Nouriel Roubini on Economic Threats, Dollar and Fed

I'm gonna go back I want to give people a little vignette of yours in my relationship we're sitting at a wood panel Davos like bar and it's a very famous Secretary of Treasury sitting somewhat near us and you and I walked through the excesses of 0506 and you nailed 2008 are we there again yes we are here again but in addition to the economic monetary and financial risks and there are new ones now we're going towards stagflation like we've never seen since the 70s in the book I point out that there are also geopolitical risk like we are on a confrontation with some revisionist powers like China Russia Iran or Korea that are challenging the geographical order of U.S and the west and that's going to lead potentially to conflict there are environmental risks that are very severe there are health risks coming from pandemics and there is a relation between global climate change right and pandemics there are technological risks coming from AI machine learning robotic automation destruction of jobs there's a backlash against globalization and we're going to go to a world that is the globalize there are political risks where polarization and we have radical extremist party or the extreme right and extreme lives coming to power both in advance economies and in emerging markets and on top of it we have amount of the debt like we've never seen before explicit that well what is it that's right where I want to go is a Confluence of all these Mega threats none of them together IMF was heeded about the debt buildup on the back of your book you've got a guy named rogoff from Harvard Bremer of Eurasia Dr illyrian from Cambridge Martin Wolfe always wonderful at DFT and at the very top the quote of the season from taleb the gravities return to the physics we've got a higher real yield now we've got a risk-free rate now what are the ramifications in our economic system that the gravity is return to our physics well there were many in solvent agents in the economy because private and public debt as a shadow GDP has gone from 200 percent to 350 globally between 2000 and today in advanced economies more like 420 and rising in the US is now higher than after the Great Depression and after World War II and we're not out of a Great Depression or a major war and until now even if you had zombie households corporates Banks Shadow Banks governments countries they were built out they were built out during the global financial crisis zero policy rates negative quantities credentialism and even during the covet crisis many of them were fragile they were built out again we went back to do even more of the same this time around instead is different because we have so much debt and central banks like the Fed Up to increase interest rates to fight inflation so that zombie institutions are going to go bankrupt that's why not only we're going to have inflation and circulation but we'll have a stagflationary debt crisis in the 70s we had negative Supply shock 7 379 but with very low debt ratios so we didn't have a debt crisis in advanced economies we had one in Latin America Argentina Mexico Brazil Borough too much in the 70s when vulgar and jacked up interested 20 they went bankrupt after the GFC we had the debt problem mortgage diet housing debt Bank debt and we added that crisis but was a negative aggregate demand shock and therefore we had low flation and deflation today we have the worst of the 70s with a massive amount of stock flashery negative Supply shock in the book I identified 11 new ones over the medium term and at the same time with that ratio like we've never seen before so we get inflation with that price so don't give us the 11 themes John or we'll be here all day I was waiting for the 11s jumped in we used this phrase in there I could tell you in this in the Sun by about 11. I'm not going to give you the time you said zombie institutions yeah where are they and are you talking about countries now and not companies not households not private balance sheets are you talking about countries sovereigns oh well there are plenty of sovereign that are in trouble in Emerging Market we know what has happened in Lebanon what has happened in Zambia what has happened in Sri Lanka and there's about 40 of them that the IMF in the World Bank said that on the verge of having a debt crisis severe that crisis because of what's happening and look what happened to the United Kingdom and now it started to be pricing like an emerging market with the fiscal stimulus Reckless forcing the bank of England essentially to monetize it and then the currency falling and rates going much higher until they reverse themselves so it has happened in Greece it's happening in the UK it could happen in Italy of course we have a large number of not only emerging markets that are at risk but also advanced economies that are resource so over the last 10 years we've had a series of counter-cyclical circuit breakers fiscal had the capacity to do that yeah central banks had the capacity to do that similarly we're questioning the capacity of those institutions central banks sovereigns to be able to do so this time around you offer Solutions in this book too what are they well for every one of these Mega threats there is a solution but then there are two final chapter one about a dystopian future where all these threats materialize they feed on each other and it's not just the end of the world economy it could be even global war and there is a less dystopian future in chapter 12 where we have the policies nationally and internationally that leads us to a better outcome the problem is there are both domestic political constraints and geopolitical political constraints to achieving the best solution and I'll give you an example of global climate change domestically in this country half of the country doesn't believe into it two there is a conflict between generation the young people care about the future they already care less at the international level there is a free radical problem if a country can't submission to zero nobody else does it then they don't get benefit and only the cost and not because of geopolitics we're telling India and China you should cut your emission out to their next 20 years but we created a problem in the last 200 years 90 of the stock of a mission came from advanced economies and now we're telling them don't grow don't become rich because there is a problem is through the flow of new emissions coming mostly from China and India so there are four elements of conflict two domestic and two International they essentially implied that we're not going to find the right solution so there's lots of green washing green wishing during fig leaves a lot of esgs just talk and no action Glasgow cop was just a total failure and or slow motion train wreck which goes to your point John about electric vehicles nine thousand pound EVS in the United States because they're green there is an issue there going forward with the central banks and whether a lot of your thesis scenario is predicated on their inability to go through with what they need to do to get inflation down is that your base case is that the most likely outcome yeah right now all central banks are playing tough and talking tough and acting tough hawkish because they have a problem of credibility but in my view there are two problems one problem is that they if they try to get to two percent inflation they cause a recession and this recession is not going to be short and shallow it's not going to be Garden variety it's not going to be playing vanilla it's not going to be two quarters of negative growth then inflation collapses and they can ease again in the book I explain all the reasons why it's going to be a severe recession because of the debt ratio because we're going into fiscally monetary tightening and at the same time not only have an economic crash you're going to have also a fiscal crash where not only in fiscal dominance in this game of chicken between treasure and Central Bank where in what the folks at the bank of international settlement call a death trap there is so much private and public debt that if central banks try to fight inflation they cause a crash of financial markets and not just the stock market that's the least important credit Market Bond markets and that crash and financial crash feeds on the economic crash and vice versa and therefore they're going to whimp out and they're going to Blink and the first one was the bank of England the FED is going to do the same DCB is going to do the same have you been surprised that we haven't seen some sort of catalyst some sort of financial stress so far given how quickly quickly the FED has already hiked rates well we've not yet seen it some people worry there's some major Financial institution not in the U.S may go bust I think that the financial strains are going to become more severe because right now the FED is on the way to go from three towards five percent you already have a stock market down 25 NASDAQ even more public rates 33 percent you have the crash of Mimi of spark bubble of the crypto Bible private Equity Venture Capital Growth everything is down credit is down leverageable Market is shutting down Silo Market shutting down and the only thing they used to be safe there were government bonds now the crisis correlated positive equities because when inflation is rising you lose money on your Equity side you lose money on your bond side yields have gone from one to four and the price action downward on bond has been worse than inequities 30 losses so any 60 40 70 30 or disparity portfolio lost money on both hands there was nowhere to ride even cash gave you a negative real return because of inflation there are other Alternatives that can protect you against these still risk but they're not the traditional ones you're a man of high conviction we know that you've also got some very smart friends if you had any pushback to this book that's convinced you of absolutely anything made you rethink how bad things might be impossibly made you think that possibly they could turn out better than you think uh honestly everyone was ready then any level I said the threats you're talking about they're all too real of course there may be solution to them and I discussed them chapter by chapter in the Final Chapter about the less dystopian future but think of it this way I have gray hair I grew up in the 60s 70s in in Italy at that time did I ever hear about climate change the general concept did I worry about the nuclear war after the town between Soviet Union U.S there was nothing they worry about AI destroying most jobs we're in the high winter with the stable democracy we didn't have pandemics last time Iran was 1918 we had low debt ratios with low implicit debt because there was no aging or population and all that funded liabilities there were no major Financial economic crisis this is a Quantum shift there was a period in 1945 in the mid-80s that was something of a stable period Global Prosperity welfare peace and so on today these are threats that did not exist and those threats are more similar to the period in 1918 and T45 when we had World War One World War II the greater depression trade War financial crisis inflation hyperinflation deflation Nazis fascists in Germany and Italy Spain and and Japan and with World War II and then with the Holocaust and then with the Korean War yeah as as Neil Ferguson on Bloomberg is saying right now in Scotland this week it says we'll be lucky if we repeat the 1970s because it's more possible we end up like in the 1940s meaning he's talking about World War III I love Neil but can we be clear that wasn't a column that was a book on Bloomberg opinion mostly have you read that it's a long column can you tell Neil The Columns are short I love it because you know he's speaking about he's speaking about the fact that it's a meaningful chance that we have flu inflict between and I write it about in my own book there's a chapter about the new cold war between us and this revision is power and I say it could end up into a hardware it's a significant risk I want to go to the past and I was so pleased that you mentioned on page 37 your colleague Alberto alicina I still can't believe we lost him at such a young age you two looked at the politics of our economic system rubini and Albert Alberto alicina I want to bring it forward to where we are now which is a massive dollar shortage and central banks they've got a plan but they're going to be overrun by a global dollar shortage in em and frankly in developing economies as well is there a Dollar shortage now and is that the Catalyst for central banks to Blink is going to be one of the catalysts there is a dollar shortage and there is an interest is the United States is particularly dramatic for em they're the terms of trade shock those that are importing Commodities they have a rise in interest rates because of what the FED does and they have their own domestic inflation and that the weekend of the currency that increases the real value in local currency of their own debt so for them it is a perfect storm some of them have a lot of reserves some of them don't have reserves some of them receive IMF money but there is right now A strengthening of the dollar that's implying even further tightening of financial conditions in the rest of the world now I think that eventually the dollar is going to have to fall very sharply because we're between fiscal and current account deficits in other Advanced economy you have a fiscal deficit but with a currency can Surplus and now we're essentially using the dollar is a tool of National Security and foreign policy we're weaponizing it directly so sanctions against Russia against Iran North Korea China we're starting by the way war with China economic world this is what will be sanctioned about for dollar weakness how do we get there forget about this Plaza is going to be essentially the FED wimping out once you see a severe response that means blinking right yeah blinking they're gonna blink and wimp out because you'll have a severe recession it's a mega threat to wimp out well either you're a hardcore you're a wimp and so or a dove in this case uh but that's gonna happen and once the FED is gonna essentially prevent an economic and financial class so try to prevent it by essentially stop raising rates even inflation is too high then the dollar is going to start sharply weekend that's going to be the trigger for it because what's raising the dollar is of course the tight monetary policy a viewer wrote in and wants to know what you're doing with your money considering that it seems pretty bleak out there you know do you just stuff it into a mattress no you don't stuff in the mattress because then even cash loses money because of inflation there are three solutions to the problems of inflation the basement of yet currency political and geopolitical risk and environmental risk solution number one is to have very very short-term treasuries that adjust in the in rates and don't have the price action of long bonds that have a fall in their price secondly you want to be into tips even if tips right now have not yet done well because inflation expectations are not yet the anchored I think you want to go into gold and precious metal again gold is not done very well because you have tight monetary policy a strong dollar but if central banks are going to Blink and wimp out gold is going to rise in value those are going to Rising value also because the enemies of the US are subject to sanctions China allows worried they have a trillion dollars of reserves in dollar they have to move to other things if it's Euro and Yen they can be seized the only thing that cannot be seized is gold of course not in the vault in New York or London but in Beijing or in Moscow and so on and finally appropriate types of real estate that are environmentally resilient because real estate compared to equities in recessions as well because you have more pricing power for rents and so on so a combination of these assets provide you in an optimized way a hedge against some of these terrorists on the flip side you've always been brilliant on leveraged in the system I'm credit and we've heard from one fund manager after another that there is resilience in this corporate credit sector even with the debt that they have even with the low coupons that they're currently paying that will reset higher do you disagree do you think that people are overly sanguine about the upcoming credit cycle yeah right before the covet crisis the Fed was writing reports on financial stability pointing out the leverage of the corporate sector of course high yield and Fallen Angels but then during kovid these folks should have gone past but they were built out we bought even high yield that you remember commercial paper and everybody on that Sun so the zombies were built out and the excesses of having leveraged loans closed light got even worse and people got even more indebted this time around the party is over because the FED for now will have to raise rates does that service Generations are going to become impossible and you get the double whammy for those corporates you get a PLL because income is going to fall because of recession and you get a debt problem with that service area rising and therefore there'll be a corporate debt crisis one we avoided during the GFC and during the covet crisis the clo and leverageable Market are shutting down right now I want to get to chapter 12 where you talk about a more optimistic future a utopian future you started by quoting The Economist Yogi Berra I thought that was very good you go right in there about predictions in Yogi in the future and all that how do you get from Yogi Berra to a more optimistic future well the model of instinct future starts with essentially technological innovations like for example I don't think it's going to be renewable maybe Fusion if Fusion happened then you can have unlimited amount of essentially energy a cheap cost with no greenhouse gas emissions we look like we are however only 15 to 20 years away from Fusion becoming a reality if it comes faster then we can increase the economic pie we're going to reduce the cost of energy we're going to stop greenhouse gas emissions we can grow more what about the fractures what about our fractured political system whether it's your Italy and the turn there to the right or what we see in the election here coming up in two weeks how do we get Beyond this fractured political system uh for now we're going to go to a world that is even more divided domestically there's more polarization there's lack of partisanship and it's happening I mean you have authoritarian regimes in power you have put in in Russia you have erdogan in Turkey you have kazinski in Poland you have Orban in Hungary you have melon in Italy you have these Nazi Swedish Democrats now in Sweden yet the brexit phenomenon you had the Trump phenomenon and in Latin America used to be only Venezuela Argentina populist of the left but in the last two years Chile Ecuador Peru Colombia right or the left so that's the world we're going unfortunately is a world that is not liberal democracy if you saw the movie right here no not yet

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Length: 17min 48sec (1068 seconds)

Published: Tue Oct 25 2022