In his new book, Megathreats, the Turkish-born US economist Nouriel Roubini paints a grim, dystopian picture of the world.
He says the global economy is on a collision course with not one but 10 overlapping, interconnected potential disasters all of which have the ability to amplify the others.
His so-called Megathreats range from the economic: he’s predicting “the mother of all debt crises” and a period of stagflation than will make the 1970s look like a walk in the park to the political. He believes we’re already in the early stages of a new cold war between the US and China, one that could turn hot on the issue of Taiwan. And also the technological: he believes AI (Artificial Intelligence) could cost millions of workers their jobs, accelerating income inequality and populism in many countries.
If all that isn’t bad enough, a looming climate disaster is now almost inevitable as countries and companies fudge on their net zero targets and Russia’s war in Ukraine pushes us back towards fossil fuels.
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Sound policy choices and collective decision-making might partially or fully avert one or more of these threats, but not all of them and therefore calamity is now almost guaranteed, he says.
He warned repeatedly that a giant housing and credit bubble placed the entire global financial system at risk
“We totter now on a precipice, the ground shaking beneath us. Yet most of us still imagine that the future will resemble the past. That’s a whopping mistake,” he says.
Roubini is the Nosferatu of Dracula economists but his world view can’t be dismissed as mere pessimism. He has form in predicting crises.
In the mid-2000s, the economics professor from New York University’s Stern School of Business was widely derided for his overly negative assumptions about the build-up of debt in the US real estate sector. He warned repeatedly that a giant housing and credit bubble placed the entire global financial system at risk. Wall Street labelled him Dr Doom (he prefers the moniker Dr Real). When his dire forecasts materialised, he was heralded as a prophet.
His latest book presents an even scarier picture of the coming decade.
The first part highlights the rise in global debt — private and public — which has been climbing as a proportion of global GDP (gross domestic product). In the 1970s, it equated to about 100 per cent of global GDP, in 2000 it was 220 per cent, last year it was 350 per cent. Every time there is a problem, governments, instead of raising taxes or cutting spending, borrow and issue more debt, Roubini says, citing the pandemic as the most recent example.
But this cannot go on forever. Eventually, the cost of servicing debt begins to “smother economic growth”. While interest rates were on the floor, countries and companies got away with it. Not anymore.
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In debt terms, the entire world now resembles Argentina, a country that has defaulted four times since 1980, he says. He insists he isn’t against debt just that it needs to be temporary (in times of recession) and needs to finance investment that eventually pays for the cost of financing it.
The UK’s recent financial troubles illustrate the point. Former UK prime minister Liz Truss’s ill-fated plan to borrow to fund tax cuts in the hope that they would spur growth was too vague, too financially tenuous for markets hence the run on the pound and the squeeze in bond markets. The episode may prove to be the first in a series of financial crises as fiscal plans clash with new monetary realities.
The incoming crisis will not be like its predecessors, Roubini says. In the 1970s, we had an inflation problem but not a debt problem. After 2008, we had a debt problem but no inflation because of the shock to demand from the credit crunch. The coming decade is going to see “a global financial and debt crisis plus stagflation”, he warns.
We’ve reached “the tipping point of a debt supercycle ... Recession and high-interest rates will hobble all but the sturdiest institutions, banks, global corporations, and countries,” he says.
“I’m not saying it’s going to unravel tomorrow, or next year, even if stagflationary shocks are already mounting. It will happen in slow motion.” He suggests the disruptions of Covid-19 and the war in Ukraine may be “first salvoes in this slow-motion unraveling”.
Because the next recession will be stagflationary and accompanied by a financial crisis, the contraction in stock markets could be closer to 50%
Roubini suggests Italy — which has a national debt of €2.7 trillion and climbing — is particularly vulnerable. If it collapses and Germany decides not to bail it out, the euro zone could unravel, Roubini warns.
On whether equity markets will rebound — they’re down about 20 per cent from the last peak — he notes that in typical recessions, US and global equities tend to fall by about 35 per cent.
But because the next recession will be stagflationary and accompanied by a financial crisis, the contraction in stock markets could be closer to 50 per cent.
Roubini’s book is the equivalent of a cold bath intellectually, not because his looming crises are so scary but because they’re so plausible. He devotes the final and shortest segment to solutions but appears sceptical about the appetite of policymakers. “Fasten your seatbelt. It’s going to be a bumpy ride through a very dark night,” he says.
