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27 October 2022

Nouriel Roubini: a new Great Depression is coming

The economist who predicted the 2008 crash warns that a combination of uncontrolled inflation and ballooning debt will push the world economy into ruin.

By Will Dunn

When Nouriel Roubini was 16 years old, his father took him from their home in Milan for a holiday in London. It was the winter of 1974, just before Christmas. They wanted to see the lights of Piccadilly Circus, but when they arrived, the shops were closed and the famous signs that he’d seen in photographs were dark. He wondered if this winter, or next, the lights will go out again.

But the future Roubini, 64, predicts features more than an energy shock. If he is right in his assessment of the world economy, the next decade will contain mass unemployment, mass personal bankruptcy and business insolvency, a severe, protracted recession, and a wave of financial crises and defaults in countries around the world – a new Great Depression, and one that will not be solvable using the tools of the past. 

Roubini’s predictions were playing out in the UK economy as we spoke: a disastrous fiscal plan, a panicked sell-off of government debt, a central bank forced to intervene, waves of political and economic instability.

The UK is the first of the advanced economies, “the canary in the coalmine”, to become destabilised by a situation Roubini described as combining the “the worst of the Seventies” in terms of supply shocks (surging energy prices and disrupted supply chains), with a debt bubble that makes even that which precipitated the 2008 global financial crisis look modest. By his estimate, the average advanced economy is carrying more than four times its own GDP in combined public and private debt: this is, he said, “the mother of all debt crises”. 

It doesn’t stop there. The balance sheets of advanced economies are not just groaning with debt but riddled with “unfunded liabilities” – things we were supposed to have paid for up front, but which we’ve neglected in favour of illusory growth and consumerism. Unfunded liabilities are what keep pension fund managers awake at night, and advanced economies all face the prospect of a dwindling number of workers paying for a retired majority, but Roubini said the liabilities are so much broader: “There is an implicit debt coming from global climate change, from future pandemics, from the need that we’re going to have to subsidise permanent technological unemployment, deriving from AI and automation. We are essentially kicking the can to the future all the time, we’re borrowing from the future in a way that increases debt, that reduces economic growth.”

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As politicians and central banks find themselves powerless to address these growing crises – or “megathreats”, as he called them, in a book of the same name that is published this week – advanced economies will move into a situation he described as a “stagflationary debt crisis”. This is a three-way economic pile-up: inflation that central banks can’t solve, a recession that governments can’t stop, and a debt crisis that markets can’t alleviate. Jobs will disappear and wealth will shrink while the cost of goods, services, student loans and mortgages climbs ever higher.

While other economists warn of “Japanification” – permanent economic stagnation – Roubini is more worried about what might be called Argentinification, in which a massive debt burden causes recurring financial crises.

“Over the next decade, we could have something equivalent to a Great Depression,” he told me. “That certainly is a material risk right now. If the conflict in Ukraine gets worse… if Iran and Israel go to war… then it gets even more ugly faster. We could have a Great Depression in the next two or three years. But even if things are slow motion, the trend is not your friend.”

[See also: Politicians fixated on growth have led Britain into chaos]

There is something of the cleric about Roubini. He was polite but forceful, explaining and declaiming, reciting a litany that returns always to the same unholy trinity of inflation, recession and debt. He has seen a pattern in the world and he has a warning for the rest of us. 

He remembered playing the board game Boom or Bust once, in which the object is to avoid going bankrupt; he lost. He preferred Monopoly, which he described as a game of “oligopolistic concentration of power”, but he said he usually lost at that too. He is more interested in discovery: he spent six of the eight weeks before we spoke travelling. When he visits a country he talks to finance ministers and central bankers but he seeks out the opinions of cab drivers (“they’re usually very opinionated”), waiters, “normal people”. He prefers to see things for himself. “As much as I can, I try to see what’s happening in the real world.”

His insights have not always been welcome. For many years – as a researcher at Yale and while working for the International Monetary Fund (IMF), the World Bank, the US Federal Reserve and the Bill Clinton administration – he specialised in the debt bubbles and subsequent crises that occurred in emerging markets such as Argentina. In 2006, he began warning that the US housing market was a debt-fuelled asset bubble and that, when it burst, it would trigger a serious recession that was likely to affect other economies. He delivered this warning to the IMF and the World Economic Forum, and wrote a paper outlining, in typically unvarnished style, “The Rising Risk of a Systemic Financial Meltdown”. Ben Bernanke – who was this month awarded a Nobel Prize for economics – downplayed the risk of contagion; to his critics Roubini was “Dr Doom”. 

After the 2008 crash he was treated as a prophet, but the optimism that debt pays for is alluring. From March 2009 to March 2020, a broad sweep of companies enjoyed the longest and steepest bull market in history while assets ballooned in value. The story was that all this came from hard work, from clever people assembling a new economy based on knowledge and innovation. 

In fact, this was a world built on the creation of new money. More than $26trn in quantitative easing (QE) – in which central banks create new money by buying huge amounts of debt, which makes borrowing cheaper – since the 2008 crash had created a situation in which “everything went up in value. Public equity; private equity; VC [venture capital]; firms without revenues or profit, just with a business plan; meme stocks; tech stocks; Spacs [special purpose acquisition companies]; crypto; housing – anything under the sun was really in a bubble, in a massive bubble.”

Perhaps this explains the nagging feeling of unreality that followed many people during the cheap-money decade. More than a third of the UK population went to work every day at jobs they felt were fundamentally unproductive and meaningless. The shiny new technologies weren’t really working, either: “In the average aggregate productivity number, you don’t see at all the benefits of this technological revolution,” said Roubini. “Productivity growth in advanced economies is dismal; it’s close to zero right now.” 

Loose monetary policy – a decade of near-zero interest rates and QE – had only made it feel as if things were picking up. While real wages didn’t grow, the “easy money” of cheap debt led to “inflated asset prices, more borrowing, more spending, more inflated asset prices, more economic growth – but it’s artificial”.

With the artificial economy came an artificial culture that is the subject of some of Roubini’s darkest predictions. He sees widespread addiction to video games as a “disease”, and social media as a “cancer”; he talked bitterly about fast food and opiate addiction. His deep concern was that a generation made “jobless, wealthless, hopeless” by the Great Stagflation will live in “a more nightmarish version of Aldous Huxley’s Brave New World”, in which social unrest is kept at bay by Big Macs, video games, televised sport and Oxycontin. “That’s what is happening. There’s a whole generation of people who are really desperate.”

A person diagnosing a sick society usually comes armed with a plan to remake it, and Roubini said that one of the great dangers of this interconnected crisis of debt is the opportunities it will provide for new authoritarians to arise at the political extremes.

“We’re going to have a massive backlash, not only against liberal democracy, but against everything, against private markets, against trade, against globalisation, against technology… the populism of the extreme right and left is going to become more popular around the world.”

For someone so outspoken, Roubini is perhaps unusual in that, while he predicts great turmoil, he does not think a new paradigm is needed. He recommended people resist the call of populism as the debt crisis unfolds and seek credible, evidence-based centrists – “socially progressive, but also fiscally prudent” on the left or the right. “Populism eventually leads to economic disaster, as the history of the last few decades shows.”

Will the UK default on its debts? With a central bank that can effectively lend the government its own currency, this is highly unlikely. But the more money a central bank prints, the more inflation itself becomes what Roubini called “a sneaky form of default”, because it causes the real value of the bonds bought by investors to fall. Eventually, this could lead to a critical lack of appetite for the UK’s debt: “you can’t fool all of the people all of the time. And eventually, things get repriced. And if your debt is unsustainable… you may have to go eventually, like in the Seventies, to the IMF… I will not rule it out. It might be a repeat of the Seventies.”

But while the UK has the highest predicted inflation among advanced economies (averaging 9 per cent through 2023, according to the IMF), Roubini predicted a severe recession for Europe, the US, China – nowhere will escape the supply shocks of climate change and old age, of pandemics, of rapid technological disruption, of political and geopolitical change, all of which will occur in a global economy staggering under the weight of more than $300trn in debt and in which a reduction in potential growth is, according to the IMF, not just cyclical but a permanent feature of the future world economy.

Roubini wrote Megathreats, he said, as a look at “how the world is going to be in the next ten to 20 years. But literally every single one of these megathreats… is materialising today.”

[See also: Why increasing corporation tax is good for growth]

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