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.
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Worse, this
diplomatic breakup will set the stage for a new cold war
between the US and its rivals – not just China, but also
Russia, Iran, and North Korea. With a US presidential
election approaching, there is every reason to expect an
upsurge in
clandestine cyber warfare,
potentially leading even to conventional military
clashes. And because technology is the key weapon in the
fight for control of the industries of the future and in
combating pandemics, the US private tech sector will
become increasingly integrated into the
national-security-industrial complex.
A final risk that
cannot be ignored is environmental disruption, which, as
the COVID-19 crisis has shown, can wreak far more
economic havoc than a financial crisis. Recurring
epidemics (HIV since the 1980s, SARS in 2003, H1N1 in
2009, MERS in 2011, Ebola in 2014-16) are, like climate
change, essentially man-made disasters, born of poor
health and sanitary standards, the abuse of natural
systems, and the growing interconnectivity of a
globalized world. Pandemics and the many morbid symptoms
of climate change will become more frequent, severe, and
costly in the years ahead.
These ten risks,
already looming large before COVID-19 struck, now
threaten to fuel a perfect storm that sweeps the entire
global economy into a decade of despair. By the 2030s,
technology and more competent political leadership may
be able to reduce, resolve, or minimize many of these
problems, giving rise to a more inclusive, cooperative,
and stable international order. But any happy ending
assumes that we find a way to survive the coming Greater
Depression.
Nouriel Roubini, Professor
of Economics at New York University's Stern School of
Business and Chairman of Roubini
Macro Associates, was
Senior Economist for International Affairs in the White
House’s Council of Economic Advisers during the Clinton
Administration. He has worked for the International
Monetary Fund, the US Federal Reserve, and the World
Bank. His website is
NourielRoubini.com. -
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