Fed funds rate
market right now, financial institutions, not just commercial banks, but those shadow
banks, rely on the repo market for their needs of liquidity and lending, money, and so on.
I think part of what has happened was that the Federal Reserve, when it started its policy
of quantitative tightening, believed that actually, the amount of excess reserves that
were needed in the system were lower than otherwise, and that quantitative tightening,
allowing, essentially, the roll-off of maturing debt, implied there was a shrinkage of excess
And then you have, suddenly, a situation in which there is a demand for reserves.
So when the corporate sector, at the end of a quarter, needs a lot of cash to pay taxes,
or have a situation of that sort.
And the other thing that has happened has been then, of course, a number of shadow banks,
including hedge funds, have been using the repo market as a way of borrowing money, as
a way of then going into a variety of carry trades, borrow short low to make risky investments.
So that demand, the repo market for liquidity, has had spikes that are cyclical and structural
when the supply of essential liquidity was limited.
That’s why the Fed is worrying about a similar shock occurring again towards the end of the
I would say that since the Fed has gone aggressively towards providing liquidity and increasing
its balance sheet, again, most likely, these problems are going to be contained.
ASH BENNINGTON: So we talked a little bit about China earlier, and there’s a lot to
There is potential for a currency war, a trade war, effectively, balkanization of the technology
There’s a lot going on.
You’ve written about China as a potential Thucydides trap.
Could you talk a little bit about what your view is in that context and what that means?
NOURIEL ROUBINI: Yeah my view– the strategic rivalry between US and China is going to stay
with us for a long period of time.
I remember about four years ago, in November of 2015, I was with a delegation in Beijing.
We had the honor of meeting President Xi Jinping in the Great Hall of the People just off Tiananmen
And this was actually a year before Trump was elected.
He spent the first 10 minutes speaking formally, specifically, about the Thucydides trap.
For those who don’t know it, Thucydides was the great historian that essentially wrote
the history of why a rising Athens and new rising power facing an existing power, Sparta,
led to war between Athens and Sparta.
And that term now has become, essentially, a code name for a situation which has a rising
power facing an existing power.
ASH BENNINGTON: Graham Allison– NOURIEL ROUBINI: And Graham Allison, from the Kennedy School
of Government at Harvard two years later, wrote the famous book now, Destined to War:
Will the US and China Avoid the Thucydides Trap?
Now, what Xi Jinping was telling us was that the rise of China will be peaceful, and therefore,
we shouldn’t worry about the Thucydides trap.
But guess what?
We’re now two years later where we’re in the middle of a trade war, a currency war, a technology,
war a rather cold war.
Alison pointed out that in 12 out of 16 cases, when you have a rising power facing an existing
one, there is a hot war.
I don’t think in the case of US and China, we’re going to have a hot war, even if there
are strategists both in Beijing and Washington who are thinking about those tail risks.
But certainly, the risk of a cold war between US and China, I think, is a rising risk.
It’s important, because for the last 40 years or so since 1979, when China opened up to
the world with the reforms, of Deng Xiaoping, or since 1989, when we had the collapse of
the Soviet Union and the fall of the Berlin Wall, we have been in a process of greater
globalization and more trade in goods and services and competent labor in technology
and data and information.
And instead, if a collision course with the US and China will occur, we’ll be at the beginning
of deglobalization, of decoupling, of fragmentation of balkanization.
And just to give you an example, know today, the US is worried about the 5G of Huawei and
having a back door to the Chinese government.
And of course, those 5G networks are going to control our telecom and our cell phones
in the next few years.
But in the next few years, once we have autonomous vehicles, we need a 5G system to make sure
that millions of cars that are autonomous don’t hit each other.
But a few years from now, every piece of consumer electronics, even a coffee machine or a toaster
or even a microwave is going to be 5G cheap.
So if you believe that China is listening to our devices, using microphones and drones
and whatever not, they can do so also with a coffee machine or with a toaster.
And therefore, if you’re going to have a technology war, eventually a technology becomes a trade
And therefore, I think you are going in that direction.
If you look at all the data, we are already in a process of decoupling with the US and
We see it in the trade side.
We see it in then FDI, with Chinese FDI in the world has collapsed, or towards the US
has collapsed by 90% in the last couple of years.
We see it in movements of talent, where now people worry in the US that every Chinese
researcher or every student might be potentially suspicious or a spy, whatever.
We see it in a variety of other technological areas, where clearly, China wants to achieve
strategic dominance in the industries of the future, where there is AI, telecom, quantum
computing, biotech, electric vehicles, autonomous vehicles.
And the US now sees China as being a strategic rival of the United States.
And therefore, this tension between the two powers is always going to dominate the technology
of the future, going to imply restriction of movements of technology.
So we see that across the spectrum.
I mean, to give a couple of recent examples, even restriction of data and information,
there is this dating app for gay people that was purchased recently by a Chinese media
And now the US is asking China or this Chinese firm to divest from it, because of worries
that some people that stay in the closet might be subject to blackmail if you have control
of their data.
Or people now are worried that maybe TikTok might be used as a way of essentially getting
data about what US teenagers are doing.
There are even some ideas about making sure that even TikTok is divested from a Chinese
So it’s not just a restriction in trade and goods and services, in capital, in labor,
but also technology, information, and data.
So across the board, we are in a process of de-globalization and decoupling between US
It’s going to occur slowly over time, and a trade truce is going to postpone some of
it until after the US election.
But I think the medium-term trend is deglobalization and decoupling.
ASH BENNINGTON: I mean, the scope of the problem that you just described is absolutely enormous.
If you think about the size of the bilateral trade relationship, and then you talk about
these technology issues that were things we didn’t even think about as recently as five
years ago, it’s an extraordinary degree of coupling technologically, economically– all
of the diplomatic and Asia-Pacific military issues.
I mean, it is an extraordinary problem.
Are you ultimately optimistic about it, pessimistic about it?
Do you think we just blunder forward for a while?
I mean, it almost feels as though there has to be a resolution, or there has to be conflict.
Or is that too simple of a way to look at it?
NOURIEL ROUBINI: Well I don’t believe in a hot war, but there is certainly risk of a
cold war between US and China.
Some people are more pessimistic.
They think of a sheer cold war and just strategic competition between these two major powers.
Other people are more constructive, say, the former prime minister of Australia Kevin Rudd,
who’s an expert on China, says that we should have managed strategic competition between
US and China, so that we compete in some dimensions, and we cooperate in others.
Other people have a variant.
They use the term “co-petition,” where there is competition in some dimensions and cooperation
in other ones.
I think that one important point is going to be Europe, because of course, the US and
China are going to say, either you are with us or against us.
Either my 5G or their 5G, my AI or their AI.
I think that maybe Europe can have a important role in making sure there is still an international
economic order where you follow some rules, even if there is competition in some strategic
dimension, and we don’t have a destruction of the international economic order that we
created with the WTO, the IMF, the World Bank, and the UN, NATO, after World War II.
So it could escalate into a full-scale cold war, or it could be something where you compete
and you cooperate on some dimensions.
I don’t think that the outcome of it is very clear for now.
ASH BENNINGTON: And that conversation has already begun, for example, in the UK, with
using data infrastructure for 5G.
You were talking about World War II, and I was thinking back to World War I, the notion
the Guns of August scenario, that Europe had become so economically integrated that it
was simply impossible that a hot war could take place.
And I suppose the message is that we should never take for granted that positive outcomes
will occur, and we should never stop to attempt to solve these problems.
NOURIEL ROUBINI: Yeah, people make mistakes.
And if you’re in a mindset where you’re fearing the other side, then you can end up into a
self-fulfilling situation, which things escalate in a fullscale cold war or something worse
Therefore, leadership matters, both in the US and in China and in Europe.
Leaders can make sure that some semblance of the international economic order that gave
us peace and prosperity for the last 70 years stays with us.
If we’re going to go the direction of a full-scale trade and cold war, the economic damage is
going to be huge.
When there was the first Cold War between US and Soviet Union, you got a sense of, we
were doing barely any trade, a little bit of oil, a little bit of wheat, and so on.
But there is such an integration of the US and China and global supply chains from Asia
to Europe and so on that decoupling is going to be much more of a negative supply shock
for the global economy, let alone the geopolitical implications of it.
But finding the right balance within cooperating and competing is going to require leaders
that have the long-term view of how to manage this complicated relation, because of all
the geopolitical issues of our time, how to manage the rise of China and make sure it
doesn’t lead to conflict is going to be the most important geopolitical issues for the
next decades to come.
ASH BENNINGTON: Do you have any confidence that we see leadership in the United States,
either presently or on the horizon, that understands the complexity and scope of these problems?
NOURIEL ROUBINI: One can be only hopeful that there will be changes, politically, in the
US so that we have, actually, leadership.
China is rising.
If China is rising, you need to have a strategy towards Asia.
The first thing that, say, Trump did when he came to power in the first week was to
pull out of TPP.
And at least Obama had a strategy.
China is rising.
There’s a pivot of the US towards Asia.
People cannot be just sending a few Marines to Australia.
There has to be an economic lag, and the economic lag was TPP, to make sure that the Asian countries
and the Asian Pacific countries stay in the economic orbit of the United States.
Well, Trump pulled the plug on that one, and the economic pillar of maintaining that strategic
role in Asia has disappeared.
So unless you have a vision about how you engage your allies in Asia– and you have
to engage with them, and you have to support them, whether it’s Korea, whether it’s Japan,
whether it’s the other Asian camps.
Otherwise, they’re going to end up into the economic and then political and geopolitical
orbit of China.
So you need a strategy.
But that probably implies having leaders in the US that have that vision about how, in
a constructive way, you engage China.
This cannot be containment.
It has to be engaging the allies of the United States and Europe and the rest of the world
in Asia, so make sure that the economic re-balance system remains an economic liberal system.
ASH BENNINGTON: So Kennan’s doctrine from the Cold War will not suffice.
We need more engaged leadership.
NOURIEL ROUBINI: Absolutely so.
The Soviet Union was a declining power, and therefore, containing it eventually led to
a collapse of the Soviet Union.
With all its flaws, China is a rising power.
Even if potential growth has fallen, it’s going to be at least 4% to 5% for the next
And if you try to contain China, as opposed to engage it, the risk is that China is going
to become more aggressive.
So it’s a much bigger challenge to manage the relationship with China than it was with
the Soviet Union.
If you make stupid mistakes, then it could escalate into something, which, some of the
conflicts both, economic, financial, but also military and geopolitical, could become tense.
In Asia, of course, there are tensions in Taiwan, in Hong Kong, the East China Sea,
the South China Sea.
All these things are important, and having leaders in the West who know how to engage
China, to push back on certain things, but engage it in others is going to be so absolutely
ASH BENNINGTON: And very complicated potential military flashpoints in the South China Sea
around the shipping lanes.
NOURIEL ROUBINI: Yeah, absolutely so.
And one should recognize that some of the issues of China are legitimate.
Any power that becomes a major economic trading and financial power, also as to flags, is
also a military and geopolitical power.
China is worried that, since they are importing commodities and materials from all over the
world, they have to have some insurance that the shipping lanes, like the Strait of Malacca,
are going to remain open.
So the fact that China has a blue-water navy right now doesn’t have to be seen as aggressive.
It could be purely defensive.
But that’s where there is a source for miscalculation.
What they think as defensive, we can think of it as being aggressive, and then things
ASH BENNINGTON: Guns of August again.
NOURIEL ROUBINI: Yeah.
ASH BENNINGTON: So obviously, we’re coming into a 2020 election cycle.
One of the things that’s coming up quite a great deal is the rise of populism, issues
of economic inequality.
What’s your view of that?
NOURIEL ROUBINI: Yes, throughout the world, we’re seeing this populist backlash against
trade, against globalization, against migration, against supranational authority, even against
technological innovation and maybe threatening jobs and opportunity.
And this is happening, I would say, not just in advanced economies– the election of Trump
in the US or Brexit in the UK or the rise of the political power of some populist parties
of the extreme right or left in some parts of Europe, but you also see authoritarian
strongmen becoming entrenching powers in many emerging market economies.
You have Putin in Russia.
You have Erdogan in Turkey.
You have Orban in Hungary.
You have Maduro in Venezuela.
You have Bolsonaro in Brazil, Duterte in the Philippines.
And Xi Jinping is also an authoritarian leader.
And even Modi in India has some authority unrestricted.
So there is even a threat to liberal democracy.
Now, what’s happened, I think, is in part concerns that are economic, and then there
are also concerns about identity, social, cultural, religious, ethnic identity.
On the economic side of it, I think that the lesson we’ve learned that was known to our
economy is that while trade and globalization, migration, increases the economic pie, there
are also distributional effects.
Some people benefit out of it.
Some people don’t benefit as much of it.
There are winners and losers.
There are those who are going to go ahead, and those that are left behind.
And unfortunately, whether it’s trade or globalization or migration or technology, there are plenty
of people that are left behind, that are struggling.
And it’s not just trade and migration.
In the future, of course, technological innovation in AI is going to threaten jobs and incomes
and entire firms and industries.
And therefore, these distributional effects have to be addressed.
You have to make sure that globalization and digitalization doesn’t leave people behind
and makes it successful for most people.
Otherwise, the populist backlash is going to become more extreme.
ASH BENNINGTON: You’ve written about this devastating trinity, from AI specifically
and technology more generally, that it’s effectively labor-saving, capital-biased, and skills-biased,
which effectively serves to be a pro-cyclical, I guess, effect for income inequality.
NOURIEL ROUBINI: Yeah, income inequality has been rising.
Initially, it was a story about trade, migration, and globalization.
But technology, innovation, and skill-biased labor saving implies that if you have capital,
you’re going to do well.
If you are in the top 20%-30% distribution of skills, you’re going to do well.
But if you are a low-skilled laborer– not just blue-collar, but increasingly even white
collar jobs are going to be threatened by technology– then your income and your jobs
are going to be threatened by this technological innovation.
I think part of the risk is, we may be fighting the last war.
Trump is worried right now about the application of trade and migration for jobs and income.
But make the following thought experiment.
Suppose we have a big wall all over the US, and nobody can get in.
Suppose we have 100% tariffs and we’re not importing anything from the rest of the world
in the next five to 10 to 15 years.
The job disruption that occur through technology– I don’t know whether it takes 10 or 15 years
until we have semi-autonomous vehicles, but you have millions of Uber drivers or millions
of truck drivers, the Teamsters.
And those jobs are going to be gone.
And those jobs have nothing to do with trade.
They have nothing to do with migration.
So even if you, quote, have a big wall, and you have tariffs, technology is going to disrupt many more jobs and incomes and entire firms and industries, more than trade and globalization.
And we have to think about solutions about those problems.
Otherwise, the rise in inequality is going to come from technology, and these other forces
of globalization are going to lead to an even bigger backlash against globalization.
ASH BENNINGTON: It’s extraordinary.
It’s something that’s been happening in blue-collar jobs for decades.
And now, it seems that people who live in cities and read The New York Times are concerned
about it, because they realize that their jobs are being outsourced.
Or there’s this unusual shift that’s happening, with jobs that were previously outsourced.
They’ve now been parameterized and structured in a way that they can be fed into computers.
For example, law, my job, for example.
We have, increasingly, stories being written about financial and economic data by machines.
And it seems as though the potential opportunities to displace labor with technology are virtually
NOURIEL ROUBINI: They are limitless.
And what has happened that is a different route from the past is that with the first,
second, and third industrial revolutions, we’ve moved labor from farm and agriculture
to manufacturing, then from manufacturing to services.
But now, many of the service jobs are also threatened by technology.
Two, the speed at which these things are occurring is much more rapid than the past.
And therefore, the disruptions are going to be severe.
And as you point out, for every job created, say, by Amazon, there may be 10 other retail
jobs that are disappearing.
And now a whole bunch of services, financial services, through fintech are going to be
subject to large amount of automation, payment system.
Threat allocation, robo-advisors, asset management, insurance.
Transportation– we have autonomous vehicles, going to be disrupted app.
Media is being disrupted.
Legal firms are disrupted.
Audit firms are disrupted.
So even good jobs that are white-collar, middle-, upperincome, can be disrupted by technology.
So it’s really a much more sweeping process that’s going to be highly disruptive in the
ASH BENNINGTON: That leads us right back to economic populism here in the United States,
if we look at some of the field in the Democratic Party talking about things like universal
basic income and wealth taxes and some other things that wouldn’t have been on the table
as recently as four years ago.
What’s your view about those?
Are they things that could potentially be helpful, or are they just destructive, in
that they’re going to create economic dislocation?
NOURIEL ROUBINI: Well, we need to do something to help those who are left behind.
I would say the first best policy will be to provide the skills, the human capital,
the tools, the relocation, to make sure that everybody survives and thrives in a globalized
It’s easier said than done.
Not everybody can become a venture capitalist or entrepreneur.
Some people will, but some people are not going to be able to do so.
So if people are going to be left behind, then I think the other thing is to have a broader social safety net.
If you cannot have the same job for life, and you have to hop from one job to another,
you have to make sure that if it’s bad luck, rather than your own characteristics that
led you to lose a job, you have enough unemployment benefits and reskilling, you have enough health
care, you have enough other things that are going to be pensions and others that are going
to make sure that then you can move from point A to B to C. That’s going to be part of the
solution, to try– like in the Nordic model, to help jobs rather than protecting specific
So you need to have that new type of a social safety net.
Paradoxically, you need a wider a social safety net to make sure people are more flexible,
because if there is not a social safety net, people are going to resist globalization and
If they make sure that, then, if they lose a job they can move to other ones, and there
is a safety net, then they’re going to be more flexible.
And if all of these things are not going to be sufficient, of course, some variants of
universal basic income may be part of the solution.
But all these solutions essentially imply that the economic pie becomes bigger, but
the distribution of it becomes more unequal, because owners of physical and financial capital
do better, those that are skilled workers are doing better, and everybody else is left
So you have the margin to tax the winners and then redistribute stuff to those who are
left behind, you get redistributed as income and subsidy.
You can do it as a provision of public services that are essentially free, like health, education,
and reskilling and so on, or you could do it in different ways.
But we’re going to probably have to move towards a more progressive system of taxation and
try to make sure that those that are left behind are less left behind.
ASH BENNINGTON: I was curious about the Nordic model, because these are very small, homogeneous
And how do you administer something like that on a scale of 330 million Americans living
in diverse regions and different regional economies?
It’s an interesting question.
NOURIEL ROUBINI: Yeah, you’re right.
They are much more homogeneous societies, even less so than the past, given migration.
But the idea that you should protect workers rather than specific jobs, I think, a principle
that can be applied anywhere.
If an industry or a firm, because of technology or trade, is disappearing, propping it up
is not be sufficient.
Keeping the same job– ASH BENNINGTON: Always popular.
NOURIEL ROUBINI: You want to make sure that the workers have enough to be able to survive
and then move to something else.
So the concept can be applied even onto a large economy like the United States.
And we do have the fiscal resources, if the economic pie becomes bigger, to tax those
who are successful, to try to help those who are left behind.
ASH BENNINGTON: Does it involve changing the structure of the tax system, meaning, is it
sufficient to simply increase things like corporate taxes some marginal percentage,
Or is it, in your view, going to take something like taxing wealth, as some have suggested?
NOURIEL ROUBINI: Well, whether you tax wealth or you tax more the income of high-income
individuals, or whether you tax slightly more capital and less labor, there are pros and
cons about doing it for wealth as opposed to income as opposed to capital income versus
But I think the basic principle is, the economic pie becomes bigger.
Some people are winners.
Some people left behind.
Those who are left behind– eventually, it’s going to cause economic and social and political
And then you have to tax those who are winners to provide either public services or income
or subsidies to the other ones to maintain an economic balance.
Even from a point of view of economic growth, leaving aside the political instability, if
there is too much redistribution of income from labor to capital, from wages to profits,
you’re transferring income from those who have a propensity to spend to those who have
a high marginal propensity to save.
So these concerns about secular stagnation might be in part due to the rise of inequality.
Karl Marx had this view that capitalism is going to self-destruct because as profits
become larger and wages become lower, you’re going to have this theory of under-consumption.
And I think some of the weakness we’ve seen in the last few years has been driven by this
For a while, we could paper it over by keeping up with the Joneses, by borrowing against
their housing wealth, and that’s why we got the global financial crisis.
But now we have the same dismal income prospects, and people cannot borrow like the past.
So we have to find much more fundamental solutions to this problem of under-consumption.
Otherwise, you have both economic and political instability.
ASH BENNINGTON: Marx was much better at diagnosis than prescription, wasn’t he?
NOURIEL ROUBINI: He was, but certainly, the diagnosis there are some potential fundamental
problems in capitalism that can’t be addressed, happened.
But even after the first and the second industrial revolution, there was the same squeeze on
wages and on labor income.
And those counter the benevolent, I would say, capitalists, realized that you’re going
to have, eventually, revolutions like in Russia and China in the West.
We created a social welfare system, free education, health care, unemployment benefits, worker’s
rights, and other things that increased, actually, incomes of the workers to maintain social
And that’s why that mixed economy, market economy with welfare system, led to a change
of capitalist societies that maintained them successful and stable.
And we’re having the same challenge right now.
Either we reform capitalism to make it work for everybody, or eventually, you’ll have
either revolutions or civil wars or political instability.
That’s a story of the past.
ASH BENNINGTON: So perhaps it’s in continuity that the Silicon Valley potentates are looking
at things as modern-day Henry Fords, perhaps, things such as universal basic income and
other schemes to democratize education and do other things that would be pro-social,
NOURIEL ROUBINI: Yeah.
Well, they’re resisting, however, being taxed more.
I think that we’ll have a backlash against Big Tech, not only because of its economic
power, but also because of– everybody has to pay a fair share of the tax system.
and That’s not happening, especially in the tech sector, in part because of offshoring
and so on.
So we’ll need to have a different tax system, where those who are winners are paying a fair
share of the taxes as well.
ASH BENNINGTON: And also, the different tax treatment for private equity versus ordinary
NOURIEL ROUBINI: Yeah, absolutely.
ASH BENNINGTON: So Nouriel, here we are in December.
As we head into 2020, what are you going to be looking for specifically?
NOURIEL ROUBINI: As I pointed out, there are a variety of scenarios.
I’m more confident that we are going to continue with this global economic slowdown.
But optimists say we’re going to have a reflation and expansion.
And the pessimists, of course, are going to look at potential for shocks that are going
to lead to a recession.
I think that the key things to look for the next few months are going to be, one, what
happens with the US and China, how much there is a real truce and improved trade and tech
relations, as opposed to a truce that leads them to an escalation of a technology war.
ASH BENNINGTON: Are there any specific indicators you’re looking for in that particular outcome?
NOURIEL ROUBINI: Well, the specific one will be that while there’ll be a truce on trade,
I fear that this technology war between the US and China is going to escalate, and the
US may take various types of legislations or regulatory restrictions that restricts
further, for example, what China can do in the United States.
There is a new proposal that the Commerce Department may have the right to block any
technology that comes from abroad, that is coming from a foreign adversary.
That will create a whole new system of bureaucracy equivalent to [INAUDIBLE].
So the technology space, I think, is a very important one.
Regardless of the results of the UK elections, whether it’s going to be a true process of
negotiation that leads to a soft Brexit, as opposed to a contentious relation between
the UK and Europe, it’s going to be something to monitor.
I think that the tensions in the Middle East still can explode.
I don’t know whether Iran can stay for another year under these very severe sanctions imposed
on them without doing something like escalating some of the friction that leads them to a
military attack by the United State.
And that could escalate, certainly.
And I’m going to also look at what happens to Europe, how much political tensions are
going to continue to occur in Germany, in France, in Italy, and Spain the four important
key eurozone economies.
And whether the Trump policies on trade lead to the escalation just not with China, but
also with other parts of the world.
Are we going to have a trade war on technology and digital taxation with Europe?
Are we going to impose taxes and tariffs on European exports of cars?
And there are lots of other things that can happen on the trade protectionist side as
ASH BENNINGTON: So a landscape fraught with quite a bit of peril.
NOURIEL ROUBINI: Absolutely.
And hopefully, some of those tail risks are not going to be materializing, in which case,
maybe this slowdown occurs without the recession, or maybe growth could pick up slightly stronger
than otherwise in a more positive scenario.
ASH BENNINGTON: I love ending on a positive note.
NOURIEL ROUBINI: Yes.
ASH BENNINGTON: Thank you for joining us, Nouriel.
NOURIEL ROUBINI: Great being with you today.
Unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option.
NEW YORK – There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.
The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
All three of these potential shocks would have a stagflationary effect, increasing the price of imported consumer goods, intermediate inputs, technological components, and energy, while reducing output by disrupting global supply chains. Worse, the Sino-American conflict is already fueling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanized, global production costs will rise across all industries.
Moreover, the trade and currency war and the competition over technology will amplify one another. Consider the case of Huawei, which is currently a global leader in 5G equipment. This technology will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.
It is easy to imagine how today’s situation could lead to a full-scale implosion of the open global trading system. The question, then, is whether monetary and fiscal policymakers are prepared for a sustained – or even permanent – negative supply shock.
Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. Today, however, major central banks such as the US Federal Reserve are already pursuing monetary-policy easing, because inflation and inflation expectations remain low. Any inflationary pressure from an oil shock will be perceived by central banks as merely a price-level effect, rather than as a persistent increase in inflation.
Over time, negative supply shocks tend also to become temporary negative demand shocks that reduce both growth and inflation, by depressing consumption and capital expenditures. Indeed, under current conditions, US and global corporate capital spending is severely depressed, owing to uncertainties about the likelihood, severity, and persistence of the three potential shocks.
In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.
Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.
In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the United Kingdom with a permanent negative supply shock, and thus permanently lower potential growth.
Such shocks cannot be reversed through monetary or fiscal policymaking. Although they can be managed in the short term, attempts to accommodate them permanently would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. In the 1970s, central banks accommodated two major oil shocks. The result was persistently rising inflation and inflation expectations, unsustainable fiscal deficits, and public-debt accumulation.
Finally, there is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. Because the former was mostly a large negative aggregate demand shock that depressed growth and inflation, it was appropriately met with monetary and fiscal stimulus. But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term. Trying to undo the damage through never-ending monetary and fiscal stimulus will not be a sensible option.
Dr. Doom lives up to his moniker
.. Roubini pointed to the ongoing U.S.-China trade conflict as the likeliest trigger of the next crisis. “There is a cold war between the U.S. and China,” he said. “We have a global rivalry . . . about who is going to be controlling the industries of the future: artificial intelligence, automation, and 5G.”
Because the standoff has evolved into a one about national security and geopolitics, Roubini predicted that “there will be a trade and tech war between the U.S. and China that’s going to get worse.”
Roubini dismissed the trade truce declared by U.S. President Trump and Chinese President Xi Jinpeng over the weekend as mere talk, though stock market investors appeared to think otherwise this week. The S&P 500 index SPX, -0.05% closed at a record high Monday, while the Dow Jones Industrial AverageDJIA, -0.09% and Nasdaq Composite index COMP, -0.11% also gained to be within 1% of their record closes.
The uncertainty that the standoff has created is forcing businesses to delay or cancel plans to make additional investments, Roubini added. “There’s already been, in the data, a collapse in [capital expenditures] and once capex is down, industrial production is down, and then you have the beginning of a global recession that starts in
- tech, then spreads to
- manufacturing, then to
- industry and then it goes to
- services,” he said.
The Sino-American trade dispute will have even further consequences than just triggering the next recession, as it will cause “a complete decoupling of the global economy” as private entities and countries will have to choose whether to do business with China or the U.S., and it will lead to a reconstruction of “the entire global tech supply chain,” which will be a drag on economic growth going forward.
He compared the predicted U.S.-China “cold war” with that between the Soviet Union and the U.S. during the last century, arguing that the coming war will be more disruptive. “This divorce is going to get ugly compared to the divorce with the U.S. and the Soviet Union,” because there was little economic integration between America and Russia prior to the conflict.
Whether or not US President Donald Trump and his Chinese counterpart, Xi Jinping, agree to another truce at the upcoming G20 summit in Osaka, the Sino-American conflict has already entered a dangerous new phase. Though a negotiated settlement or a managed continuation of the status quo are possible, a sharp escalation is now the most likely scenario.NEW YORK – The nascent Sino-American cold war is the key source of uncertainty in today’s global economy. How the conflict plays out will affect consumer and asset markets of all kinds, as well as the trajectory of inflation, monetary policy, and fiscal conditions around the world. Escalation of the tensions between the world’s two largest economies could well produce a global recession and subsequent financial crisis by 2020, even if the US Federal Reserve and other major central banks pursue aggressive monetary easing.Much, therefore, depends on whether the dispute does indeed evolve into a persistent state of economic and political conflict. In the short term, a planned meeting between US President Donald Trump and his Chinese counterpart, Xi Jinping, at the G20 Summit in Osaka on June 28-29 is a key event to watch. A truce could leave tariffs frozen at the current level, while sparing the Chinese technology giant Huawei from the crippling sanctions that Trump has put forward; failure to reach an agreement could set off a progressive escalation, ultimately leading to the balkanization of the entire global economy.
JAW-JAW OR WAR-WAR?
. On the trade front, the US wants China to buy more American goods, reduce tariff and non-tariff barriers, open more financial and service sectors to foreign direct investment, and commit to maintaining currency stability and transparency with respect to foreign-exchange data.
On technology, the US is demanding that China strengthen intellectual-property protections, cease making the transfer of technology to Chinese firms a condition of market entry for US (and other) companies, and crack down on corporate cyber espionage and theft. A temporary deal could include any of the above, with the US offering medium-term (through the end of 2020, and possibly longer) exemptions to Chinese tech firms that use US components, semiconductors, and software. This would leave Huawei severely constrained, but not dead in the water.
The second possibility is a full-scale trade, tech, and cold war within the next 6-12 months. In this scenario, the US and China would adopt rapidly diverging positions after failing to successfully restart negotiations (with or without a truce). The US would follow through with import tariffs – starting at 10% but increasing to 25% – on the remaining $300 billion worth of Chinese goods that have so far been spared. And the Trump administration would pull the trigger on Huawei and other Chinese tech firms, barring them from purchasing components and software from US companies.
China, meanwhile, would take steps to protect its economy through macro-level stimulus, while retaliating against the US through measures that go beyond tariffs (such as expelling American firms). Huawei might survive within the Chinese market, but its growing global business would effectively be crippled, at least for the time being.
Beyond trade and technology, this scenario also implies increased geopolitical and military tensions. The possibility of some type of conflict over the East and South China Seas, Taiwan, North Korea, Xinjiang, Iran, or Hong Kong could not be ruled out.
Finally, in the third scenario, China and the US would fail to reach a deal on trade and technology, but they would forego rapid escalation. Instead of plunging into a total trade and technology war, the two powers might ratchet up their conflict more gradually. The US would impose new tariffs, but keep them at 10%, while renewing only temporarily exemptions that allow Huawei and other Chinese firms to continue purchasing key US-made inputs, while retaining the option of pulling the plug on Huawei at its discretion. Negotiations could continue, but the US would essentially hold a veto over Huawei’s bid to develop 5G and other key technologies of the global economy. Given that Trump could suddenly pull the plug on the company whenever it suits him, China’s leaders would probably abstain from blatant full-scale retaliation, but would still intervene to minimize the economic damage.
THE GOLDILOCKS OPTION…
The third scenario is the most likely for now, because China is playing a waiting game until November 2020, to see if the US elects a more even-keeled president. Even with a truce, therefore, any negotiations that are relaunched after the G20 summit will probably drag on indefinitely, with no real signs of progress. In the meantime, the Trump administration will want to apply additional pressure on China, while keeping its options open. Better, then, to start with a 10% tariff on that remaining $300 billion worth of exports. The US could always hike the rate to 25%, but at the risk of raising the costs of goods that many of Trump’s own lower-income voters rely on.
Where does that leave us? If both Xi and Trump find the third scenario attractive, neither will be willing to meet halfway on a deal. That makes the second scenario – a full-scale trade and technology war – the most likely outcome, given that a controlled escalation is inherently unstable.
As matters stand, the probability of a deal eventually being reached is low (my colleagues and I put it at just 25%). Still, we will know more after the G20 summit later this month. If Trump and Xi fail to broker a truce or a temporary agreement regarding Huawei, the US will probably follow through with 10% tariffs on the remaining $300 billion worth of Chinese exports. We will then be in the initial stages of the third scenario.
On the other hand, if Trump and Xi hold a friendly meeting and agree to a truce, the US will probably withhold new tariffs, and we will be in the early stages of the first scenario. This would make the probability of the two sides reaching a deal slightly higher. But a lurch to the third scenario – a precipitous escalation of the current confrontation – would still be more likely, followed eventually by a descent into a full-scale conflict. Where it will end is anyone’s guess, but an escalating trade and tech war is, in my view, more likely than an eventual deal.