nouriel roubini on megathreats

What Leaders Need to Know About a Looming Recession – and Other Global Megathreats | Nouriel Roubini on the HBR IdeaCast with Alison Beard (881)

Check out the Episode Page & Show Notes 

Key Takeaways

  • Megathreats are serious threats that are not only economic and financial, but social, political, environmental, technological, etc., and they are all interconnected
  • Global public debt to GDP was 100% in the 1970s, 200% in the 2000s, and 350% in 2021; these debt-to-GDP ratios are unsustainable 
  • Public debt builds up because every time there is a problem, we choose to steal growth from the future instead of experience pain in the present
  • Zombie entities can survive when interest rates are near zero because the cost to service their debt is low; however, it becomes much more difficult to service debt when interest rates must increase to fight inflation
  • Climate change affects energy prices; criminalizing the use of fossil fuels has led to underinvestment in the fossil fuel industry
  • The increased investment in the renewable energy industry is not sufficient to compensate for the underinvestment in the fossil fuel industry
  • The US has weaponized the dollar around the world, which may result in it not being the global reserve currency for much longer
  • Central banks are in a debt trap: they have to raise interest rates to combat rising inflation, but they cannot raise interest rates too high or for too long without risking an economic and financial crisis because of the all-time high levels of debt 
  • Today, we have the worst of the 1970s and the worst of the post-Great Financial Crisis (GFC) period: debt levels are at all-time highs and there are stagflationary supply shocks
  • We know that having a tight fiscal and monetary policy is needed to fight inflation, but there is so much debt in the system that central banks will be forced to pivot back to inflationary monetary policies to service the debt 
  • There will be a backlash against the private sector if the government doesn’t provide a sufficient amount of goods and services for those that have been left behind 
  • “Eventually, we need to have another major burst of technological innovation that increases productivity growth in order to start to address these problems in a more cooperative way.” – Nouriel Roubini 
  • Companies, countries, and sovereigns are incentivized to act in their own self-interest, and not necessarily in the self-interest of the rest of the world 
  • “The only way to survive a storm is to build a shield. And the shield has to be collective, rather than individual.” – Nouriel Roubini 

Intro 

  • Nouriel Roubini (@Nouriel), nicknamed “Dr. Doom”, is the CEO of Roubini Macro Associates, a global macroeconomic consultancy firm in New York. He is also a professor of economics at the Stern School of Business, New York University. Nouriel’s new book Megathreats examines the ten dangerous trends that imperil our future, and how to survive them. 
  • In this conversation, Nouriel Roubini and Alison Beard discuss the ten megathreats the world faces today, how they are interconnected, and why we must act today if we want a slight chance of avoiding them  
  • Check out these Podcast Notes on the history of central banking from Lyn Alden 
  • Host – Alison Beard (@alisonwbeard)  

Megathreats

  • Today is much different than when Nouriel Roubini was growing up in the 1960s:
    • He didn’t have to worry about climate change destroying the world
    • There were no global pandemics 
    • Artificial intelligence wasn’t taking anyone’s job 
    • There wasn’t a major war between great powers
    • There weren’t large amounts of public and private debt 
    • Demographics were an asset and not a liability
  • There were 75 years of peace and prosperity following World War II, but now there are many “megathreats” emerging around the world 
  • Megathreats are serious threats that are not only economic and financial, but social, political, environmental, technological, and more
  • All of these megathreats are related to one another; it’s like a 10×10 matrix of doom 

The Economic Megathreat & The Mother of All Debt Crises 

  • Private debt is that of households, corporates, and financial institutions
  • In the 1970s, global public debt was 100% of the GDP
  • By the 2000s, global public debt reached 200% of the GDP
  • In the year 2021, global public debt reached 350% of the GDP
  • Public debt builds up because every time there is a problem, we choose to steal growth from the future instead of experience pain in the present 
  • Governments choose to borrow from the future instead of raising taxes and cutting spending in the present 
  • Zombie households, zombie companies, zombie governments, and zombie countries have formed all over the world as a byproduct of low-interest rates and being able to borrow cheap money 
  • Zombie entities can survive when interest rates are near zero because the cost to service their debt is low; however, it becomes much more difficult to service debt when interest rates must increase to fight inflation
  • Mass defaults will happen at the individual, institutional, and sovereign levels as debt servicing costs rise with interest rates
  • Today, the United States has a higher debt ratio than it had during the Great Depression and after World War II      
  • Today’s debt ratios are absolutely unsustainable, according to Nouriel Roubini

Stagflation and Other Threats  

  • In the short-term, the rise of inflation and fall of economic growth (stagflation) can be attributed to supply shocks from the COVID-19 pandemic, the Russian-Ukraine War, and China’s Zero-Covid policy 
  • In the medium term, there are other supply shocks that will reduce potential growth and increase the costs of production:
    • Deglobalization 
    • The rise of protectionism 
    • The reshoring of manufacturing from low-cost China to high-cost Europe and the US 
    • Aging populations and poor demographic outlooks
    • China and the United States are decoupling
    • Geopolitical depression where China, Russia, North Korea, and Iran are challenging the West’s economic and geopolitical order 
  • Young people produce more and consume less, while old people produce less and consume more; this is inflationary and further contributes to stagflation
  • China, Russia, North Korea, and Iran challenging the West will lead to a fragmentation of the global economy, balkanization of global supply chains, decoupling, and deglobalization 
  • Climate change is stagflationary; a lack of water leads to droughts which leads to food prices rising in places that already face food scarcity 
  • Climate change affects energy prices; criminalizing the use of fossil fuels has led to underinvestment in the fossil fuel industry
  • The increased investment in the renewable energy industry is not sufficient to compensate for the underinvestment in the fossil fuel industry 
  • Roubini expects there to be more frequent and viral pandemics, which will reduce growth, increase carbon production, and contribute to stagflation 
  • Roubini expects an increase in cyberwarfare that will damage economic activity 
  • Rising disparities in wealth inequality have increased the number of people who are pro-union, which will result in wage growth 
  • Finally, the United States has weaponized the US dollar around the world, which may result in it not being the global reserve currency for much longer 

Central Banks

  • Central banks are in a debt trap: they have to raise interest rates to combat rising inflation, but they cannot raise interest rates too high or for too long without risking an economic and financial crash 
  • Things are worse today than in the stagflationary period of the 1970s 
  • The 1970s had supply shocks, but debt levels were low so there was no debt crisis
  • After the Global Financial Crisis in 2008, debt levels were high but there weren’t supply shocks
  • Today, we have the worst of the 1970s and the worst of the post-GFC period: debt levels are at all-time highs and there are stagflationary supply shocks

Lessons Learned from Previous Crises 

  • Central banks did not adequately fight inflation in the 1970s
  • Today, central banks will be forced to monetize the fiscal deficit, or else there will be a debt crisis
  • We know that having a tight fiscal and monetary policy is needed to fight inflation, but there is so much debt in the system that central banks will be forced to pivot
  • The world will experience a debt crisis in addition to a recession if central banks keep interest rates too high for too long

Advice for Business Leaders

  • The era of free money for corporates is over; now, as the tide rolls out, we will see who was swimming naked 
  • For some companies, there may still be time to deleverage and sell assets to reduce debt-servicing costs 
  • Reduce current debt loads because your debt servicing costs are getting much more expensive 
  • The Federal Reserve won’t be able to bail zombie companies out this time because we’re already in an inflationary period, whereas post-GFC was a deflationary period so cutting interest rates was a viable option     
  • Increase the robustness of your balance sheet 

Advice for Corporations

  • Prioritizing short-term profits at the expense of everything else will result in backlashes  
  • Corporates need to take more responsibility or else there will be economic and financial disasters 
  • There will be a backlash against the private sector if the government doesn’t provide a sufficient amount of goods and services for those that have been left behind

How to Mitigate Megathreats

  • Corporations will try to cut costs by laying off workers
  • A corporate’s labor cost is the employee’s labor income, and less income means less consumption, thus increasing the severity of the recession  
  • Many of the megathreats cannot be mitigated at the level of individual firms or countries 
  • These megathreats are global and have global externalities 
  • Companies, countries, and sovereigns are incentivized to act in their own self-interest, and not necessarily in the self-interest of the rest of the world 
    • A predicament that organizations like the International Monetary Fund (IMF), World Bank, World Trade Organization (WTO), etc.  try to mitigate
  • Living in a multipolar world with several great powers complicates global coordination relative to living in a unipolar world that has many rivalries 

But What About Technology?  

  • Technological innovations are needed to solve some of these megathreats
  • “Eventually, we need to have another major burst of technological innovation that increases productivity growth in order to start to address these problems in a more cooperative way.” – Nouriel Roubini 
  • Economic historians are puzzled that relatively recent tech innovations are not showing up in the productivity data
  • There will be winners and losers on the other side of a tech-enabled productivity boom the same way there were winners and losers with globalization 
    • If the benefits that come with technological innovation are not properly distributed, there will be a backlash against technology 
  • In the next ten years, job destruction will come from artificial intelligence and technology, not migration or trade

Optimism for the Future  

  • Being pessimistic about the future can lead to a sense of urgency 
  • The world has ignored these megathreats because they are slow-motion train wrecks 
  • Young people will have to change professions multiple times in the next 50 years because improvements in technology will continue to disrupt their skill-set
  • Roubini recommends young people study in a STEM field, but also receive adequate exposure to the liberal arts, saying “… you need a combination of the two. That’s how you survive the coming onslaught.” 
  • We can end up in another great depression unless we address these megathreats in a meaningful way
  • “The only way to survive a storm is to build a shield. And the shield has to be collective, rather than individual.” – Nouriel Roubini

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Notes By Stan Rizzo

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