Nouriel Roubini Face-to-Face Keynote Lecture

Summary:

The Spanish flu has nothing to do with Spain. It came from the United States, but Spain has kept that San Benito. A century has passed. Three years ago we saw the start of Covid, the global pandemic. It has affected the whole world. We had to see how to survive, how to keep the job and the business, how to keep on earning, how to avoid hospitalisation, how to take care of the children, what was going to happen to our savings and our property. So, suddenly, an unexpected risk appeared that would completely affect our lives.

Thinking more broadly, right now we live in unprecedented, unusual, unexpected times, with constant uncertainties, possibly chaos, and a wide variety of risks. I am talking about mega-threats, which are threats that can significantly affect our incomes, our jobs, our economy, and can significantly affect humanity and its future.

One of the terms that surfaced last year is the poly-crisis, a combination of economic, financial, social, political, geopolitical, environmental, technological and commercial. A set of interconnected threats, affecting each other. Not since the Second World War have we faced such a combination of factors. Many things can go wrong, but to solve the problem you first have to know that there is a problem, to understand its consequences. Then you have to understand what you can do about it.

Since the Second World War there have been almost eighty years of relative peace, progress, prosperity. These years can be divided into two distinct periods. In the golden years, until the early 1980s, we had not even heard of a global pandemic unless we got into a history book. Until AIDS came along, nobody had heard of pandemics. Nobody had heard of climate change. Temperatures were at pre-industrial levels. The concern was about limits to growth. The Club of Rome said there was not going to be enough food and water. There was a concern about resources, but not about the climate itself. There was a risk among great powers, but, in the 1970s, it was a very small risk.

Nor had we heard about artificial intelligence posing a threat to jobs. Nor were we concerned about trade wars, protectionism, the fragmentation of globalisation. There was GATT, then the WTO, the enlargement of the European Union, NAFTA, trade liberalisation. There was even, for thirty years, hyper-globalisation, first Russia, then China, emerging markets, the global economy and global supply chains.

I was not worried about excessive indebtedness because economic growth was high. Nobody was worried about that crisis. Nor was the debt implied, as a result of the ageing of the population, because there were many young people and payrolls paid for pensions, so there was no room for this liability. There were recessions, but very mild ones. It is true that, in the 1970s, there was stagflation. But then came the great moderation, low inflation, the global deficit and everything else.

Financial crises did not worry me. Until the 1980s, when the Latin American debt crisis occurred, there were no major financial crises. Financial institutions were regulated and supervised. There were capital controls, there was order. The toxic derivatives and leverage that we have seen in recent years had not yet arrived. So there were cycles, but they were smooth cycles.

The West and the advanced economies lived in liberal democracies. There were centre-left and centre-right parties, but there was not the polarisation that we see today. Even in Europe, countries that had been authoritarian became democracies and became part of the European Union. Most democracies were liberal and stable.

The last twenty years, and certainly those of the Great Recession of 2007-2009, have changed things. We now face unimaginable threats. Today there are a number of revisionist powers: China, Russia, Iran, North Korea, Pakistan, which are indeed allies and challenge the commercial, financial, political, geopolitical and security activities, those orders sought by the United States, Europe and their allies that have been established after the Second World War.

We are not talking about a new Cold War. There is a hot war between Russia and Ukraine. In truth, we are talking about a war between the United States and Russia, or between the West and Russia. It is a terrible war, which could well turn into an unconventional war if Putin decides that nuclear could impede the advance of Ukrainian troops and could involve NATO. This conflict could lead to a third world war.

Iran is a threshold nuclear state. It has 60% of uranium and in a few months it can move to 90%. A decision has to be made. Israel has to think about whether to do something about it and what the consequences will be for Israel, its allies, the world and the global economy. When you look at events like the Yom Kippur War in 1973, or the revolution in Iran in 1979, we see oil prices tripling and stagflation and recession.

The Middle East is a source of conflict, with Iran and its Sunni allies and a number of failed states, such as Lebanon and Libya. We are on the border of Europe. We have seen mass migration from Syria, which has led to many tensions in Europe.

There are many tensions between the United States and China in Asia. It's not just about Taiwan. It has to do with who is going to be hegemonic in Asia. China is involved in problems with Japan, India, Malaysia, Vietnam, the Philippines, Indonesia, with many countries in that part of the world. Depending on how, this cold war could end up heating up, being a war between the US and China over Taiwan. The Financial Times said in October 2022 that this is a risk that could materialise before 2024. At some point there is going to be a collision. It's the Thucydides trap: rising power, declining power, cold war and hot war.

That is where we are at the moment, and that is why there is this unfolding, the fragmentation of the global economy, de-globalisation, the balkanisation of global supply chains, friend shoring. Secure trade exchanges are growing, slowly but surely, but they are growing.

On climate change, the costs are rising, things are getting worse. This summer there have been droughts in Europe, India, Pakistan, sub-Saharan Africa, half of the United States, Mexico, Central America. The economic costs of these extreme events are growing by leaps and bounds. Because of them, millions of people from the affected areas are coming from these failed states to Europe. Biden's migration policy is no different from Trump's. He is not going to consider opening the door to the EU. He's not going to consider opening the doors, so what's going to happen there.

In the fight against climate change there are too many wishes, too few realities. We talk about SDGs. There is even talk of green inflation, i.e. what is needed for batteries, minerals like lithium, zinc, cobalt, which chew up energy in such a way that fuel is expensive, so the green transition becomes a very expensive transition.

Solutions involve short-term costs and sacrifices when the benefits are medium-term. In a democracy, politicians want to be re-elected and no one wants to make the sacrifice of taking short-term measures whose benefits will be seen in the future, when they are no longer in power. In France, pension reform is so unpopular, with people having to retire at 64, that there are going to be more demonstrations than with the yellow waistcoats. Le Pen is rising in popularity and could win the next presidential election with this very radical anti-European policy. That is a threat. But if we don't do what needs to be done to solve the problems, what will happen? Well, you can also lose the election because you don't find solutions. So climate change is still serious, zero economic growth is unacceptable, and we still don't have the solutions.

If we want to comply with the Paris Agreement, that the temperature should not rise more than 1.5°C, the average carbon tax should be two hundred dollars per tonne, and today that tax is two dollars. Today that tax is two dollars. What government is going to impose a carbon tax a hundred times higher than the current one? Moreover, everyone is cutting taxes on coal because of the crisis in Ukraine. These are the constraints we face in doing what we have to do.

As for global pandemics, they are terrible, but people do not think it very likely that they will happen again soon because there have been very few such pandemics. Between 1918 and 1980 there were almost none. But since then we have seen AIDS, SARS, MERS, swine flu, Ebola, TICAM, Covid-19, and anything else will come soon. Pandemics are becoming more frequent, more virulent and more dangerous.

There is a link between climate change and global pandemics. Climate change destroys the ecosystems of animals. Those animals that have those pathogens get closer and closer to other animals and to humans. So they transmit those diseases to humans. So, if we are destroying ecosystems, the likelihood of more pandemics is higher. Climate change also releases a lot of methane. Methane has ten times more greenhouse gas emissions than CO2. Bacteria and viruses that are, for example, in Greenland, come to light when the ice sheet melts, so we don't know what diseases may emerge when the ice melts and those pathogens are released.

Some of these threats are long-term, such as a war or a pandemic. But in the short term we have to worry about inflation and recession. Normally, when there is inflation, there is a lot of economic growth and vice versa. But this phenomenon of high inflation and negative growth, which we call stagflation, raises the debate of how much is due to some policies that were too loose for too long - we needed them during Covid, but we overdid it - and how much is due to bad luck.

We have had three shocks on the supply side: Covid, on the production of goods and services, the supply of labour and the shutting down of supply chains: Then we have the impact of Russia's invasion of Ukraine, with the prices of raw materials, metals, fertilisers, and so on. And then the zero Covid policy in China also created a lot of bottlenecks in supply chains. It was a combination of both bad policies and bad luck. But even if these negative supply shocks were to disappear, surely in the next decade we are going to see stagflation because there are more negative shocks in the medium term that reduce output and growth, increase the cost of production, which leads to a recession. Protectionism and de-globalisation drive up the cost of production.

We now talk about secure trade, rather than free trade. We also have the fact that manufacturing is moving from the south to the north, from China to other countries. We are not going to have secure global supply chains; we are going to have multiple supply chains, because if there is friction in some of them we can opt for the others.

We have ageing populations in advanced economies and emerging markets. Ageing is inflationary because young people work, produce and tend to save. Older people retire, they do not produce and consume, they no longer save. The impact of this is stagflationary. In the past, migration from the south to the north kept wage growth in check. But, now, there will also be labour cost inflation.

The alliance between China and Russia is going to increase the international cost, there will be less growth, everything is going to go up. Climate change is also stagflationary. Even before the invasion of Ukraine, food prices were rising because of the lack of water and droughts. Or it has an impact on the cost of energy. Natural gas and oil producers are being told that they are emitting, so they are not going to be financed anymore, so they are not investing in increasing production capacity and they are not being compensated. Therefore, even without the situation in Ukraine energy prices would be very high. For all energies, because not enough has been invested in copper, in cobalt, in all these elements. So there is not enough supply, so the price is going to go up. So inflation is not going to go down very much and commodity prices are going to go up by 40% this year.

Pandemics are stagflationary. They reduce production, increase production costs and create these bottlenecks, and more to come. Then there is cyberwarfare. There you stop production in a company, or if you have to protect yourself, you spend a lot of money to do so. This is also inflationary.

A couple of other factors are stagflationary. There has been an increase in income inequality. So there is a negative reaction against liberal democracies. Fiscal policy is becoming pro-worker, pro-immigrant, pro-people affected by other problems, pro-minority, because if we don't help them, there is going to be social tension, there is going to be violence, there might even be a revolution if there is too much inequality. As a result, labour costs are going to go up. This increases inflation.

The United States and its allies are using sanctions to punish their rivals, affecting reserves in dollars and other currencies. But by doing so, these countries may be diversifying their reserves, moving into gold rather than just the dollar. This may affect the value of the dollar and, by creating friction in international trade payment systems, this may lead to higher costs because dollars and euros are needed to make payments for trade in goods, services, technology, capital, information. This is also stagflationary.

On the demand side, we have the risk of the mother of all debt crises. We are in a world where private debt and public debt, as a percentage of GDP, have risen dramatically. Private debt is the debt of workers, companies, banks and other financial institutions. Public debt is the debt of central and local governments. That debt ratio was 100% a few years ago, in the 200th it was 200%, last year 350%, in advanced economies 420% of GDP. Until very recently, debt ratios were high, but debt service ratios were low because there were negative interest rates due to quantitative easing, so the interest paid on that debt was low. Government debt in Japan, mortgages in Denmark and corporate debt in some countries had negative rates. But we are lucky because in the two previous shocks there was a demand shock and deflation, so there was a lot of easing. That helped everybody, rates stayed low, even though debt was very high.

Unfortunately, that has come to an end because central banks have to raise interest rates to fight inflation. Therefore, the cost of financing mortgages, buying a car, studying, for companies, etc. is increasing. Those who are highly leveraged are going to find themselves in a situation of financial stress with the risk of default. That's why I fear that the current recession is going to be quite serious because inflation is going to remain high, central banks are going to raise interest rates more than we expect. The ECB is not going to be able to leave it at 3%. And there is so much debt in the system that we are in a debt trap. There may be a shock in the stock market. One thing feeds the other and makes the recession even more severe.

Then we have the implicit debt of governments. The number of old people is increasing and the young people have to pay for the pension of the old, so when they retire there is not going to be enough money for them. So the pension system, which is not popular, is going to have to be reformed.

I believe that, in the end, governments are going to amortise the real value of debt with inflation. If you can't tax more, or have less public spending, the solution is inflation, which is a tax. On the supply side we have negative shocks that have to be monetised, but we are not going to avoid the debt crisis. Simply, interest rates become higher, they become unsustainable, so what we do is postpone the problem.

All these problems increase inequality and violent reactions against liberal democracies. Unfortunately, in the world, for example, Erdogan in Turkey, Putin in Russia, Kaczynsky in Poland, Le Pen in France, are on the rise. Populist parties are on the rise. We have the Brexit phenomenon, in the United States the Trump phenomenon. On the left, in Latin America, we have a couple of populists in Argentina, Venezuela and, in the last two or three years, also Mexico, Colombia, Chile, Peru, Brazil, all have gone to a level of populism. In Brazil they had to choose between a dangerous right-wing populist like Bolsonaro and Lula, who in his second term did a terrible job. In the United States on 6 January 2001 there was a near military coup that failed. Last week something similar happened in Brazil.

We cannot take democracy for granted. When people feel their future or their children's future is threatened, when there is more inequality, people become more radical, more authoritarian. And authoritarian regimes, when they don't do well, go to war, like Putin in Ukraine or Argentina in the Falklands.

For each of these threats there are solutions. But we cannot start by saying that if we had better leaders, if we did this, things would get better. It is not that easy. We cannot take the last seventy-five years of peace and prosperity for granted because, in these last seventy-five years, the first forty years were like that, but in the last twenty years these threats emerged and they are becoming more and more serious. So the assumption that the future is going to be like the past is not necessarily true. In the 1970s, there was also a disaster. Despite the industrial revolution, despite the first era of globalisation, we could not avoid the First World War. Then we had the Spanish flu, then we had the stock market crisis of 1929, the beginning of the Great Depression, trade wars, currency wars, inflation, hyperinflation, deflation, financial crises, defaults. Then came Hitler to power in Germany, Mussolini in Italy, Franco in Spain, an authoritarian regime in Japan and the Second World War and the Holocaust. Only after this disaster did we create a supranational, global institution of governance that would avoid these problems and bring peace and prosperity.

The threats I am talking about today are more similar to the period between 1919 and 1945. They are not only similar, they are worse because in those years you didn't have to worry about climate change. It didn't exist. You didn't have to worry that artificial intelligence was going to destroy jobs. There weren't even computers. Nor did they worry about the ageing population because people were dying before they got their pensions. World War II was conventional. Only in 1945 did the United States have the atomic bomb and, unfortunately, used it on Nagasaki and Hiroshima to end the war. Today if there were a war between the great powers, China, Russia, Iran, North Korea and Pakistan all have the nuclear bomb. A war between great powers that starts conventionally can soon become unconventional. This is guaranteed. So this is the kind of thing we have to think about when we think about the future.

Is there hope? Maybe, but it has to come not from throwing the ball forward, or sticking our heads in the sand like ostriches, or not paying attention to threats. We have to stop leading like zombies, as if these threats do not exist, and realise that each of us can do something. We can do it collectively, organising ourselves in social and political movements to solve these problems in our own societies. But also to find a global solution, because most of these problems are global and cannot be solved with a national solution. Financial and economic crisis, trade integration, security and global peace cannot have a national solution, it has to be global. The success of the last seventy-five years depended on globalisation. Europe alone, if it had not united with small countries with no influence on global affairs, would not have had such prosperity. European integration gave Europe a lot of strength, and many countries, including Spain, have benefited. Problems are global and therefore we need global governance, whether we like it or not. Europe is a success story, despite all its problems. So we have to stop dreaming and be aware that we have to take it seriously on an individual and collective level. Sacrifices have to be made. They will be painful, but the benefits will be for us, our grandchildren and humanity in the future.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of their authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

• Facebook
• X
• LinkedIn