Storm Clouds Looming: Q&A With Nouriel Roubini

Nouriel Roubini, who predicted the 2008 financial crisis, has a new book, Megathreats: The Ten Trends that Imperil Our Future, and How to Survive Them. He shares his thoughts on stagflation, the climate crisis and how the corporate sector is responding.

Global Finance: Which of the ten mega threats are most relevant to the corporate world in the short to medium term and why?

Nouriel Roubini: The risk of inflation together with recession—stagflation. In the 70s, the global debt-to-GDP ratio was 100%. Today in advanced economies, it is 420% of GDP and rising. My worry is that we’re going to have a very severe debt crisis.

In the last 10 to 15 years there has been a buildup of corporate debt and shadow bank lending to the corporate sector. That buildup of excessive and toxic corporate debt became even more extreme after Covid-19. All the zombie institutions that survived before because we had negative [interest] rates, quantitative easing [and] credit easing, now face rising debt servicing ratios. The dawn of the zombies is over.

Today, we have the worst of the 70s in terms of negative supply shocks—Covid-19’s impact on the economy, Russia’s invasion of Ukraine, China’s zero-Covid policy. I worry that the Great Moderation is over, and the Great Deflationary Debt Crisis and instability is upon us and not just for a year or two, but it’s more of a medium- to long-term phenomenon.

GF: Do we need to let financially distressed companies, banks and people fail?

Roubini: So, usually the Keynesian reaction of backstopping the system (monetary, fiscal, credit easing) is based on the idea of preventing a great recession from becoming a great depression. But on the other side, there are also institutions that are truly illiquid and insolvent, and the Schumpeterian principle of creative destruction has to work. If you don’t allow that creative distruction, you have zombie institutions kept alive and then there is economic inefficiency.

Fine-tuning the balance between the two is an art rather than a science. You have to do triage, otherwise you end up in zombification, like Japan, stagnating with, essentially, deflation and mediocre economic growth for 20 years because they kept zombies alive for too long. Doing it right is complicated.

GF: Are the Fed and other central banks taking the right approach?

Roubini: Central banks are damned if you do and damned if you don’t. They are talking tough [but if] faced with a debt crisis and an economic crisis, they’re going to wimp out. They’re not going to want to [raise rates further], meaning there is a debt trap. It’s a bit like during the Great Financial Crisis people said, “What’s the solution?” The problems had built up for 20 years, and once it happened, we had to go through the mess. Unfortunately, I feel that this time around we’ll have to go through the mess. There is no simple solution to these threats.

GF: What is your sense of whether corporate leaders understand the climate crisis?

Roubini: Every big corporate has a white paper on how they’re going to achieve net zero eventually. Frankly, most of it is greenwashing and “greenwishing”. All of those net-zero plans are a bit of a joke. They’re not really serious. They’re written by their PR or communication departments rather than based on hard choices. It’s very costly in the short run to do the stuff that gets you the net zero.

GF: Do you think Big Tech will lose market leadership under this new scenario?

Roubini: The world is moving in the direction of more digitalization and, after Covid-19, hyper digitalization. That’s why Big Tech firms did very well. Valuation became excessive and that’s why we see the correction of stuff that is more VC-related, especially [those businesses] without any successful business plan. Stuff that is tech-related is hit by rising interest rates because they are long-duration assets, [which] are more sensitive to interest rates than shorter-duration assets. That’s why the Big Tech stocks corrected a lot more than S&P this year. But the future is a future where firms in AI, machine learning, Big Data, 5G, 6G, IoT, cloud, quantum, biotech and tech in general are going to do well. 

GF: If the war in Ukraine ends, to what degree would this resolve the biggest problems? Or are there too many other threats to make much difference?

Roubini: It’s not going to make much difference. Food prices were already spiking before the invasion because you have desertification of lots of parts of the world, and therefore the food supply is limited. Brent was already at $100 a barrel before the invasion. The capacity of renewables has not kept pace with the reduction in capacity in fossil fuels, so we now have a structural supply problem. Paradoxically, dealing with climate change and bashing Big Oil has led now to a spike in fossil fuel prices, regardless of what’s happening in Ukraine.

Many of the problems of geopolitics have to do more with Asia—China, the US and Taiwan. Fifty percent of all semiconductors in the world and 80% of high-end [semiconductors] are produced in Taiwan. So, if there was a confrontation in Taiwan, the shock to the global economy is going to be much bigger than any spike in oil and food prices.

Given the fundamental problems of the world—climate change, geopolitical conflicts outside of Russia/Ukraine, pandemics, the risk from AI, the risk of deglobalization, inflation, stagflation, tech problems, backlash against liberal democracy—Russia’s invasion of Ukraine is just a small footnote, frankly.

GF: The US is investing around $50 billion in domestic chip companies and Taiwan Semiconductors is putting up $40 billion to build a plant in Arizona. Will this make any difference?

Roubini: [New regulations mean that] now any high-end semiconductor with a US design cannot be sold to China, not even the machinery that produces semiconductors. No American citizen or resident can work for a Chinese chip firm. This is a policy of outright containment because of course, whoever controls chips will control AI, machine learning, quantum—you name it. China’s not going to take lightly this attempt at full technological and economic containment. They can counter-sanction in the short run because they produce or process most of the rare-earth metals that are used in electric vehicles. That could be their first response. And they may become more aggressive  towards Taiwan. The head of the US Navy said a few weeks ago that the risk of China doing something in Taiwan could happen before 2024, which means this year. It’s a race on dominating the world both economically and geopolitically.

GF: Given all these looming perils, have you found any reasons to be optimistic?

Roubini: To me, to be optimistic means to accept reality and then do something about changing the world for the better in many small and big ways. If more of us do it, we are going to go in the right direction. Many young people are a little more engaged than other generations and maybe, once they start to get engaged and vote and be politically organized, they can move the needle in the right direction. That’s the hope.

The world and the future depends on whether we have the collective will to address these megathreats before it’s too late. Unfortunately, they are costly to make because of all the political constraints. So we tend to kick the can down the road…hoping that either a miracle or technology are going to resolve [them].

Then there is a more utopian scenario, where a combination of good policies, good leadership, some luck and massive technological innovation allows us to address these threats. But the desirable outcome looks less likely than the dystopian one.