Odd Lots - Nouriel Roubini Sees A Bad Recovery, Then Inflation, Then A Depression

Episode Date: May 4, 2020

During the last crisis, the economist Nouriel Roubini earned the nickname “Dr. Doom” for his ominous prognostications about the economy and financial system. While he prefers the moniker “Dr. Realist” Roubini is once again extremely negative. On this week’s episode he explains why he sees a poor recovery, then a bout of inflation, and then ultimately a depression in the wake of this crisis.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. So Joe, you know all those economic recovery shape letters that everyone's talking about? Yes, W-V-V-U-L, lower-case V, the square root sign, K, I've seen them all. There's some really esoteric ones out there. So what do you think is the most sort of bearish out of all those shapes or letters or symbols or whatever? That's a good question. I mean, I guess the L or the U, something like that.

I mean, anything that isn't premised on there being some sort of snapback. Also, maybe just the I, just a straight letter down. They just never comes back. I suppose that's a possibility, too, that people don't talk about. I'm glad you said I. So I actually hadn't heard that many people talking about this letter, but yes, there is an eye-shaped economic recovery, which is a straight line going down. So it's really not an economic recovery at all. And it's probably the most bearish of all the forecasts.

And the person we're going to speak to today is someone who has written about that eye possibility. Yeah, so I'm looking forward to our talk today. It's someone who's going to be very well known to our audience who in the past, and I don't even know if it's rightly or wrongly. I'm not even sure where he, if he always embraced the nickname. But nonetheless, his nickname, Dr. Doom, became many people would have heard it during the last crisis. Yeah. And I think as soon as you say the name, Dr. Doom, everyone knows who we're going to be talking about. But it's Noreal Rubini, the chairman of Rubini macro associates. And he's known, well, he's known for forecasting the previous financial crisis back in 2008, but he's also known for pretty bearish prognostications. And it's been very bearish of late, has it not? Things have not been great.

So, yes, I would say that that is a safe call. All right. Understatement of the year. Okay, well, without further ado, then, let's bring a... on Noreal Rubini. Nouriel, it's so great to have you. Thanks so much for coming on the show. Great being with you today. It's a pleasure. So Nouriel, Joe and I were sort of joking just then, but you do have the Dr. Doom moniker. Do you feel, I guess, vindicated isn't the right word given current events, but do you feel that

you are living up to that Doom reputation? Well, usually I say that I'm Dr. Realist, not Dr. Doom. And if you look at the last decades, I've not been negative all the time. When there were a risk-off episodes, I pointed them out when there was economic and market recovery. I pointed it out as well. So it's not as if I'm permanently a perma bear. I think that would be a mischaracterization of my views. So call me Dr. Realist.

Something I'm curious about is, you know, we see these economists forecasts right now that are like, oh, okay, Q2 GDP is going to plunge 30 percent and then maybe we'll have a small recovery in Q3 and then maybe we'll have a robust recovery in Q3, whatever it is. How do you go about the process of making a recovery forecast? How does anyone, while separating that recovery from the policy response? because, of course, we got the CARES Act at the end of March, and that probably helped slow down the crash somewhat. But it seems hard to make any sort of forecast about Q4 or Q1 of next year without having a view on how robust the policy response from both the Fed and fiscal authorities will continue to be throughout the course of this year.

Well, usually when there is a recession, it's very hard to make forecast about the length of it and the shape of the recovery. By definition, is a change in regime, and even traditional economic forecasting models essentially break down, because those models don't tend to predict recessions. So once you are in a recession or financial crisis,

you have to ask yourself in a more, I would say, qualitative way rather than a quantitative one, what is gonna be the shape of the economic recovery? So, for example, you know, I wrote a recent paper with my global economic outlook with my research colleagues and we argued that there are three scenarios. One is the what we call the greater recession. It would be more like a U-shaped recovery. Second one is a downside scenario, call it depression, L-shaped, and then there is an upside scenario of a V-shaped recovery.

Now, markets for the last few weeks, especially U.S. equities seem to be pricing a V-shaped recovery in that paper and I don't have time to go on every point of it but we present about 14 separate factors why we believe that the recovery is going to be U-shaped rather than V-shaped now those predictions are not based on a formal econometric models because by definition those forecasting models are useless when we are in the depth of recession but you're trying to understand what's going to be the economic dynamic of the behavior of the private sector, households and corporates, what's going to be the policy response?

And of course, any prediction you make on the shape of the recovery of economies and markets depends on the policy response. We know a lot about the policy response, how strong it has been in the United States, strong but not as strong in Europe and Japan, more constrained in emerging markets. So any economic forecast, of course, makes also predictions about the policy path, monetary policy, fiscal policy, credit policy, regulatory policy, in this case of course, L policy, because we have to decide how fast or how slowly to reopen. And you feed that one into your essentially model in terms of predicting the shape of the recovery.

So certainly the shape of the recovery is not independent from the policy response. And you can make sense of that policy response. We've already front-loaded in one month in terms of unconventional monetary fiscal policy, it took about three years during the global financial crisis to occur. The entire toolkit of unconventional tools that the Fed created between 2007-2009 have been redeployed in less than a month because they were there and they were available and the Fed made the decision of going and front-loading it and they created even new ones. Like for example, purchasing corporate bonds is something that the Fed did not do during the global

financial crisis and not only they've started to purchase high grade investment rate, but they've also now gone into willingness to purchase high yield, something in my view is very risky, but changes completely, for example, the dynamic of the recovery of spread products, including corporate bonds, high grade and high yields. I want to dig into the central bank response, but before we do, if we zoom in on the U.S. and talk about your forecast, which is this U-shaped recovery sort of lengthy road, back to economic health, what do you think is the biggest factor in driving that scenario? Is it health policy or is it economic and monetary policy?

I guess another way of asking that question is whether or not economic and monetary policy can fully offset the impact of the coronavirus. Well, I do take the policy response as being very aggressive, both monetary, credit, and fiscal, and that everything else equal is positive for making sure that this recession is only two quarters, Q1 and Q2, and then there is a recovery. But I think that there are many factors that lead me to essentially express the view that my baseline, say 60% probability is a U-shaped recovery, and I sign only a 20% probability, to say V-shaped recovery of the economy.

The market is a different story. I think the main factors I would point out are that on the health side, we know there is going to be a second wave. The second wave could occur already in July and August, depending on how fast we reopen and there is a temptation to reopen too fast. Secondly, there'll be another second wave or a third wave in the winter when we are not going to have yet a vaccine and when the cold weather comes back, we're going to have it again. How severe is going to be? We don't know, but we know there's not going to be a vaccine by then and depending on how much we flattened the curve,

it could be severe or less severe. But I think that the fundamental reason, why I believe it's going to be you is that you have two critical agents in the economy, in the private sector, households and corporations, and both of them are going to be stress. The household sector is going to be in a situation which is effectively, you have millions of people that have lost jobs. Even when there is a reopening, many of them are not going to regain their jobs, or if they're again, their jobs are going to be part-time jobs, informal worker, gig workers, contractors. So their income generation is going to be much weaker.

So you have consumers, there are one, shell-shocked, two, they're still scared of the virus, three, their income challenged, four, they are asset crushed, five, they are burdened with a huge amount of debt, mortgages, auto loans, student loans, consumer loans, credit cards, and anybody sensible should be more precautionary in their consumption and saving behavior, right? There will be a massive increase in precautionary savings for any level of income. and your income is going to be certainly lower than before. So you have lower income. You spend less, you save more.

Why do you save more? Because, you know, 40% of US households, allegedly, have less than $400 of cash in the case of an emergency. So after what has happened with the risk of another shock coming from the corona, you're losing your job, not regaining it, better safe rather than sorry. So I expect that the savings rate of the household sector is going to be sharply up,

And the investment of household sector, what's investment for household is purchases of homes is going to be sharply down. Would you want to buy a home, you know, even with this lower mortgage rates and your credit score is going to be worse? So you have higher savings, you have lower investment for households. Same story for the corporate sector. The corporate sector, as we know, was highly leveraged, leverage ratio like we have not seen in the last 40 years for the corporate sector.

This is an accident waiting to happen. And every corporate will have to survive, reduce leverage. How you survive by reducing leverage, by cutting costs, labor costs and other costs. So you have to increase your saving rate and you have to cut on your CAPEX, option value of waiting, right? There is glut of capacity. You don't know how recovery is going to be. So you're going to have an increase in savings of the corporate, a reduction of CAPEX.

So the financial balances of both households and corporates is the difference between their savings and their investment. They're going to improve. They're going to improve because they have to save more and they have to cut spend. on CAPEX on residential. While that's individually rational, in equilibrium, higher saving and lower investment means a depressed economic recovery, even if the fiscal authority and even the monetary authority are doing monetary and fiscal stimulus.

So you have one positive coming from the policy, but the de-leveraging that has to occur in the private sector leads you to this thing. Now, during the global financial crisis, the households were highly leveraged and they had this de-leveraging. But the corporates were not as leverage. This time around, we had high leverage of corporates and high leverage of households. So both of them have to be leveraged by increasing savings, reducing investment. That's a recipe for a U-shaped recovery. There are many other factors, but that's a key argument of why it's going to be a U rather than a V.

And I think it makes a compelling argument. When you talk about sort of the quasi-behavioral ramifications of this, so households will have just watched their incomes, vanish at a shocking speed, same with corporate revenues. Are there other periods in the past, either specific economic events in U.S. or global history that show how sudden shocks to the economy leave lasting changes in business or household inclination to investor spend? Well, the difference between this recession and all the other ones is that even the global financial crisis,

even the Great Depression were a slow-motion train wreck. It took three years for output to fall this much, for unemployment to go this up, for stock market to fall 50%, for credit spreads to rise at double-digit levels, and so on and so on. This kind of a shock instead is like an asteroid hitting planet Earth and not just one country, but the entire world, and shutting down economic activity. So we have never had this experiment. We've had experiments, of course, of isolated cases. There is a hurricane in Puerto Rico or in somewhere in the Caribbean or a major natural disaster of course you have that

Shock limited to that particular you know region of the world or town or whatever and you have those dynamics of course of a Massive shock that is economic and financial and otherwise, but this is something is hit pretty much Planet Earth So it's very different, but even if it's different you can make inferences intelligently based on economic behavior and the dynamic and the dynamic of what's happening to income, to jobs, and so on, they're going to lead you to understand what's the shape of the recovery. I mean, there was already after the global financial crisis,

an example, a tendency for firms not to hire full-time workers with full benefits, right? Those jobs were gradually going away. It was all gig workers, part-time workers, contractors, freelancers, hour-in workers, and so on and so on. Given the shock that's occurred right now, we know that 26 million Americans have lost their jobs, probably at the peak is going to be more like 35 million people.

These people are not going to get their jobs back. I mean, I live in New York City. Take anybody who worked in a restaurant or in hospitality and so on. Even when you reopen a restaurant, you'll be back in rent by three months, four months. You have to pay back. They're not going to cancel it. You'll have to have every other table empty for security. And these restaurants live on a margin of, you know, five, ten percent.

There is no way. Half of all the restaurants in New York are going to be gone for good. Half of the retail stores in New York are going to be gone for good, even if there is a reopening of these things. Reopening means nothing. There was an article yesterday in the Financial Times saying that they reopened all the shops in Berlin. By the way, in Germany, the heat to income has been much less because we're not firing everybody, that this system of resharing, right? So you have not had mass unemployment. So the stores are open and nobody is going there because everybody is scared. And everybody's worried about their future. Who's going to buy a car? Who's going to buy a home?

Who's going to take a vacation? Who's going to go on an airplane? Who's going to take a cruise? I mean, these are changes that regardless of whether they open a close, a store, or an airplane, or a cruise ship, are going to change behavior. The issue is not whether we reopen, but once we reopen, whether they're going to show up. In my view, most people are not going to show up. What does that imply for inflation? Because on the one hand, you have people who are probably saving more.

and spending less, as you put it. But on the other hand, you have central banks who are sort of throwing the kitchen sink at everything right now, and some people are even talking about debt monetization. So how do you see net net inflation shaping up? Well, last November, before this crisis even was on the horizon, I wrote a long paper saying,

if and when the next recession will occur, monetary and fiscal policy is going to become even more uncombattenance. And I said, effectively, we're going to have monetization of large fiscal deficits, what people call otherwise modern monetary theory, helicopter drop of money, or people's QE, or the new euphemism that people like Bernanke or Stan Fisher uses coordination of monetary fiscal policy. So it's clear that once a recession occurs, policymakers cannot sit there doing nothing pretending they don't have the policy bullets.

And we've seen it. We've had now budget deficit in the US. are going to be 20% of GDP, and the Fed is saying unlimited QE. And this morning, the BOJ is saying unlimited QE, and the ECB is not yet saying unlimited QE, but they're going to soon be at unlimited QE. So you'll have massive monetization of fiscal deficit. So we're going even more unconventional. Now, in the short run, this shock is recessionary and is leading to deflation.

Because while there is a supply shock, the shock to aggregate demand is bigger, and there you have a massive slack in goods market, tons of capacity, machines that are not working, and tons of people, dens of millions, who are not working. So that is deflationary in the short run, and therefore, monetizing fiscal deficit prevents, one, economic depression, two, prevents deflation from setting in. However, the point that I've made in that paper, and is repeated now, is that over time, I fear that one of the medium-term consequences of this crisis is going to be permanent negative supply shocks. We're going to have more de-globalization.

We're going to have more decoupleading between the US and China. We have more volcanization of global supply chains because they're not safe if they're all concentrated on China. We'll have more fragmentation of the global economy. We have more populist parties in power to say, I'm going to protect my workers, my firms. So more protection is, more tariffs, more restriction to trade in goods, in services, in capital, in labor, in technology, in data and information. That's a negative supply shock that over time reduces potential growth and reduces actual

output. It's like the negative all shocks that we had in the 1970s, 70s, 70s, 79. Think of it as a negative supply shock that reduces potential growth and increases cost of production. Now what happened in the 70s when we had the two oil shocks, we monetize them, monetary policy was beyond the curve, and we fiscalized them. But the extent, by the way, of those fiscal stimulus and monetary stimulus was limited compared to today where we're running budget deficit of 20% of GDP and we're fully monetizing with QE.

At that time, you were just behind the curve in terms of monetary policy. You're not that negative policy rates let along QE. So the extent of the monetary fiscal stimulus is 10 order of magnitude bigger than the 70s. Now you throw monetized fiscal deficit in an economy where over time you have negative supply shocks and then you end up with not staggered deflation like today stagnation and deflation that occurred in the 70s where effectively when you monetize fiscal deficit with negative supply shock you get inflation and recession over time now this is not a story for 2020 it may not even be a story for 2021 but I do

believe that these policies over the medium term are gonna lead us back to stack deflation and once you're in stock deflation then you're in a nightmare because you have negative growth and you have inflation. When you have stuck deflation, recession and deflation, it's easy. You have to stimulate the economy to get you out of a recession and out of a deflation. So you need to do monetary fiscal stimulus. Once you have inflation together with economic stagnation, then you have a problem because you cannot this monetary policy if you care about inflation.

So we're going to get there, but it's going to take two or three years. So we've basically seen for decades now, arguably, since the very early 80s and Volcker era, the sort of gradual opening up of the global economy, expanding supply, liberalizing policy, et cetera. And this is the moment to some, that it reverses all those trends, about 40 years to some extent. This virus in the aftermath will finally be the reversal of that in your view. Well, the reversal started to occur after the global financial crisis, because the era of hyper-globalization started either in 1979 when then Xiaoping opened up China or 1989 when of course the Berlin Wall collapsed and the Iron Curtain collapsed and the opening

up of Russia, Soviet Union, and Eastern Central Europe. So we had four decades of globalization, more trading goods, in services, in capital, and labor, technology, data, information, you name it. We reached peak globalization, in my view, already 10 years ago, because after the global financial crisis, there was a slowdown of global trade. There was the beginning of protectionist policies, inward-oriented policies. So peak globalization probably was already 10 years ago, but certainly, these crisis implies much more de-globalization, much more decoupling between the US and China.

The Cold War is going to become colder, the two-city this trap is going to get worse, and will have total balkanization of global supply chains, first in technology, then in manufacturing, then in services. You cannot rely anymore on China. You have to reshore. And by the way, if you reshore economic activity, you're not going to create jobs because you're reshorring economic activity from places where costs are low, say China and Asia, to places where labor costs are high.

So it's going to lead either to use more gig workers and pay them nothing or to use machines. So the process of automation and robotization is going to accelerate. So we'll have more activity in US. It's going to help capital. It's going to still screw labor like it has for the last decades. So these trends are going to get worse, but certainly is a world in which will have more restriction to everything. And even supply of sales, supply chains of food are going to be disrupted globally because every country says, hey, I want to keep my food for myself in case coronavirus comes back. We'll have restriction to exportation of food.

Of course, we'll have restriction to exportation of pharma products and medical equipment. Everybody is going to want to keep it for themselves. And we, of course, have given the tech war between U.S. and China, the entire tech sector is going to decouple, and we'll have a split-in-net, and we'll have two completely systems for tech and Internet and a 5G and you name it going ahead. So there'll be massive balkanization of the global economy. That's a massive negative supply shock that permanently reduces potential growth. and is eventually, given the non-thony fiscal policy,

stuck flaccalae over time. So one of the things that always strikes me whenever I read your work or listen to you talk on TV or the radio or a podcast like this is your sort of specificity of your forecasts as well as your confidence in making them. I'm just wondering, in the current situation, is there anything that surprised you

or that you weren't expecting to happen? Well, initially, of course, the free fall in economic activity took even me by surprise. You know, at the beginning was not a U, was not a V, was not even an L, was a I, literally free fall. The collapse of output, employment, consumption, investment, export, imports, pretty much every component of agri-demand and agri-supply was like a free fall. And, you know, even Morgan Stanley, J.P. Morgan and Goldman-S. Sachs now saying in Q2, the contraction of output in US, for example, at the annual rate is going to be between 35 and 40% at the annual rate, right?

So everybody was taken one by the free fall because we're not seeing a shock of this sort sudden stop where everything shuts down. In any typical financial crisis or economic crisis, you have a buildup of the economic downturn, but it's slow and gradual. As I said, what happened in the past, even in the Great Depression, in two, three years or during the global financial crisis, this time around has occurred in three weeks. The other aspect that has been partially surprising, but not totally surprising to me, has

been the policy response. But as I said, I wrote last November that when the next recession is going to occur, we're not going to do the typical zero rate, negative rates, a little of QE, a little of credit easy, a little bit of forward guidance. We're going to go full Monty on helicopter drop of money. And by the way, what's the difference between having helicopter drop of money and full direct monetization of fiscal deficits and having large deficits plus QE? The only difference between the two is when you do QE, you buy the bonds in the secondary

market. While when you do direct monetization, you're buying them in the primary market, right? But that's a fig-lift. The impact on long rates and on financial condition is exactly the same. Who cares whether you're buying the bonds, you know, direct- directly from the government or the government issues them and a week later literally the Fed purchases bonds at the rate of 100 to 100 billion per week. It's just the same thing. It's just a fig leaf to say it's not direct monetization. It is direct monetization. You just

wait a week rather than waiting one hour. It's just the same thing, right? Let's call it euphemistically coordination of monetary fiscal policy. It's a joke. It's not coordination of monetary fiscal policy. It's fiscal dominance and the central park has no option given a deficit of 20% of GDP, but fully to monetize it. Because if they were not monetizing them, you know, 10-year treasuries would not be at 0.6, there will be at 2, 3%. That would happen. So they have no option with a deficit of 20% of GDP to fully buy the entire stock of new

bonds issued by the treasury. That's what's happening in the US. That's what's happening in Japan. That's what's happening in Europe. That's happening in all advanced economies. Now, emerging market is a different story. In emerging markets, you monetize. monetize fiscal deficit, to this extent, you end up in hyperinflation, like Zimbabwe, like

Argentina, like Venezuela. Luckily, in advanced economies, we have some modicum of policy credibility left, and we're not going to end up into high inflation or hyperinflation. But over the next few years, we may see inflation rise from the current very low levels to higher levels. That can happen in the presence of de-globalization and the supply shocks. I want to ask you a little bit about the sort of pre-crisis era. You mentioned corporate leverage was high, household leverage as well. You know, after the last, after the great financial crisis, and you look back at 2005, 2006, there's obvious all kinds of risks as opposed to related to housing. Was the economy inherently fragile pre-crisis? I mean, we talk about this incredible crash, the speed of which caught literally everyone by surprise. Does that mean that the economy must have had weak foundations going into this? Or is it just like we turned

off the economy due to public health risk and this is what was going to happen? How much does the current crisis sort of indict the stability of the pre-crisis economy? Well, there were plenty of fragilities even before this crisis occurred. You know, after the global financial crisis, in spite of the talk about the great de-leveraging, very little de-leveraging occurred because of course as we know a public deficit and debt roads significantly both in advanced economies and emerging markets and also private debts remain high or they increased in the case of the US there was partial the leveraging of the household sector but the deleveraging did not occur

through massive increase in saving it occurred only because lots of people defaulted on their mortgages and personal loans and eventually their debt were reduced but there was a massive releveraging of of the corporate sector, right? Whether it was, you know, CLOs, leverage loans, massive issuance of junk bonds, a trillion dollar of fallen angels in high grade, they're not gonna be downgraded.

All these share buybacks that implied that a complete change in the capital structure of most firms with less equity and more capital as a way of boosting earnings per share and the valuation. So, the levels of corporate debt, And people had been writing it for the last year. Even the Fed recently was saying we are worried about the buildup of corporate debt. So this is an accident waiting to happen because the corporate were leveraged like never before in history.

You know, my colleague Ed Olman, who's an expert of corporate default, had been reading about years about the buildup of corporate debt and lots of other people did. And in the case of the household sector, the debt levels were not much lower. They did not increase, but they remained high. What changed was that during the last decade, private and public debts were higher. Domestic and foreign debts were higher. In the private sector, debts of households, of corporates, even of the shadow banking system, were higher. But given near zero policy rates and given very low, long rates, that servicing ratios were very low, right? That ratio were not low.

What made the system sustainable was that we had zero rates, if not negative, and long rates that were extremely low all over the world in advanced economies. And therefore, there was a false sense of security because debt servicing ratio were a historical law. But, you know, once a crisis occurs and credit spreads blow up, even if safe assets like Treasury, boons and JGBs can go even lower, if the spreads for corporate debt or household or credit cards or RMBSs or you name it go through the roof,

then you can have a debt crisis even with the yield on safe. bonds being close to zero, if not negative, because it's credit spreads that are blowing up. And that's what is happening right now. Now, this time around, one of the new things is happening is that not only at the V-shaped recovery of US equity, the other V-shaped recovery has occurred for developed market spread products, RMBSs, money bonds, high yield, high grade, and so on. What explains it? It explains it the fact that the Fed, the ECB and now the BOJ have decided to very aggressively buy not just government bonds, but also to buy corporate bonds.

Now the BOJ and the ECB were already buying for the last few years corporate bonds, let's say the VOJ today announced they're going to triple the amount of corporate bonds and commercial paper that are buying, but for the Fed is anew to buy corporate bonds. And as long as they're buying a high grade, investment grade, it was okay. But once they decided to go and buy even fallen angels that have been downgraded from triple B minus to somewhere in the double B range, and when they decided to buy even high-yield FTFs, the Fed is going into totally uncharted and dangerous territory, because you're really buying stuff that is highly risky, first of all, and you're creating a huge amount

of moral hazard, and you're not allowing the necessary the leveraging that has to occur among leverage firms. They're going to kick the count down the road if you're aggressively trying to narrow the spreads, especially for high yields. So to me, that's a mistake, is again making sure that zombie companies, zombie financial institutions, zombie houses are going to stay live on life support when they should be allowed to default and restructure and have both financial and operational restructurally. So we're going to pay the price for that particular policy. I think that everything else in the Fed is doing may be right, but moving into the space of buying highly risky junk bonds, I think it's crazy. It's utterly crazy.

Just on the policy question, is that the one thing that you would do differently if you were in charge of the policy response here? So, for instance, if you were either in the U.S. administration or chairman of the Fed or something like that, what would you be doing in response to the economic downturn that we're seeing? Well, as I said, the idea that you're going to run large budget deficit that you're going to monetize them. It's the right response in the short run. I worry about the overhang of the balance sheet of central banks, and they're not going to be able to run them down, because if they run them down, there's a debt crisis. Think of it. Even the Fed started quantitative tightening in 2017, but in the fourth quarter of 2018,

when you had just a minor blip, you know, stock market went down 20 percent, big deal in Q4 after going up to 100%. By January 1st, Paul said, okay, I was kidding. I'm not going to continue QT, and I'm not going to raise rates until 325. I'm going to stop. And then three months later, he said, okay, we're going to start cutting rates and we're going to start doing new repos and new open market operation to increase the balance sheet. So, well before even this crisis occurred, the Fed realized we cannot run down the balance sheet. They tried to do it. Then the market shock in Q4 of 18 and what happened last year led them to just change and completely increase the balance sheet even before this crisis occurred. And now that the crisis occurred, the balance

sheet is going to not double but probably triple. And there is not even a sense of whether we're going to start raising policy rates above zero, let alone run down the balance sheet. In the case of Europe, the quantitative tightening never started. They stopped QE and now they've resumed it. In the case of Japan, they never. stopped their QE, the QE always continued, and now they're ramping it up to infinite amount, right? Whatever it takes like the Fed has done. So these balance sheets are never going to go down, and eventually that type of a financial overhang initially leads to asset inflation and asset bubbles. Then eventually it leads also to goods inflation. It did not happen during the last decade,

because during the last decade we had positive supply shocks. We had continuation of globalization, technology. In the next decade, we'll have a reversal of globalization and there'll be even restriction to what technology can do because while technology is going to continue to grow, there'll be massive restriction to the diffusion of technology because of national security. Technology, the tech sector is going to become a critical component of the national security industrial complex and it's going to be restricted. So we'll have two major forces that are going to lead to negative supply shocks rather than positive one.

At the time we're doing monetization and fiscalization of deficit in an order of magnitude that is three or four times bigger than what we did after the global financial crisis. That eventually leads to asset and credit bubbles and then a bust and crash and it leads even to statulation over time. Again, it's not a prediction for this year or next year, but for the medium term, my view, by the way, is that this decade there'll be a calming global depression. This is not a short-term prediction for 2020, but I believe there are at least 10 forces that are going to lead to the coming Great Depression of the 2020s.

Not 2020, 2020s. The coming decade, there'll be a global depression in the global economy, because there are forces and trends and risks and imbalances that were created by the global financial crisis. They were never resolved, and now that I'll come this time around with a vengeance, and And all of these 10 negative trends are being exacerbated by the coronavirus crisis. I don't know if I have time to discuss all of them. I'm writing a new book about the subject about the coming depression of the 2020s,

but there is essentially 10 global forces that are going to lead us to a great depression in the next decade. That's my view. So in the short run, we avoid that great depression. This year, my baseline is a U-shaped recovery, is not a depression. But over time, I believe we're going to face a great depression. Nureo, you're certainly living up to your Dr. Doom moniker there, but I have one final question. So prior to the crisis, one good thing is that we truly had something that resembled some wage growth. We had very low unemployment, the spread between, say, the unemployment in this country among educated white people versus minority groups that started to come in,

genuinely positive things that were coming about through the long expansion, obliterated overnight, what would be a model towards getting back to that point that would be more sustainable in your view? If what we saw was all these sort of unresolved imbalances, how can we get, how can we return to what seemed like some very positive societal trends in a way that doesn't involve endless bubbles? Well, you know, I would take partial issue with your characterization of how well was the situation of labor because, you know, the share of labor had been falling for a decade and was falling. The share of profits was rising in GDP. That's why you had outsized returns.

And yes, people had jobs, but most of those jobs were low wages. Yeah, wage growth was picking up slightly, but was not really robust. And many people had jobs that had essentially no bankers. benefits because many of them became gig workers or part-time workers or contractors or freelancers or hourly workers and so on and so on. You know, 40% of Americans did not have more than $400 of savings in case of an emergency. So those people that were left behind and say Trump was talking about an American carnage when he was elected, I think for most people, there is still an American carnage.

There are 80,000 people today every year in the U.S. They die from an opioid overdose. And that number is not fallen, has fallen by an epsilon. Why do they die of this stuff? Because they are totally, socially, economically, desperate. That will lead to the opioid academic. You're looking at any measure of social kind of success or whatever not. It is an American carnage.

People have jobs, but they are, you know, the hamburger flipping jobs, the lower jobs, the temporary jobs, that have no benefits. Having millions of young millennials having to do three or four times four different gig jobs and not being paid enough and not having any benefits is no kind of panacea of any sort. So I do believe that actually the situation for labor was extremely fragile. Of course, after a decade of a recovery, you had unemployment rate gone from 10% to 3.5. We created 22 billion jobs. But guess what? In four weeks, the entire jobs that have been created in 10 years, they're gone.

26 million and at peak is going to be 35. And ask yourself, if it took a decade, 10 years of anemic recovery with something happening for creating 22 million jobs, how many years is going to take us to essential reduced unemployment rate from 36 million new people without jobs back to normal? It's going to take a decade. It's going to take two decades. What's going to take? So honestly, labor is screwed. It was always screwed.

It's now screwed more than before. And it's going to be a nightmare. Okay. Well, on that optimistic note, I think we're going to leave it there. But, Nouriel, thank you so much for coming on. And I know you call yourself Dr. Realist, but you're painting a pretty depressing picture of the future. but thank you. We appreciate it.

I hope I'm wrong. I feel I'm going to be right. Well put. Thanks, Noriel. That was great. Thank you. So, Joe, I'm just trying to think all the ground we just covered. We had a great depression, food shortages, the end of globalization, a new cold war, stagflation. I could go on. But like pretty much every bad scenario was touched upon. So that was fun.

Yeah, you know, it's funny because, like, I know, when I set it up, the intro, or when we were talking, I was like, oh, they call him Dr. Doom, but I'm not sure if he really is a Dr. Doom. Maybe that was just sort of, like, I think people called him. But, whew, he's very negative. Like, he really is. And you know what the interesting thing is, is that, you know, there's a lot of, like, there's sort of, like, Perma Bear types out there. Like, there's other people. In fact, I think there's like 10 people with a nickname Dr. Doom. But a lot of them are like they sort of like hardcore gold type.

He's not really one of them so much. No. No, actually, yeah, we should have asked him. I guess we should have asked him where he'd be putting his money at this point in time. I would have been interested in that. But it was really fascinating to hear him talk about a permanent behavioral change for people and consumers. Well, it's also sort of interesting too because. There is a lot of talk about permanent behavioral change.

And it's worth sort of disentangling what is the permanent behavioral change due to the health crisis. So, okay, maybe some people are going to avoid different kinds of leisure or they're going to want more space between them and the next person at a restaurant versus the permanent behavioral change that results from seeing your income vanish in a minute or senior revenue vanish in a minute. So it'll be interesting because there's really two. two sorts of things that are simultaneously unprecedented in this crisis that could leave lasting scar. Yeah, I guess we'll have to have Rubini on in, well, a couple years to talk about those changes and also see whether or not that that stagflation idea has come to fruition. The stagflation thing is particularly interesting because you do get more people who have never really been believers in the inflation thesis starting to come around essentially

because of some version of the permanent change of the supply global trade landscape that he described. It feels like if there is going to be a moment where some of the inflation predictions could start to come to fruition, it's that combination of de-globalization and aggressive stimulus that could theoretically do it. Yeah, definitely an interesting one to watch. All right. Should we leave it there? I'll save it there.

All right. Well, this has been another depressing episode. episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at The Stallwart. And you should follow our guest on Twitter, Nouriel Rubini. He's at Nouriel. Be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts, Francesca Levy at Francesca Today, as well as all the Bloomberg podcasts under the handle at podcasts. Thanks for listening.