The Coming Greater
Depression of the 2020s
By
Nouriel Roubini
While there is never a good time for a
pandemic, the COVID-19 crisis has arrived at
a particularly bad moment for the global
economy. The world has long been drifting
into a perfect storm of financial,
political, socioeconomic, and environmental
risks, all of which are now growing even
more acute.
April
29, 2020 "Information
Clearing House" -
NEW YORK – After the
2007-09 financial crisis, the imbalances and risks
pervading the global economy were exacerbated by policy
mistakes. So, rather than address the structural
problems that the financial collapse and ensuing
recession revealed, governments mostly kicked the can
down the road, creating major
downside risks that
made another crisis inevitable. And now that it has
arrived, the risks are growing even more acute.
Unfortunately, even if the Greater Recession leads to a
lackluster U-shaped recovery this year, an L-shaped “Greater
Depression” will follow
later in this decade, owing to ten ominous and risky
trends.
The
first trend concerns deficits and their corollary risks:
debts and defaults. The policy response to the COVID-19
crisis entails a massive increase in fiscal deficits –
on the order of 10% of GDP or more – at a time when
public debt levels in many countries were already high,
if not unsustainable.
Worse, the loss of income for many households and firms
means that private-sector debt levels will become
unsustainable, too, potentially leading to mass defaults
and bankruptcies. Together with soaring levels of public
debt, this all but ensures a more anemic recovery than
the one that followed the Great Recession a decade ago.
A
second factor is the demographic time bomb in advanced
economies. The COVID-19 crisis shows that much more
public spending must be allocated to health systems, and
that universal health care and other relevant public
goods are necessities, not luxuries. Yet, because most
developed countries have aging societies, funding such
outlays in the future will make the implicit debts from
today’s unfunded health-care and social-security systems
even larger.
A
third issue is the growing risk of deflation. In
addition to causing a deep recession, the crisis is also
creating a massive slack in goods (unused machines and
capacity) and labor markets (mass unemployment), as well
as driving a price collapse in commodities such as oil
and industrial metals. That makes debt deflation likely,
increasing the risk of insolvency.
A fourth
(related) factor will be currency debasement. As central
banks try to fight deflation and head off the risk of
surging interest rates (following from the massive debt
build-up), monetary policies will become even more
unconventional and far-reaching. In the short run,
governments will need to run
monetized fiscal deficits
to avoid depression and deflation. Yet, over time, the
permanent negative supply shocks
from accelerated de-globalization and renewed
protectionism will make stagflation all but inevitable.
A
fifth issue is the broader digital disruption of the
economy. With millions of people losing their jobs or
working and earning less, the income and wealth gaps of
the twenty-first-century economy will widen further. To
guard against future supply-chain shocks, companies in
advanced economies will re-shore production from
low-cost regions to higher-cost domestic markets. But
rather than helping workers at home, this trend will
accelerate the pace of automation, putting downward
pressure on wages and further fanning the flames of
populism, nationalism, and xenophobia.
This
points to the sixth major factor: de-globalization. The
pandemic is accelerating trends toward balkanization and
fragmentation that were already well underway. The
United States and China will decouple faster, and most
countries will respond by adopting still more
protectionist policies to shield domestic firms and
workers from global disruptions. The post-pandemic world
will be marked by tighter restrictions on the movement
of goods, services, capital, labor, technology, data,
and information. This is already happening in the
pharmaceutical, medical-equipment, and food sectors,
where governments are imposing export restrictions and
other protectionist measures in response to the crisis.
The
backlash against democracy will reinforce this trend.
Populist leaders often benefit from economic weakness,
mass unemployment, and rising inequality. Under
conditions of heightened economic insecurity, there will
be a strong impulse to scapegoat foreigners for the
crisis. Blue-collar workers and broad cohorts of the
middle class will become more susceptible to populist
rhetoric, particularly proposals to restrict migration
and trade.
This points
to an eighth factor: the geostrategic standoff between
the US and China. With the Trump administration making
every effort to blame China for the pandemic, Chinese
President Xi Jinping’s regime will double down on its
claim that the US is conspiring to prevent China’s
peaceful rise. The Sino-American
decoupling in trade,
technology, investment, data, and monetary arrangements
will intensify.