Nouriel Roubini: Megathreats
Become a sustaining member of the Commonwealth Club for just $10 a month. Join today. Good afternoon, ladies and gentlemen. Welcome to today's Commonwealth Club program. I'm Barry Eichengreen, professor of economics and political science at UC Berkeley and your moderator for today.
And it is my special pleasure to be able to introduce Nouriel Roubini and his new book, Mega Threats Ten Dangerous Trends That Imperil Our Future and How to Survive Them. Nouriel is CEO of Roubini Macro Associates. He is also professor emeritus of economics at New York University's Stern School of Business. Nouriel has extensive policy experience, having served on the White House Council of Economic Advisors and as senior advisor to the Undersecretary for International Affairs at the U.S. Treasury Department. He has consulted for numerous private and public institutions, including the World Bank and the International Monetary Fund.
And I would add that Nouriel and I have known one another for the better part of 35 years. A reminder to our audience that we encourage you to submit your questions for Nouriel in text chat on YouTube, and I will channel them when when the time comes. Nouriel is well known for his gloomy view of the world and for predicting financial crises. It can be said, of course, that if you're always predicting that it's about to be met, you'll be right once a day. But Nouriel has done more than that. He nailed the timing of the 2007 2008 Global financial crisis.
And he shows by the timing of this book, it's coming out precisely when everyone is on edge about the next financial crisis that that wasn't a one time achievement. So well done, my friend. You are the master of timing. So, Nouriel, to quote the conclusion of your book, the world is facing ten mega threats over the next couple of decades. They will lead to a type and a collision of economic, financial, technological, environmental, geopolitical and social forces. This isn't exactly an uplifting book, is it? No, it's not the uplifting book about this, in my view, or at least the book, because it deals not only with the traditional economic, monetary and financial risks and threats.
I'm an economist and I usually believe in comparative vantage, but I look at the world and I saw there were broader trends and risks that we have to be aware of. And I must say, I've known you since I started grad school, and you taught me economic and financial history. And the period between 1918, 1945, as we know, was a period of two world wars, of a Great Depression, of trade wars on one side, hyperinflation on the other side, deflation of geopolitical tensions, the rise of the power of Nazis, of fascist Germany in Italy, and then seeing militaristic regimes in Japan and even in Spain. And we had World War Two and we had the Holocaust without even a major global pandemic in 1918.
So we tend to project from the recent past and we believe maybe that the next 30 years are going to be like the last, that the quarter of a century, that there's been a period of relative peace and prosperity and not that there were not crises and so on, but we've never had the same war explicitly between great powers and economic cycles until recently were relatively mild, that we had stable democracies within a worry as much about climate change or pandemic. So right now, in addition to the economic risk, of course, there are geopolitical ones that are four revisionist powers China, Russia, Iran and North Korea, which challenge the economic, social, political and geopolitical order created by U.S., Europe and the West after World War Two. Climate change is a major, major threat, of course, a now global pandemics that actually are related. As I explain the book to global climate change.
We have technological risks. What's going to be the implication of A.I. machine learning? Robotic automation for labor? But blue collar white collar jobs. Low value added high value output.
And for labor income, there's a threat of the globalization and fragmentation and Balkanization of the global economy and of protectionism. And, of course, on the economic side, we've had a massive build up of private and public events, a historic irony to GDP. I worry about the mother of all of that crisis in due time.
I worry not only about explicit debt, but also implicit unfunded liabilities coming from aging and unfunded physical Social Security and health care Medicare system. I worry about the return to the seventies negative supply shocks of various sorts that may reduce growth, increase the cost of production. And we have loose monetary fiscal policy lead to inflation and to recession, to stagflation, what the economy call. And then we have repeat that boom bubble bust in crisis cycle in part because of the monetary policies that were necessary. At times of this, monetary and fiscal and credit policy have become excessive.
And they are leading now not only to financial cycles, but also inflationary cycles. So there is a problem of financial stability. And finally, we are seeing a backlash against the liberal democracy. Populist parties of the extreme right and extreme left are coming to power in a wide range of both advanced economies and emerging markets.
There's a threat to liberal democracy, in part because that people are left behind that are angry. There is a rise in income and wealth inequality and therefore those who are left behind, rightly so, are bashing the elites, saying that you essentially don't care about us. So there is also social political instability is like a ten by ten matrix in which each one of these mega threads affects the other and is affected back. So I thought that you have to go beyond economics to try and understand much of the world economy, but the world at large.
Final point I'll make as an introduction. The book is about the next 1020 years, but lately each and one of the megatrends that I'm talking about is materializing literally today for looking step by step at least one of these threads I would explain or how that materializing this year in the economy, in the markets, in the policies and all the geopolitical tensions. So this is not about what disaster could occur 20 years from now is how much those dangers are rising and becoming real threats in the current, present time and the near future, not just the far distant future. That is a lot for us to get our minds around in the next 40 minutes or so.
Maybe we can start by focusing on a topic that is near and dear to your heart and my heart. Financial stability. So you're deeply worried about financial stability and and looming threats to it.
But haven't we learned a lot since the global financial crisis 15 years ago? Didn't we successfully avoid bank failures and a financial crisis during the COVID downturn? Didn't Ben Bernanke, Doug Diamond and Phil Big just win the Nobel Prize for their work explaining financial fragility and how to prevent it? Well, I think that we do agree that when there is a severe economic downturn and there is a collapse of asset prices, the real economy and the financial economy can feed on each other in a way that creates even more of a economic collapse and financial collapse. And even agents that are not liquid, meaning they are solvent, they're not bankrupt, but they have a shortage of liquidity. They could become bankrupt because of that. And of course, the lessons of the Great Depression, the last crisis in the effort to provide liquidity is to provide credit easing it provides fiscal stimulus. The problem, however, that I address is that, one, some of this stimulus has become too much and too excessive in the past was leading to asset bubbles this time around for a reason we can discuss will have led also to asset not just asset inflation although said goods and service inflation. And I think that has been not enough of a consideration that a bubble doesn't come out of nowhere.
And of course, when the bubble goes bust, if you don't clean up the mess, the risk of a recession becoming a depression, but loose monetary and fiscal policies and crazy policies in anticipation of a crisis. And I discuss in much detail the history of the last few decades, especially in Chapter four. Create Asset Bubble, Create leverage and leverage. It leads to even more of a risk taking, and then it builds a bubble. And then when it goes crashing, we have to bail out again, everybody, and we create the foundations for the next cycle of another bubble. So I think there is a while I'm in favor of trying to have to say how the system and avoid a depression.
We have to look at the long run aspects of this cycle where the Greenspan put. Then if Bernanke put than a Yellen put, now that Powell put these policies over time, explain why private and public that as a share of GDP within the seventies was about 100% of GDP globally by 2000 was 200% of GDP. Last year was 350% of GDP.
Private debt, implying those on household corporates and financial institutions. In advanced economies, the number is 420% of GDP and rising in China, 330. Of course, we know as economies that can be good or bad, depending on whether you borrow to invest or you borrow to speculate or to consume. All those caveats are important, but we've essentially created what is a boom bust cycle and what today economists, the bank for International Sentiment, call a debt trap, that there is so much debt in the system that now the central banks have to fight inflation.
If they're going to raise the rates to fight inflation, not only there is to cause a hard landing, but a severe landing, but there is causing also a financial crash. This is going to feed and make the hard landing even worse. So because they are in this debt trap.
One of my arguments in the book is that they're going to blink, they're going to wipe out because there is so much debt in the system that right now they say we fight inflation, but we're not seeing the economic and financial pain when it occurs. They're going to blink and they've got to win out. The first example of it was nothing happened in the United Kingdom in the last few weeks with the Bank of England having to essentially monetize this reckless fiscal stimulus by the government. So a similar thing is going to happen throughout the world, in a world in which there are geopolitical risks, even a risk of war.
As we know, during wars and we have already war. We have a war against the pandemic. We have a Russia Ukraine war.
We have a buildup of military in US, in Europe because of the threats coming from revisionist states. Historically, wars are settled with budget deficits, budget that's not financed with debt, and eventually by printing money so that wars are leading to eventually excessive deficit, that crisis and inflation. And unfortunately, I think we're at the beginning of a period of wars, real wars, not just cold wars.
You anticipated my next question. Not for the first or last time. I was going to ask you about the Bank of England. I think you make a convincing case that about the problem of boom bust cycles and how the Greenspan put that Bernanke put the Yellen put encourage overleveraging and speculation. But that does bring us to the question of whether the Bank of England in the last couple of weeks did the right thing by intervening in the gilt market and bailing out the pension funds. Do you think they created more problems than they solved? Well, I can justify their behavior based on short term financial stability, but every time there is something happening, financial markets, then central banks come to the rescue during the COVID crisis, bailing out not just banks, non-banks, shadow banks, high end debt, high grade banks, commercial paper money markets, pretty much everything under the sun.
Households, corporates, small businesses, large businesses, economists think of a moral hazard as being a concept of how helping people in bad times may lead them. Then to believe that they have no insurance and then they become even more reckless next time around. And this time around, I think there is now a consensus that the rise in inflation that we're seeing now in advanced economy is not just driven by bad luck. The COVID shock on supply, the Russian invasion of Ukraine, and now the zero tolerance policy of China. It was also bad policy.
We may have need that monetary, fiscal and credit stimulus, of course, given the shock of COVID. But that stimulus was too much, too long, too excessive compared to what it should have been. And that's how we have created not only an asset bubble, but also at not only the inflation, but also actual inflation. And now we have to fight it. And that asset bubble is now being deflated.
So. So you would say the Bank of England had no good choices, but it picked the least worst choice? Well, the dilemma is as follows. In the seventies, where negative supply shocks, Yom Kippur war between Israel, Arab states, all embargos, tripling of oil prices are in a revolution. Following the paradox of Iran. Second also led to inflation and given loose monetary fiscal policy.
We ended up with high inflation and recession. But in the seventies we had low debt ratios in advanced economies. So we had stagflation, recession, inflation, but we did not have a debt crisis. There was a debt crisis in Latin America that borrowed like crazy in the seventies. And when Volcker Act to bring interest rates to double digits, of course, Mexico, Brazil, Argentina, they all went bankrupt after the global financial crisis.
We had a debt problem, too much housing, that mortgage backed bank lending and so on. But we had that negative dimension of the credit crunch and we had the low deflation, if not deflation. So we could have aggressive monetary and fiscal easing. Today, we have the worst of the seventies and the worst of the post GFC period because we have a whole bunch of negative supply shocks. Not only the three I described, but in the book I speak about 11 other ones that are going to be emerging over the medium term, reducing growth, increasing cost of production.
Where on one side, I also have declarations at 420% of GDP like we have never seen before. So even with stagflation, shock is a hard thing for central banks to avoid a hard landing. Why? Growth is lower, inflation is higher. So if you fight inflation, you raise rates, makes the risk of a contraction in growth even more severe.
And if instead you care about growth and you don't increase interest rates, then you have a risk of the ongoing inflation inflation expectation and having wage price bottom. So it's already hard enough to avoid a hard landing. But now there is a second layer that if you raise interest rates not only because it have nothing, but you can cause a crash of the stock market, of the bond market, of the real estate market, of credit markets. And you lead to financial crashes as well. That makes even the trade off even more difficult. So in some sense, the central banks are not evil, they're not stupid, they are not that arrogant.
They already had that terrible trade off because of stagflation, shocks and on top of it, now there's a build up of debt that makes that achieving a soft landing of the economy and of the market, in my view, Mission Impossible. That's a very different world as the world has been in part created by the behavior of central banks and financial regulators, because we have allowed this buildup of debt cycle after cycle. Normally in bad times you build up a debt, but then you have to save in good times. And it is that that you start in advanced economies, emerging markets. There's been such a buildup of debt that this point we are in a debt trap and therefore we're not going to be only a hard landing of the economy.
We have at risk of having a financial crash feeding on each other. That's part of the mistakes of long decades, of falling certain sets of policies. There's a danger that you and I will talk about financial stuff for the entire hour. I'm conscious we have to move off of this. But I want to ask one more question related to finance. You're well known for your view that cryptocurrencies are either a bubble or a scam, or maybe both.
And you write about that extensively in the book. But I remind you that you're talking to a Silicon Valley audience today, and they would respond, If this is a bubble, this is an extraordinarily long bubble. It has persisted and survived for more than a decade. Isn't a continuing existence, even popularity of cryptocurrencies, a bit hard to reconcile with your skeptical view? Well, you pointed out that it's common a bubble some way. There have been 20,000.
I CEOs and academic study suggests that 80% of them were a scam in the first place to the point that they see created a parody website to show how you can take a white paper, cut and paste it, put a new name on the coin, and just take the money and run. So 80% were a scam in the first place. Another 15% have lost 100% of their value.
And the remaining 5% in thousand. What does happened? Take the top two Etherium in their bitcoin. Since the peak of last year in November, they each have lost 75% of their value. The other top ten have lost 80% of their value, and the remaining 900 of these 5% have lost more like 90% of their value. So, first of all, huge scam. Secondly, a bubble that has really gone bust big time.
Additionally, you and I are not just economic historians, but economists, and we know what the money is. And calling this things currencies is a joke. I mean, for something to be a currency, as we all know, if that's to be a unit of account, nothing. Nothing is priced in Bitcoin, not even Bitcoin conferences.
Secondly, has to be a scalable means of payment. With Bitcoin, you can do five transactions per second with the visa network, you can do 50,000 transactions. Recycling three has to be a stable store of value is not. The price of bitcoin can go up or down 20% overnight. I've been to many bitcoin and blockchain conferences.
They don't accept payment. They don't accept payment in Bitcoin. Why their entire profit margin ten 15% can be wiped out overnight by 20% fall in the price. They're not stupid. They're one dollars and euros.
They don't want bitcoin. And finally, in any monetary system, we need a single numeral, right? To compare the relative price of goods and services. But if I need a Pepsi token to buy a Pepsi Cola and I need that coca token to buy Coca Cola, I don't know anymore what's the rising price of goods and services? I mean, the Flintstones, Stone Age and a more sophisticated monetary system than crypto than the single numeric shells. So I could tell the are the price of bread relative to meet this is in crypto like going back tokenization is going back to barter literally so calling them currencies it's a joke and anybody as a little bit of knowledge of any economics or monetary theory would know that these are not cryptocurrencies. So is your conclusion that that crypto will disappear? Huh? I, I believe that some of these quote crypto whatever they are not even assets for reasons I can discuss may linger over time, but I do not believe that the future of money or the future of finance is in crypto.
If there is a future of money in finance, I think that fintech fintech that is based on big data Iot to get the big data AI and machine learning to make financial decisions and 5G to put it all together is going to be a revolution is revolutionizing, say, payment system, Alipay, WeChat, pay, Venmo, PayPal, the UPI system in India and Paisa in Kenya just to name a few. You can do billions of transactions a day and it's done by billions of people. Payment systems are going in that direction in the future. Of course, we can talk about central bank, digital currencies, things of that sort, credit, that allocation and long decision again done by machines, insurance, nonbank machines, asset management, robo advisors.
All these things have nothing to do with crypto, have nothing to do with blockchain. The centralized system using AI big data 5G to make financial decisions and that thousands of firms that they have a real business plan they have revenue their profits as opposed to the vaporware of 99.9% of crypto. So not every technological innovation stays the course. Most of them actually are used less than disappear.
They may have a bubble that may have a cycle. They disappear. I think that crypto is going to disappear in the dustbin of economic and financial history. Given your skepticism. To put it in an understated way about crypto, I was a little bit surprised to see that you think that China's central bank digital currency will be a game changer and that it will allow the China's currency, the renminbi, to eventually dethrone the US dollar as the world's currency used for international transactions. I wonder whether central bank digital currencies are simply more crypto hype.
You have to be resident in China to use that country's central bank digital currency. Do you really see it being used in cross-border transactions? Are you convinced it will be a game changer, that it will help the renminbi dethrone the dollar? First of all, central bank digital currencies, in my view, are not going to be cryptocurrencies. They're not going to be even on a true blockchain because they're going to be on a private blockchain that is permissioned, centralized, and the transactions are validated by trusted number of institutions. So they're not going to be blockchain or crypto, they're going to be something different, they're going to be digital. But they way 99% online is already digital. The only thing is not digital are coin and banknotes.
And now we're going to find a way of making coins and banknotes digital, but they're not going to be based on blockchain, even if it looks like a blockchain in name only. Secondly, on the substantial part of your question, regardless of where there is a CB, DC or a traditional R and B, the question is whether the R and B can be thrown the dollar. Now for the last step since at least World War Two, of course, our international monetary system has been based on the dollar tag that to the gold until 7172. Since then, fiat currencies, there have been many attempts to create a multipolar currency world bancor was the idea of Keynes at Bretton Woods. Then we tried. There's the variants of it, including the R&B. Now
Murakami has an idea for some synthetic typo that currency that is global. Given the geopolitics, my view is that the world is going to be divided, is going to be complex, is going to be fragmented into economic trading and financial blocs. One, Iran, the United States and its allies. The odd one, Iran. China and China is already having sophisticated payment systems domestically, even more advanced than ours. Alipay, WeChat, pay and you name it.
And they're going to try to have the R and B becoming also an international reserve currency is not going to be easy. Let's say use part of your reserves. R&D, maybe we can pay for some ordinary B, maybe eventually we're going to surprise or not. And B, of course, is not going to be easy to do all of that, you can do it. Give your allies and your vassals. But China is going to offer to these countries that are closer to a fait accompli.
And so it's not just a monetary system, a financial system, a payment system, a 5G system, a technological system, a surveillance system. So a whole of sense of technology and trade and financial things and B, Orion, you name it, so that these countries are going to be under the overall economic, monetary, financial, technological, political and geopolitical sphere of influence of China. So where the unipolar monetary world, the world and we have many problems, it is unipolar. We try to do something multipolar. That implies agreement between the great nations and great powers.
Now we're going to geopolitical decoupling and depression. So I think that the world is going to become bipolar, one in which one part of the world is going to be close to China, one state close to the United States. And in that part of the world, close to China, the Chinese not only currency but financial system, payment, technology, trade, investment is going to be of a Chinese style and that sends the role of the ball and is the only dominant reserve currency is going to shrink over time.
I don't think it's going to be totally replaced by that and be shrinking over time. A bipolar world, a divided world at decoupled world, a fragmented world, splintered and so on and so on. Balkanization, even of supply chains, secure trade, reshoring, a manufacturing frame. Shoring is gradual, but we are moving in that direction. Let's let's talk about that end of globalization and what it implies.
So I think no one would dispute that friend shoring and the move from just in time production to just in case production are taking place. Everybody sees the rise in tensions between the US and China, but when those tensions rise, all that happens as Apple moves iPhone production from China to India. Which bloc would India be in in such a world? Isn't there a substantial class of economies that will want to do business with both the US and China? Isn't globalization in that sense too embedded in our 21st century world for it to disappear? Well, even if the US becoming a bipolar world where trade the trade in goods and services, in the movement of capital, of investment, of FDI, of labor, technology, data and information, where it is split in two and that's the minimum. It'll be a very fragmented, balkanized and divided that world. The first observation very different from the kind of gradual integration that we had over the last few decades of globalization, of production, of various types of restriction to trade in every dimension of trade, first observation and gradually we are going in that direction.
How much of that then implies that you want to produce domestically as opposed to among your friends? A friend sharing depends. For example, take semiconductors. 50% of all semiconductors are produced in Taiwan, 80% of the high end.
It's a threat because now U.S. is not providing any of that technology to China. China is not yet independent of it. But eventually, if there is a conflict on Taiwan and we destroy, say, those factories or Chinese destroy them, or there is a blockade, then that shock coming from semiconductors is going to be bigger than any shock we've seen, even the seventies. I think everybody agree because there is a chip in everything under the sun.
The U.S. is not saying now let's move those factories to friendly nations is putting pressure on someday. Sorry, Samsung in Korea and on TSMC that is the big producer in Taiwan is saying we want you to build your factories in the United States in spite of the fact that we don't even have the ecosystem of supply chains and so on to produce these chips because the design has been in the US.
But the production has been all mostly in Asia. So if we are going to be serious about building those factories in the United States is a major cost increase. The cost of production take another example, 5G we don't want the 5G of why way because we believe rightly is a backdoor to the Chinese government. But the 5G of Cisco, Nokia or Ericsson costs 30% more than the one of Wang Wei and it's 20% less productive.
So to build the same 5G network in the West is going to cost us 50% more. So when you move from offshoring to fracturing and from free trade to secure trade, you may gain some national security, but you do it at a significant economic cost. And if I could add one final point today, 5G, essentially, I want to say helps us with our say cellphones and so on.
Tomorrow, 5G is going to be not only the system together with big data, Iot and AI, it's going to make sure that millions of autonomous vehicles can move around without hitting each other. So that's also become national security. But tomorrow, every piece of even basic consumer electronic, your chip toaster from China, your coffee machine, your microwave, even a copper, a mug is going to have a 5G chip just to see how the system one moves around the global supply chains. And two, because it will have in the Internet of Things, smart devices, billions of them, so you can use them and so on. So once you don't have 5G for your phone, even your toast, there can be a listening device for the Chinese.
So once you start that, this way of decoupling on the technology, every piece of goods and services going to a 5G and therefore they're not going to import anymore even the Chinese toasters. So that's a really radical degree of decoupling. And these are going to have significant economic costs. Even if we're going to do more trade with our allies, yes, they'll do more to liberalize.
There is a complete reversal of that process of globalization that occurred for the last few decades since World War Two. You know it very well as an economic startup that got rounds at WTO and all the rest. It's a reversal. And is that a radical reversal? What do you think about the wisdom of what the Biden administration did this month in terms of banning advanced semiconductor design exports to China and encouraging our allies not to export advanced semiconductor equipment to China? Doesn't this just ratchet up pressures, tensions between us and them and encourage them to greatly accelerate their own capacity to do those things. Are damned if you do and damned if you don't. If you don't block them, they're going to use this technology and they're going to use them both from a security military point of view.
But more importantly, there's a competition between us and China on who is going to be dominating the industries of the future. And all of those indiscriminately are some combination of AI and machine learning, Iot sensors, collecting the big data, and then 5G and finally putting it all together to provide all sorts of goods and services. I mean, the fact that just last year or this past year on one side, Eric Schmidt, the former CEO of Google, and on the other side, Eric Kissinger was the greatest geopolitical strategist of our time, the one who did the open to China, wrote a book together saying We are at risk of losing the AI machine learning robots and automation race with China in the past, it doesn't matter.
Technology develop by somebody, maybe give you more benefit to the innovators, but spills over to everybody. But in the case of AI, there is a sense that there is a bit of a zero sum game. Who is going to control AI machine robotic and automation is going to control not only the economic levers of power, but also the political, the geopolitical, the military and the security. So it's first time in which a technology innovation looks like a zero sum game as opposed to a positive sum game and elements to it.
So if we don't want China to be as an authoritarian regime with state capitalism to dominate the world, probably we have to do those restrictions. Yes, China is already beside, regardless of what we do, that they have to become independent in semiconductors. That's why they're not going to hit Taiwan until are independent. Same thing with the like to avoid that.
But I think that's unfortunate. Not just competition, but that time for confrontation between the two sides is leading to a new Cold War. And the only debate is only how fast this Cold War is going to become colder and whether whether eventually there'll be a hot war between us and China. I'm not making any predictions, but as you know, people are discussing if and when. On the issue of Taiwan, that would be a major confrontation between these two powers and history. You are familiar with a book of Graham Allison on that, to say that this threat, a rising power facing an existing one in the last 500 years, out of 16 cases, 12 of them have led to war exceptions being British Empire and transfer to the American Empire or the Soviet Union, the U.S..
But in one case that the same economic, political, social system aligned with the US and Carter and the other one, the Soviet Union, was a declining power that eventually imploded and collapsed from within. Well, China is not a country is going to implode any time soon, is a rising power, even if it has tons of problems. So I think these these geopolitical tensions are are serious. And it's not just China, US is Russia versus the West is Iran versus Israel and the United States is North Korea have at least four revisionist powers, don't accept our international order and they want to create an alternative, one that's a source of tension, of confrontation, of containment, of competition.
And let's hope that doesn't lead to actual military confrontation. Let's hope so. But there is some risk that that would happen. You just made Nouriel a a case about the revolutionary effect of five key and artificial intelligence and that cluster of innovations it seems to me, that sits uneasily with your pessimism about the climate change challenge. It's a big challenge, but think about the scope for future technologies, some which haven't been invented yet for addressing the problem. Look at all the progress we've made in terms of improving the efficiency of solar and wind power.
Think about green hydrogen carbon capture. So is there really a technology vehicle problem here or are you talking about a a political problem, a problem of political will, that our political systems are incapable of addressing this problem? It's a combination of the tool, given current technologies. And maybe technologies are going to change over the next few years if you want to reach net zero greenhouse gas emissions. And we need to shut down economic growth during the COVID year 2020, where the biggest collapse of economic activity globally in 60 years and that emissions fell only by 9%, 9%.
And now they're gaining again. Secondly, adaptation, that means let's temperature go 2 to 3% above and then let's limit the costs. That is hugely, hugely expensive.
Three years of the money that we don't have. And the third solution that is geoengineering looks like big science throwing dust in the atmosphere to reflect the sunlight. So given current technology, we don't have a solution that doesn't imply negative economic growth forever. The political constraints are both domestic and international domestic. There are two of them think the US, at least half of the country and the GOP doesn't believe in a human related climate change and it's a problem when they're in power. Secondly, there is an intergenerational problem.
You know, I'm 64. I'm not going to be around when the distractions are occur. Young people care. They don't vote, the elderly care less and they vote. And therefore, we have these.
We discount the future and we don't put as much weight on the world for our future generation and our future humanity. And we are kicking the can down the road. Internationally, you have two sets of problems. One is the free rider. Typical tragedy of the commons. If I'm a country and all they pay in an effort to reduce greenhouse gas emission to zero and nobody else does.
I still have a warming environment and it hurts me. So why should they do it? Unless we can agree and cooperate on all of us doing? And finally, we weren't created this problem. We're 200 years of greenhouse gas emission. With the Nasser Revolution, 90% of the stock is due to US, Europe and advanced economies.
The flow of new emission comes a lot from China and India. But China. India. And telling us you want us to cut our emissions to zero by the end of this decade.
When you create this problem 20 years where you're barely getting the middle income class levels in China, not so in India, we are going to continue to increase on a nation emissions another ten, 20 years and then once we are richer, maybe we want to do something about it. So are there solutions like saving, going renewable, imposing carbon tax and so on and so on? Yes, but the constraints are both technological. So far, the technologies do not allow us to resolve this problem without having negative economic growth. And there also the other political and geopolitical constraints and by the way, my former colleague at Yale, Bill Law, does the Nobel Prize in economics for his work on the environment, said that in order to achieve the Paris target of plus to not even one and a half plus to the average carbon tax globally should be $200 per ton. Today, the average global $2 $2 rather than 200 US even less than that.
And everybody now that oil prices are rising are cutting actually fuel taxes rather than increasing them, who's going to which currency? You have a politician. I'm going to make $200 on carbon tax and you need those price incentive to switch to renewables. These are all serious problem. So it's both technological and political. Now, in Chapter 12, I speak about the technological solution that, by the way, it's not renewable. People who are in the know believe that fusion technology can lead you to energy.
It is very cheap and it's going to have no greenhouse gas emissions, and that would be a real revolution. People say maybe in the next 15 to 20 years we can have actually cheap fusion energy, but in the next 15 to 20 years, we may destroy the planet to the point of of no return. So that's not fast enough. So That's another constraint. So eventually there may be technology to save us.
They may arrive too late as of now. Let let's do one more topic before we turn to the Q&A, I want to challenge you on artificial intelligence, a first objection to the case you made earlier is there is no such thing as artificial intelligence or what we call AI is not, in fact revolutionary. It's just machine learning dressed up by a different name.
We load large amounts of data into computers and we slice and dice it. It's not. It's mindfulness and autonomous mindfulness. It's not in the cards. I can't do what you and I are doing this afternoon.
And the second objection to this dystopian view in the book that I will destroy our jobs, destroy our politics transform our battlefields, is that we can shape and challenge and channel it through regulation. If we regulate it better than we do our financial markets, we can be sure to ensure that it turns out to be a net positive rather than a negative. Important and valid points. I'm not an expert. Then I learned a lot about each one of these topics while I'm doing the book, there is a view that I would say is quite dominant among at least scientists that we're going through a process that eventually is going to lead to superintelligence, to a singularity, to the point that machines can become thinking, they can become autonomous was initially we thought that only routine jobs, mostly blue collar, could be automated.
Now we realize that most of cognitive jobs can be split into a series of ask, and each one of these tasks can be automated. And now there are creative things that will produce pieces of music. And there's going to be only a matter of time when one of these songs totally AI is going to be top ten in Billboard magazine that only now can create pieces of art of painting that are incredible. If you have ever tried, it is shocking.
What it can do is used now by designer illustrators to make them more productive. But eventually you're not going to be these people. The machine is going to do it on his own.
So even stuff that we thought was creative can be done with the machine. And some philosophers are believing that sapiens almost sapiens is going to become obsolete. Either we eventually have a merger of the human and the machine all models, the way you Vilardi puts it in his book. And eventually we are smart enough.
We can live forever. Our consciousness and memories, everything uploaded in a bionic human being. But it's not even utopian because only a small fraction of humanity is going to be able to upgrade itself.
Everything else is going to disappear that even sapiens, not only their jobs, are obsolete. And by the way, we are the only animal species that destroyed that previous members of that species, you know, among apes. And we came from apes, the gorilla might be the strongest, but it is happening among bonobos and chimps that are weaker. But before almost sapiens, we had almost actors, almost every Elizabethan Neanderthal and so on and so on.
We had 2 million of hominids and every single ominous species was destroyed by the falling one. And we destroyed when we came dominant Neanderthal and Homo erectus. So when all models is going to come, almost happiness is going to disappear because they're going to be he or she superintelligent that that's the sense of what can happen in the next hundred years. And that's the view. So we worry about jobs. We're going to be extinct as a sapiens, maybe a superior form of humanity is going to come of it, people think is only a matter of time.
Can we slow it down? We have regulation. Yes, we could do so. And there will be a backlash against technology in the same way, there was a backlash against globalization because globalization led to winners and losers. We never compensated the losers.
And now there is a backlash against it. And technological innovation of the eye for elites is capital intensive skill bias in labor saving. So if you own the machines or the financial capital owns the machine, you're going to do well.
If you are the top 10% of distribution of skills, probably the AI for now as a lawyer, as a surgeon, as an economist, as a banker makes you more productive, smarter. But if you're a white collar or a blue collar, low value, are that a middle value out of it? Your jobs and your income increasingly are being attracted by A.I. and eventually then the top 10% is going to be replaced because the AI is going to also replace anything that is creative. So I don't think that regulation is going to be able to resolve this problem, but certainly there will be a political backlash against that massive structural, technological and unemployment, something that already John Maynard Keynes spoke about and wrote about in the 1930s. But he thought that we would own work instead of 40 hours, 10 hours, and will become Renaissance men and women and the poetry, art and culture.
The problem is that for some subset of people, 80% or more, there's not going to be any job. While those of us who have high skills are actually working not 40 hours, but 80 hours and so on, because we are so productive, so there's a split even among labor between those who are going to jobs, going to disappear, and those that for a while actually got to become more productive. So the idea that everybody will be able to enjoy leisure and live off it is not realistic. Of course, when the economic pie is bigger, we could tax the winners and transfer money universal basic income to those who are left behind. But people want the dignity of a life where they're productive, those work and things of that, and it's just a check so you can eat and survive is not socially and politically sustainable in the long run. So there are solutions like universal basic income, but they create other types of complications.
Those who vote for Trump, they don't want the check to say, I want jobs and I want manufacturing jobs. That's why they vote for problems of the right. That's not going to happen. I as an economic historian, I would note that we've had these backlashes against technology before. Remember the Luddites? So yeah, on a happy note, let me turn to some questions, prompting the audience by saying Much of what we have is about financial crises and and threats to financial stability.
Much of our last 40 minutes have been about global geopolitics and threats to political and international stability. So questions about that would be welcome as well. Question number one, Professor Roubini, if you were Jay Powell or Janet Yellen, what would you do to help soften the massive financial crisis that you see coming? Honestly, I think that right now is a bit too late given that the inflation genie is out of the bottle and given that we have these negative supply shocks, even if we didn't have any financial stability problem, citing inflation would imply a recession. And given there is so much debt in the system that fighting inflation is going to also lead to a financial crash, it's going to make the economic downturn even more severe. So we build up so much debt and we created a bubble that now is going bust. And we are unfortunately addition to bad policy, having bad luck, these negative supply shocks that at this point I will be lucky if we're like in the seventies only with stagflation.
We'd be lucky if we had only a global financial crisis without inflation. But we have the worst of the seventies and the worst of the GFC, so we're going to have both of them. And frankly I don't think that any administration where the Republican or Democrat, that any central banker, whether a lawyer like Jay Powell, as opposed to an economist like Ben Bernanke, can resolve this problem too late. It's a bit like during the GFC was too late to avoid the mess. Unfortunately where really made the mistakes in the past we created that trap. What's going to happen, as I said, is central banks facing economic and financial crisis are going to blink.
They're going to try to wipe out with inflation the real value of the debt. But they can fool all of the people all of the time, some of the time and some of the people all of the time. You cannot fool all of the people all the time. And then eventually inflation expectations get the Amcor bond yields and short term interest rates reprice and you're not going to be able to resolve that problem to unexpected inflation unless you go to Argentinian style of hyperinflation, something I don't think is likely.
So we're going to end up with inflation, we have recession, we stagflation, and still we've got that crisis. I don't see any easy way out of it. There is a question in the chat that reminds us of the first rule of forecasting. First rule of forecasting is give them a forecast, a global financial crisis coming or give them a date, but never give them both.
So we are going to ask you to give us a date. Do you think these things are going to start unfolding before the end of the year? Are they going to start unfolding in the first half of next year or the second half of next year? Can you put some timing on it for us? Well, some of these megatrends are slow motion. So the geopolitical risks, it might take decades for U.S. and China being at loggerheads really on Taiwan or maybe sooner. Some people believe that the conflict between Russia and Ukraine could become nuclear and involved Natal within the next 12 months if Putin desperately doubles down and so on. I don't know, but I see these things.
So if we're talking about global climate change, slow motion train wreck, when is going to be the next pandemic we don't know about? There'll be another one bigger, nasty geopolitical stuff then, Rob. I think of liberal democracy and globalization is not overnight is a process and degree of how much faster is going to go in the short term. I made a prediction, one that inflation was not temporary, was persistent to that. It was driven not only by bed lock, but also negative supply shocks. Three that in attempt to fight inflation, we're going to have a hard landing for that is not going to be a short and shallow recession. It's going to be severe and protracted because we have the debt problems.
Everybody is tightening monetary policy in three years of essentially easing to what? Monetary, fiscal policy. This time we have to tighten and everybody's doing it globally. So I think that we're going to have a severe recession that's going to lead to financial and that problem feeding on the real economy.
And the other prediction is that faced with an and financial crisis, central banks are going to blink. And I'm going to say tough on inflation because the economic and financial crisis is not going to be acceptable and that's going to lead to further losses on equities, further losses on bonds and a variety of assets. Now, if I look at these predictions, inflation seems to be persistent is a combination of bad luck and bad policies. Hard landing looks more likely now than soft landing.
Even central banks say, well, we might have a soft landing, we'll have some pain. The board is already predicting the Bank of England five of negative economic growth. I spoke with ECB officials recently.
They say, well, we might have already negative growth in Q3, Q4 of this year, but then maybe by the middle of next year, things are going to turn around and so on. And even the Fed is resigned to something of a recession. So hard landing is becoming a baseline. But now overall, they say it's going to be short and shallow. And I made some arguments of why it's not going to be sharp and shallow. It's going to be associated with a financial crisis at the beginning of the year.
He also said normally bonds and equities move in opposite directions. The prices. When you lose money on bonds, you make money on equities, risk on risk of growth and recession negatively correlated. But that assumes low inflation. When inflation is high, interest rates are rising. Equity markets correct.
But the higher bond yield means the lower price of the bonds. So you lose money on some of the bonds. This year, S&P has fallen 25%.
Bond prices on safe government bonds have fallen by 30% as interest rates have gone from 1 to 4%. So you lost money on your equities. You lost money on your bonds in your 6040 portfolio or 730. There was nowhere to hide. And even your cash was eroded by by inflation.
So that turned out to be actually also correct. So I see these things actually materializing right now. I think that by the third quarter this year, eurozone will be in a recession. UK is already in a recession.
You ask by the end of the year it's going to be in recession. Most advanced economies are going to be in a recession. China is going to slow down even further.
For China to go 3% is effectively like a recession. Many emerging markets are in trouble. I was just at the IMF meeting in Washington. The gloom was across the board.
The IMF was as gloomy as anybody. So we're facing a hard landing. The only question is how hard is going to be or how? How mild that is going to be. I'm in the camp of those are going to believe that it's going to be an ugly and protracted recession with financial stresses. We'll see. It was going to be proven right. There are two questions in the chart that pair nicely.
Number one, if we forced you to pick the one mega threat that you're most worried about, what would that be? I understand your argument that they're connected, but pick one for us. And number two, and it's a nice round number, but what is mega threat number 11 that ended up on the cutting room floor? Well, depends on the horizon. If you ask me, over the next 12 months, I think we're going to have inflation, recession, stagflation, and that crisis. So severe recession and a severe financial crisis. That will be my view of the mega threat that is most imminent, because climate change, of course, is slow motion, even if the damage from climate change is becoming quite severe everywhere around the world, the geopolitical issues are there is already a war between Russia and Ukraine. There are some scenarios in which this thing really could involve the nuclear weapons and natal.
I don't know what's the probability of that. There's a meaningful risk that Israel and the US are going to attack Iran because they are on the verge of getting the bomb. And that's a existential, I think that the U.S., China, Taiwan is is it's going to be more slow motion, but it's going to come to a head in the next 5 to 10 years. And climate change is going to destroy us in the next 20 to 30 years.
But the damage is already becoming quite, quite severe today. So depends on the rise. And I would say in the short run is what I call is the end of the great moderation is the beginning of a new regime of what I call the great stagflation, worry that instability and crisis, that's the short term threat to economy, to jobs and to financial markets. What do you think are the most important things policymakers and the rest of us can can do to avoid these looming disasters? Well, there are some solutions that are collective individually. We can do our share to reduce our carbon footprint, but you need to have billions of people. And for those who need policies at the national level and the international level.
But of course, even individuals can do their share about reducing their carbon footprint. Firms can do their share, businesses Even then, you have to have national and international policies. Unfortunately, in this space, even of ESG investments, let alone corporate action, I see a lot of greenwashing greenwashing green seek leaders of various sorts talk but not action so and the individual level of course you can reduce your carbon footprint you can try to re-engineer yourself to stop this time and related stop so they are not going to be made obsolete by the machines and your financial investments.
There's a whole part of chapter showing how you can protect yourself from inflation. The debasement of fiat currency, political and geopolitical risk and environmental, but is a bunch of solutions. Short term treasuries, inflation indexed bonds at eventually gold and precious metals in some commodities and real estate that is resilient to climate change.
Because a lot of the guys say even the U.S. is going to be a sense of destroyed and made stranded by climate change. So that combination of assets can provide you some portfolio security and nominal and real returns, even the onslaught you have to invest into human capital so that you're not obsolete by day machine and you have to contribute individually to reducing our carbon.
But many of these problems are national and global, and they require the right national and international cooperation policy. Unfortunately, in a world of geopolitical tensions, cooperating on China becomes harder. We then have a cooperation on COVID and global pandemics.
We are not having the cooperation on global climate change. We're not going to cooperate on financial stability issues. If anything, the Chinese would want to create their own alternative international monetary, financial, currency trading investment system because they don't trust us. They are trying to do so.
And we don't have any cooperation on on important elements of of security and so on, because we have actually geopolitical competition and rivalry. So the world of great powers is a world of competition, not of cooperation. This is the last question, and it's the hardest one of all. What makes you optimistic about the future? Well, there is a chapter on a dystopian future, chapter 11. And there is a chapter about the more utopian or less dystopian future.
And I think that the solution is not political or geopolitical. It's too hard to coordinate and cooperate is technological. If if there'll be a revolution in energy is not going to be renewable, it's going to be probably fusion. If we can get fusion, we're going to have infinite amounts of clean energy at very cheap price. Then we can desalinate water and we have enough water to produce food and new technology and agriculture are going to allow us to create more food that would resolve the climate problem.
There'll be much more economic growth. If growth is five or 6%, that's become more sustainable rather than less sustainable. Growth is the best solution for that problem. Then we can also have universal basic income.
If most jobs are destroyed by technology, and then at least we have a social solution to this problem. So if the technology revolution are going to increase rapidly, the economic pie, even if the inequality is going to rise, as long as we have the right taxation redistribution policies, we can actually make everybody better off. It has all the problems of climate problems of pandemics, problems of health, problems of debt, implicit, explicit in making available to do financial decisions that don't lead to boom, bust of financial cycles, credit decisions that are made rationally by computer as opposed to by as individuals. We can stabilize economies. We're going to have better economic policies and so on.
So the miracle has to start with technology. The problem is that technology is also leading to a race on who's going to control this technology. So it exacerbates the geopolitical confrontation because it is going to happen from the technological world. I'm trying to get us to conclude on an optimistic note, and I knew you would throw in that last sentence. Nouriel, in any case, we've reached time.
I want to thank Nouriel Roubini for joining us for his book, Mega Breaths, which people can pick up at their local bookstores. They can follow my example. I have my copy if you want to watch more programs along these lines and support the Commonwealth more and more generally, whether it's virtual and in programing, you can learn more at Commonwealth Club dot org slash events. Let me thank our guest, Nouriel Roubini and our audience and say take care. And thank you very much. Again. And as I said that you taught me economic and financial history and I realize the importance of knowing it.
To avoid the mistakes of the past, we have to learn from history. So thank you for doing that. My pleasure.
2022-11-10 20:27
