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New York University's Stern School of Business Professor of Economics & Roubini Macro Associates, LLC CEO Nouriel Roubini joins Yahoo Finance's Julia La Roche to break down his economic outlook amid the coronavirus pandemic.
JULIA LA ROCHE: But for those who might be expecting a V-shaped recovery, maybe think twice. Our next guest is Dr. Nouriel Roubini. He's a wealth economist, a professor at NYU's Stern School of Business, and he's also well known for predicting the last financial crisis. He has the moniker Doc, though. Some like to call him Doctor Realist. Nouriel Roubini, thank you so much for joining us.
NOURIEL ROUBINI: Great being with you today.
JULIA LA ROCHE: Nouriel, we keep hearing a lot of folks talk about this V-shaped recovery. You also have other letters out there, whether it's an L, a U, a lower-case V, even a Nike swoosh, et cetera. What do you make of it, and what kind of recovery are you expecting?
NOURIEL ROUBINI: Well, after a freefall of output in the second quarter-- it's going to be something like 10% in annualized for the-- you're going to see a recovery of growth in the third quarter because you're starting from a very low base after quarters in Q1 and Q2 of sharply falling output. So even if you were to grow, say, 4% in the third quarter, annualized, it's going to look like 16%. So it's going to be outsized because we're annualizing the number.
But the point is not whether there's going to be something looks like a V in the third or fourth quarter, but what's going to happen over time. And my view has been that first of all, it's not going to be a V. It's going to be most likely a U because you have a huge number of firms that are highly leveraged because the last decade, we had the CNO, levered loans, high yield, fallen angels, high grade, that $3 trillion of issuance. These firms have to avoid bankruptcy, and they're becoming very risk averse. So they have to survive and thrive. How do they do it? By spending less and saving more and cutting capital spending.
If you have to spend less, what's your major cost? It's your labor cost, and they're slashing jobs like we have never seen before. We've lost more jobs in three months than we created in the previous 10 years. And therefore, there's going to be a massive, first of all, job losses. And then when they're going to rehire, they're going to do what they've done after the global financial crisis. Rather than having full-time jobs with full wages and full benefits, going to see what we have seen-- part-time workers, hourly workers, gig workers, contract, or freelancers.
So there'll be a huge amount of uncertainty on labor income. And my labor costs is somebody else's labor income and consumption. So firms have to increase savings or reduce investment. Households are going to have less income because either you are still jobless, or if you have a job, it's going to be more precarious. So you have to be also risk averse, and you have to spend less and save more.
And of course, you'll spend less on things like big-ticket items, on discretionary spending, and on buying a new home because your credit score is ruined and you're uncertain about your job. So both firms and houses are going to be spending less, save more, do less investment spending, cap-ex for the firms, households in the case of households in residential investment, and that implies a very dynamic U-shaped recovery.
So we start with a V, going to soon go into a U, and then there is a risk we end up into a W, a double-dip recession. Because if it's likely we're going to have either a burst-- an increase in the first wave of cases or a second wave in the winter, then even then, COVID could go into another economic contraction. And over the medium term, I'm even worried about global forces that are going to lead to something like a depression, like an L. So I think the sequence is V to U to W to eventually, by the middle of the decade, an out.
JULIA LA ROCHE: I think maybe one way to sum it up, Nouriel, is that you see a lengthy road back here. That's one thing I'm taking away.
NOURIEL ROUBINI: Yeah.
JULIA LA ROCHE: The last time we spoke, we talked of what you've coined a greater depression, something even more severe than what we saw in the 1930s. Where do you stand on that view today?
NOURIEL ROUBINI: Well, I've always said that my prediction for a greater depression is not about 2020, but the decade of the 2020s, sometime by the middle of the decade. And I pointed out, there were 10 deadly drivers of these disruptions and economic difficulties that they are-- that started after the global financial crisis, but they are being exacerbated by this coronavirus crisis, things like deficits and default or demographic is going to lead us to unfunded liabilities. Or initially, deflation followed by debasement of currency as we monetize fiscal deficit end up eventually in inflation. You have digital disruption to AI and automation and then rising inequality.
And then you have de-globalization as a backlash against trade, migration, open markets, and then you a democracy backlash. And then from there, you go to this duopilistic rivalry between US and China and to digital rivalry between US and China as well. And you finish with deadly man-made disasters, like pandemics and global climate change, that are not a natural disaster, but as we know, are man-made. You combine these 10 forces, and they're all very disruptive, and you might have eventually, a greater depression. But it's not the story for this year or next, but for the middle of the decade.
JULIA LA ROCHE: Right, for the next decade, and you mentioned a number of forces. Is there anything that could be done at this point to reverse it? We've seen, you know, the government stimulus, you've seen the fiscal response, the monetary policy to kind of stem some of the issues that we've seen throughout this pandemic. Is it enough? Does it have the efficacy, or are we just kind of delaying the inevitable?
NOURIEL ROUBINI: Well, this year, if we had not done these massive monetary and fiscal and credit stimulus, there's greater recession because this recession has been more severe than the global financial crisis. It could have already ended up into a greater depression, because initially, there was a free fall of economic activity that looked like the greater depression.
So we avoided a greater depression for this year. But the point is that first of all, we cannot run fiscal deficits of 10% to 20% of GDP forever. And monetizing large fiscal deficit in the short run prevents depression and deflation because we have a slack in goods market, in labor markets, in real estate, in energy commodities. But over time, we're going to see negative supply shocks, two sources of them. One, de-globalization, decoupling, fragmentation of the global economy, trade restrictions, balkanization of global supply chains, that's going to reduce growth and increase costs.
And the second one, we'll have less technological innovation because we'll have a decoupling between US and China on AI, robotic, internet, 5G, you name it. And if we don't use the Chinese, say, 5G, but we use the European one, it's 30% more expansive and 20% less efficient. And therefore, the same 5G network costs us 50% more. That, again, is a negative supply shock.
So globalization and technology were positive supply shocks for the last decade that increase growth and reduce inflation. The next decade, we're going to see negative shocks coming from de-globalization and less technological innovation. And if you add to them monetization of fiscal deficit, eventually, the inflation genie gets out of the bottle and you end up with stagflation, stagnation and inflation, like we did in the 1970s when we had two oil shocks that were negative supply shocks that were monetized and fiscalized, and we ended up with the stagflation after '73 and after '79. So that's the risk we're facing.
JULIA LA ROCHE: Nouriel, you just highlighted the risk-- the stagflation risks that we face. You alluded to 1970s. Not all of our viewers were around then. Help us understand that scenario because it sounds like a nightmare scenario.
NOURIEL ROUBINI: Well, it's going to be a difficult one because if inflation is only falling and you have a recession, you ease monetary policy, you ease fiscal policy, and you avoid the deflation and recession. But if you have inflation rising while you have a recession, then you have a dilemma. To fight inflation, you have to tighten monetary policy, and that makes the recession worse, like we did, say, in the late '70s when Volcker became chairman of the Fed and we had the double-dip recession in '80, '82 following the oil shock of '79 that led to breaking the back of inflation. Or if instead, you decide no, you want to go for growth, then inflation gets out of control and you go well above double digits.
So in a world in which there is stagflation, inflationary pressure with economic stagnation, you have a policy dilemma, something we have not faced for the last 40 years that we may be facing in the next few years, if I'm right that we're going to see supply shocks. They're going to be reducing growth and increasing costs and inflation, and it's going to lead to this policy dilemma.
JULIA LA ROCHE: And the other thing that you outlined was jobs. Obviously, we've seen tens of millions of Americans file for unemployment insurance, and you made the case that some just aren't coming back. Do we need to rethink our economy here in the US? Our economy is majority services sector. Do we need to rethink that going forward?
NOURIEL ROUBINI: Well, the re-thinking is that the share of labor income has been falling for the last few decades because of trade, because of globalization, because of migration, because of technological innovation, that this capital-intensive skill buying and labor saving. And now it's not just the job losses for blue collars, but also white collars in technology, AI, automation, robotics is going to exacerbate this trend.
And this is leading I think right now to a social and economic backlash, you know? For a while, those that were jobless, hopeless, without income, without skills, burdened with that were voting for Trump, especially those coming from more rural areas, smaller towns. But now you have an urban underclass that is the ones that are voting for Bernie Sanders. But there is a huge underclass it is not just blacks, not just Latinos, but also white.
You know, that 80,000 Americans who are dying every year of opioid overdose, why? Because they are economically desperate. It's what Anne Case Angus Deaton wrote a book about, "Depths of Despair". And it's mostly a white underclass of people who have no skills, they have no job opportunities, they have precarious jobs. They have literally barely any income. They don't have any assets nor wealth, no homes, and they are burdened with debt if they've gone to college. And they are becoming really restless, politically and socially. Unless we address this fundamental problem, we're going to keep on having increasing economic and social and political instability.
JULIA LA ROCHE: Nouriel, I want to shift topics to China. This is something you had mentioned in the conversation as well, this decoupling of China. Are you talking about a fragmentation here, and are people going to have to start picking-- or people-- countries, rather, pick sides?
NOURIEL ROUBINI: Well, you know, increasingly, there'll be a divide between US and China on trade, on technology, on data, on information, on tax standards, on the internet, on financial flows, on FDI, on monetary arrangements, on currency arrangements. This Cold War between US and China is becoming colder. And increasingly, both the US and China are going to say, either you have my AI or their AI, my robotics or their robotics, my 5G or their 5G. And therefore, the country in the middle will have to choose between a US economic technology model and then Chinese one.
And paradoxically, actually, most of the allies of the United States in Europe, in Asia, in the Middle East, and in Latin America, they may be geopolitically allied to the US. But today, they are doing more business, more trade, more investment with China than they do with the United States. And the US has taken a very unilateralist approach to world affairs, has mistreated its own allies while cozying up to a bunch of dictators, and the US is losing a huge amount of its own soft power. So unless we have a change in approach, we might be in a situation in which even the Europeans are going to say, the Huawei 5G is cheaper, it's better. I'm going to go for that one, rather than the other one. That's the risk we're facing right now.
You have to engage the world. You have to be internationalist. You have to rebuild your alliances with your allies. Otherwise, the US power is going to decline, and the one of China is going to be rising in relative and absolute terms.
JULIA LA ROCHE: All right, Nouriel, it's not the rosiest outlook that you've painted so far in this interview. What is something that you are upbeat on when it relates to the economy, the broader economy, even the Global economy. What is the bright spot for you here?
NOURIEL ROUBINI: Well, the bright spot is that, of course, technological innovations and the industries of the future have the potential to increase productivity growth, whether it's information technology, whether it's manufacturing technologies, whether it's energy technologies, whether it's biotech, whether it's fintech that's going to change radically financial services, a lot of innovation. So eventually, we're going to see it in the macro data. So far, we don't see the productivity numbers at the macro level rising, but the thing is, is that a matter of time?
The issue at that point, however, is going to be the economic pie is going to grow much faster than before in the next few years but then the distribution of the game is going to be even more skewed and lead to more inequality. Because if you own financial and real capital, you can invest in the industries and firms of the future that are going to do well. If you're in the top 20%, 30% of distribution, of educational skills, human capital, then technology and AI is going to make you more productive.
But if you are a blue collar worker, a white collar worker, low skilled, but even medium skilled, your income and your jobs are going to be threatened in the past by globalization, tomorrow by technological innovation. And therefore, we have to make sure that everybody survives and thrives in a hyper-digital and a hyper-globalized world. Otherwise, the political bottlenecks are going to be very severe.
We may need universal basic income in addition to retraining, even skills and education to those who are left behind. And the number who are left behind are becoming the majority. That's why populist parties of the right and the left are becoming more popular not just in the US and Europe, but also in emerging markets. So yes, the economic pie is going to grow, but the inequalities are going to grow even faster.
JULIA LA ROCHE: Dr. Nouriel Roubini is the chairman and CEO of Roubini Macro Associates and a professor of economics at NYU Stern. Nouriel, we appreciate you being here. We hope you will join us again in the future.
NOURIEL ROUBINI: Great being with you today. Pleasure.
JULIA LA ROCHE: You too.