INTERVIEW: Nouriel Roubini talks about the future of global economy post COVID-19

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Mikołaj Kunica: In Europe we are witnessing a loss of control of the growing second wave of the pandemic. Talking about the trends that shape the future, it is difficult to escape from global problem number one. What in your opinion this pandemic, COVID-19 to be precise, is? Is it a painful incident or rather a permanent change that we will have to learn to live with?

Nouriel Roubini: Well, I think it is partly temporary and partly permanent. Temporary, because if we now start to control the spread of the pandemic and if we develop a vaccine next year, then, despite the current economic pain, life may, over time, partly return to normal. One could argue that this is only a temporary shock. However, this pandemic could have a lasting impact on the global economy - many people will be unemployed for a long time; many people in poorer countries will return to poverty; there will be changes in the way we live, study, shop, work - we will do more things online, we will do more things from home and fewer in direct contact with other people. Some sectors, such as the hotel industry, tourism, air transport and so on, may be affected for a long time. There will be a huge increase in public debt because everyone will rightly respond by increasing budget deficits, but will these debts ever be paid off? The crisis may also lead to lower potential growth over time if this panic continues.

This could lead to an escalation of the cold war between the United States and China and to a division in the global economy if this cold war in trade, technology, information, and geopolitics gains momentum. It could make countries more protectionist and try to protect their workers and companies, and we could turn our backs on the globalised world. The globalised world in which global supply chains are being fragmented and Balkanised. And the second thing I think we should be worried about is that pandemics can happen again and again. You know, over the last 30 years we have had HIV, SARS, measles, Zika, Ebola and other types of pandemics. Besides, there is some scientific evidence that such things are happening because of global climate change and the destruction of animal ecosystems. Transmission of zoonoses from animal to humans is becoming more likely and more frequent because animals with pathogens are closer to cattle and humans.

We know that we have a serious problem with global climate change, with population growth and now with pandemics. What if COVID-19 is followed by COVID-21? We will barely survive this one - what if there is another one? So, we must fear that some of these things will be more of a permanent threat to the world rather than just a temporary danger.

Mikołaj Kunica: This is interesting, you are touching on many important issues - geopolitical risks, environmental risks, economic risks, but we still hear from many decisionmakers that a vaccine and a drug for COVID will solve the problem. So, as far as I understand, you do not share these views?

Nouriel Roubini: When a safe and effective vaccine becomes available, let us see if we can produce it in bulk for billions of people. We will see whether it is necessary to take the vaccine again and again, or whether there is a risk that other variants of the virus or new viruses will appear. In the meantime, we have to deal with huge upheavals - economic, social, political, environmental, and technological. So, this is much more serious than the financial crisis caused by the economic shock. Perhaps the effect of the pandemic will be more debt, more unemployment, more inequality, more social unrest. Many companies are laying off employees and then hiring them back as temporary, part-time, hourly, contract, freelance or contractor workers. So, there is more uncertainty.

In addition, we are seeing increasing use of artificial intelligence, robotics, and automation, which can destroy millions of jobs. There will certainly be an increase in the desire for greater digitisation in view of the risks arising from this crisis. This is a crisis that triggers deeper social changes. Perhaps governments will move away from liberal democracy, become more populist, nationalist, protectionist. We do not know what the long-term consequences of this crisis are. In the future, we will see more damage to the environment through the impact of increasingly frequent pandemics, which will cause even greater economic, financial, and social damage.

Mikołaj Kunica: Professor Roubini, does this mean that COVID is the end ... has COVID ended the golden age of Western democracy and economic systems?

Nouriel Roubini: I do not know if this is the end, but the situation is conducive to a greater range of threats. As I said, over the last few years, there have been repeated economic crises and more frequent financial imbalances. We have accumulated private and public debts, which may prove unsustainable over time. Growth stimulated by globalisation, migration and technology has led to a widening of inequalities in income and wealth, which in turn leads to social unrest. All over the world, traditional liberal democracy is threatened by radical populism, either from the extreme left or the extreme right. After the global financial crises, we are retreating from globalisation, and now there may be deglobalisation, Balkanisation and division of production.

As I have already mentioned, technologies will demolish jobs, alter professions, transform industries. We have global climate change with pandemics and, at the same time, great technologies and states relying on surveillance are emerging. So, there are many complex issues that challenge traditional market economies and liberal democracies. I still believe that the best economic system is a mixed one. A market economy where the government provides a wide range of public services and public amenities. I think our democracies are important, but we have to make sure that we do not want radical populism to become the norm, that we deal with people's issues and accept that there are both winners and losers. That there are those who move forward, but there are those who lag behind. The less we take into account inclusive economic growth, the sharper the reactions against the free market and liberal democracy will be. Consequently, there are many issues that need to be addressed to make our economic, social, and political system more stable, more inclusive, and more prosperous for all.

Mikołaj Kunica: Let us talk for a moment about the therapies applied after the pandemic outbreak. How do you assess the responses of governments and central banks at the turn of the first and second quarter, when the global supply chain collapsed virtually overnight and both supply and demand expired? Was pouring trillions of euros, dollars, or pounds into the markets a good solution?

Nouriel Roubini: In the first phase, the crisis amounted to a supply shock, but then the collapse of economic activity stemmed from the fact that we had to close down, block economic activity to flatten the curve and limit the spread of the virus. Because of this free fall in economic activity, there was a risk that this growing recession would turn into a depression. I therefore believe that the political stimulus made sense. We needed a fiscal stimulus to provide income and transfers, both for households and businesses. We needed guarantees and credit facilities to make sure that companies and households that had lost liquidity but were still solvent would not become insolvent due to massive bankruptcies. This has stabilised the financial markets and the economy, and now there is a recovery.

Of course, we have accumulated a lot of public debt and we will ultimately have to figure out how to pay it off. There is a risk of deflation due to the slowdown in the circulation of goods and the contraction of the labour market. If there are negative supply shocks, such as decoupling payments from production or deglobalisation, then within a few years, monetising the deficit may bring back inflation and even stagflation (ed. low GDP growth with high inflation), as seen in the 1970s. Fortunately, at present, both inflation expectations and inflation itself are lower than in the 1970s. Nevertheless, it is worth realising how unconventional the monetary and fiscal policy of central banks and governments is, and what consequences this may have in the medium and long term.

Mikołaj Kunica: And, following on from this, what will be the economic consequences of maintaining ultra-low, often really, or even nominally negative interest rates almost all over the world? The former head of the European Central Bank, Mario Draghi, warned that by reducing the cost of money to zero “we are entering unknown territory”.

Nouriel Roubini: The problem was that even after the global financial crisis, when the central bank interest rate fell to zero, there was still a risk of recession and deflation. Some countries took the path of negative interest rates, others promised to keep them low for a long time. Yet others loosened their monetary policy by buying long-term government bonds. There were also those that made it easier for themselves to access credit by buying private assets, such as corporate bonds, and even buying stocks, real estate and so on. Liquidity was provided to the banking system in many ways to secure the financial markets. I think that this time, monetary policy has become even more unconventional, because in fact, we have moved on to the so-called “modern monetary theory” or “falling price of money”, because we monetise even more directly the increased budget deficits.

Do you know what the difference between quantitative easing and deficits and modern monetary theory is? Not very much. In the former case you buy government bonds on the primary market, in the latter case you buy them on the secondary market a few weeks later. But the impact on interest rates in the long term is quite similar. The central banks are even thinking about creating digital currencies, and this idea is being mooted in China, in Sweden or in the Euro Zone. If we withdraw cash, interest rates can be further reduced. That is something that can happen.

Unfortunately, in a world where there is too much private and public debt, the ability of central banks, even in the medium term, to raise interest rates or reduce their exuberant balance sheet will be limited

If banks do not include everything in their balance sheets or raise interest rates, then the debt may be unsustainable. It may therefore happen that some of these new rules will stay with us permanently. As long as there is no inflation, we can say - it is fine, because we are trying to avoid recession, depression and deflation. We would have a problem if there were a negative supply shock and inflation. We do not know whether this will happen or not, but these are medium-term questions. Such a policy is needed in the short term - what are the long-term consequences - and this remains a matter for debate.

Mikołaj Kunica: So, in the reality governed by these new economic dogmas that you have described, what is the prospect of a return to growth?

Nouriel Roubini: In the short term, these unconventional measures are necessary to avoid recession turning into depression. Of course, with large budget deficits, we need to print money to make sure that long-term interest rates do not rise. I think that the recovery of the economies that we are currently seeing, and the recovery of the markets are due to the application of appropriate monetary and fiscal stimuli. I think more about the medium-term perspective - building more public debt is sustainable if interest rates and inflation are low. But what if in the medium term this set of economic policies brings inflation back? Then we will have a dilemma...

If we put interest rates up to fight inflation, then we will hide the debt and we may make it unsustainable. But what if we cannot raise interest rates because the debt is too high? Then we could end up with inflation and create a bubble in the asset and credit market, which would turn into a collapse. These are medium-term risks that need to be tackled somehow. We need to find out what to do to fundamentally restore fiscal balance and move away from this unconventional monetary policy.

Mikołaj Kunica: Let us talk for a moment about the prospect of stock market investors. It seems that Wall Street firmly believes that the US Congress will push through a new aid package for the US economy, which, combined with the FED's dove policy, heralds a boom. Are stock market players wrong, or are they right?

Nouriel Roubini: The stock market has of course been strengthened by zero, if not negative, interest rates. This may justify higher stock valuations. Another thing is that the stock exchange believes that the recovery of the economy and profits will take the form of a “V” and a strong recovery will soon take place. I fear this aversion to risk and certainty. The need to reduce the overall debt ratio means that the private sector will hold back investments, save, spend less or with greater caution. Recovery will take the form of a “U” rather than a “V”. Therefore, there is a certain discrepancy between what the economy can do and what happens on the stock market.

The second difference is that people say it is a K-shaped recovery, because those with stable jobs and financial assets are doing better, keep their jobs, and their assets are growing. But those in a more precarious occupational situation who have lost their jobs, or are only employed part-time and do not have much capital, are doing worse. Inequalities in income and wealth are increasing. Wall Street is doing well, but it is important to remember that the stock market is not the same as the real economy. The stock exchange is made up of corporations, big technology, and big banks. The real economy is made up of workers, households, and small businesses. And if the stock market is doing better because large companies are laying off workers and cutting costs to increase their profits, it affects employees. And if big companies become bigger, but millions of small companies go bankrupt, it means that big stock exchange companies will grow, but the real economy is in bad shape.

Every job created by Amazon is likely to result in 10 retail jobs being lost. There are huge inequalities in the United States. The 10% of the richest controls 88% of global capital. Just 1% of the richest own 55% of all capital. At the same time, the lower 50% of the population has almost no assets. Fifty American billionaires have more assets than the lower half of the planet's population,

Mikołaj Kunica: I wonder how real the risk of an explosion, another wave of global revolution by angry people is? For instance, another wave of the Occupy Wall Street movement, as happened after the financial crisis of 2008?

Nouriel Roubini: There is division around the world. Into the “haves” and the “have-nots”. The winners and losers. The division into those who have more financial stability and those with precarious jobs. It is the young generation with unstable incomes, freelancers, part-time workers. Please note that during some of the demonstrations held by the Black Life Matters movement, there were many young white people who demonstrated not only because of racial injustice but also against income and wealth inequality. All over the world we have seen demonstrations, if not riots against inequality. One of the many things that every country must do, whether it is a developed economy or an emerging market - a liberal democracy or a more authoritarian country like China - is to address the issue of income and wealth inequality.

If we do not reduce the gap between those who have and those who do not have, between those who are ahead and those who are behind, we will soon see greater social and political unrest. Not only in the United States, it is a problem in many other parts of the world. And the present crisis increases the gaps and inequalities that we know.

Mikołaj Kunica: Before our very eyes, and this started even before the pandemic, there was a growing awareness of the need to create more diverse, more environmentally friendly strategies. In the EU, the fate of the green order policy is at stake. Even China surprised the world recently by announcing a retreat from coal programme. Do you think that the world is saying goodbye to fossil fuels?

Nouriel Roubini: Man-made climate change is a serious problem and causes much economic damage. Water levels may rise, which will flood large coastal areas. Some parts of the world will be so hot that they will become uninhabitable. Typhoons, hurricanes and floods, extreme heat, giant fires, droughts, and the collapse of agriculture all have something to do with global climate change. So, as societies, we have to deal with it. Of course, we have to make sure that we do not contribute to slowing down economic growth, but if we make enough investment in renewable sources, in the green economy, in clean technologies, all this can stimulate economic growth. It can create new jobs.

However, I do not think that fossil fuels will disappear completely. The problem is, can we gradually move towards alternative and renewable energy and a green economy? Can we gradually reduce our dependence on fossil fuels? If cars eventually become electric cars and we finally have autonomous vehicles, we can achieve the same level of transport with far fewer cars. Investing in a car is a bit of a waste, because 90% of the time the car is parked somewhere, and it is not the most efficient solution.

Mikołaj Kunica:
I could not agree more.

Nouriel Roubini: There are also other new technologies related, for example, to carbon capture, etc., which can stimulate economic growth and reduce environmental damage. So, I am not a maximalist who says - no fossil fuels - this will not happen. Maybe we can gradually achieve some of the Paris objectives to decarbonise the economy, precisely through new technologies and policies that stimulate growth and economic activity while creating new jobs. A compromise between environmental protection and maintaining economic growth may be much easier than we think.

Mikołaj Kunica:
COVID has traumatically accelerated the development of new trends, changed economic dogmas and business models. In your opinion, what are the three most important mega trends that we are seeing now? What will be the next big change after the pandemic?

Nouriel Roubini: A key mega trend is digitisation, which will speed up even more. It may happen that more people will work from home for longer. This, in turn, may affect the decision as to where people live - in big cities or, on the contrary, in the suburbs or in the countryside. The shift towards online shopping will increase over time and shopping platforms will become increasingly important. We may also have to get used to even more online learning. Whether this is good or bad depends on how we can improve the technologies used for such learning.

Social media can be very toxic. They create habits that do not encourage real, human, interpersonal social interaction. They can lead to the manipulation of human tastes or political opinions. Consequently, some of these things may have certain negative effects. So, digitisation is a big mega-trend that affects many things, the way we live, work, learn, play, shop, interact with others.

The question is whether we will be able to preserve personal freedom or lose our privacy. Will authoritarian regimes not take control of the flow of information and data. Will we not wake up in a world of great surveillance states such as China? This is one of the negative sides and possible consequences of this process.

Mikołaj Kunica: Professor, I would also like to ask about Poland and our situation. How do you think the current crisis will affect the economies of countries like Poland?

Nouriel Roubini: Poland is part of Europe. Your future depends on deepening integration with Europe. Assessing the effects of the current crisis, I believe that your economy has benefited from the fact that some global supply chains and production have been relocated and have resulted in investment in Polish industry. Poland can also create a technology centre if it invests in the skills and education of its citizens to make sure that people know how to find their way around in this vibrant, globalised, and digital world.

Many technology companies have started investments in Poland. Let us remember that not so long ago we saw an intellectual drain on your human resources. When the economy was doing badly, many people were leaving the country. Lots of highly qualified people, entrepreneurs. If there had been a policy that would have resulted in strong growth, many of them would have returned. They could bring a lot of human capital, skills, and knowledge into your economy.

Poland is quite a big country in terms of market size. It can benefit from integration with the global and European economy. At the same time, it is necessary to make sure that the policies pursued are caring enough, and that they protect the weaker, poorer, and elderly. In general, Poland is an economy that can do well in Europe in the medium and long term.

Mikołaj Kunica: I would like to ask you a personal question. How do you deal with this completely new situation in your everyday life, which requires us to be more disciplined, to maintain social distance? Has everything changed? How do you find yourself in this new world?

Nouriel Roubini: I am one of those people who used to travel a lot. Before the arrival of COVID, taking only hand luggage, I went on a 5-week journey, during which I visited 4 continents. Meanwhile, for the last 7 months I have been staying in New York almost all the time. Of course, the way I work has changed. Now I often connect with people and talk to them through the Zoom platform. I conduct webinars, online conferences, and interviews. The social life has become much less intense, I spend time with close friends only in small groups, safely.

I think everyone has realised that what is important in life is quality, not quantity. People need to be more selective; they need to be more cautious. This is a great emotional, personal, and financial shock for many people. There is a serious risk of a mental health crisis. Many people have lost their jobs, their hopes, they worry about their future, about their health, about their livelihoods.

This is an experience that is significant and dramatic for everyone, for friendships, for families and for the community at large. This crisis is much more serious than the global financial crisis, because of its wider social impact.

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