In this edition of Leaked Lunch Izabella Kaminska sits down with economist and author Nouriel Roubini for a modest “brunch” at the Ned in the heart of the City of London.
The duo discuss Roubini’s new book “Mega Threats“, including its Malthusian themes, the global inflation outlook and how the crypto collapse is playing out. The conversation also touches on some of the inherent contradictions in policies currently being deployed to keep the global economy on track. The recording took place on December 7 and the bill came to £47.25 (Nouriel only had a coffee in the end, while Izzy had a post-facto avocado and eggs on toast).
The podcast is available on Spotify, RSS.com and Apple podcasts.
00:04 Izzy’s intro.
01:43 Interview begins with background noise. Izzy asks Nouriel if he likes being known as Dr Doom. He says he prefers Dr. Realist.
02:03 Discussing the location of the brunch, which is at the Ned, just next to the Bank of England. It used to be a bank.
02:24 Izzy confesses she hasn’t read the entire book because she only received it two days before due to the Royal Mail issues – but she has done her best to get through as much of it as possible. Izzy contends that it feels biblical.
03:44 Nouriel explains what motivated him to write the book.
“I started to reflect on the bigger picture issues during COVID. You know, I’m an economist, and usually economists believe in the concept of comparative advantage, stick to what you know best and don’t say anything else. But I figured out that in addition to economic, monetary, and financial risks, and some of them are conventional, but some of them are new. Like right now we have a return of inflation, whether a turn of stagflation will risk a very severe debt crisis like we’ve not seen in the last few decades. But we live also in a world in which there is a geopolitical depression as China, Russia, Iran, North Korea, challenge the order the US and the West.”
Nouriel also lists other threats like new pandemics, AI and machine learning as well as robotic automation, increases in income and wealth inequality, anti-globalisation and threats to liberal democracy. Says that while the risks are known, he is connecting the dots.
05:52 Izzy asks about Nouriel’s attempt at the end of the book to offer some silver linings and how we can pull out of these issues if we generate mega growth. But that ultimately even this isn’t too optimistic, because the book implies that all roads to generating growth — especially in a sustainable green way — are constrained in some way.
06:54 Izzy asks Nouriel if his realistic take on ESG and green growth (that it comes with too many headwinds and risks of its own) has generated controversy? Nouriel doesn’t mind controversy, he wants to expose the issues with greenwashing.
“As I was studying this phenomenon, I saw that there was a huge amount of greenwashing, a lot of these ESG investments.”
Nouriel expands on why he thinks current climate measures are unlikely to move the dial. He also talks about the free rider problem.
“We are telling China, India and others cut your emissions to zero in the next 1020 years. They say you created the emissions for the last 200 years.”
Nouriel cites his former colleague at Yale, Bill Nordhaus who won the Nobel Prize in Economics, for his work on the environment, on the fact that in order to achieve the Paris targets, the average carbon tax in the world should the above $200 per tonne. But today, the average is $2 per tonne.
“There is no government that is going to increase by a factor of 100.”
In fact, he notes, the opposite is happening.
12:11 The discussion moves to how these various risks can be balanced.
12:25 Izzy tries to point out that there is a contradiction in Nouriel’s gripe with deglobalisation and his view that globalisation wasn’t on a sustainable pathway before 2016. She wonders if in a weird way, Nouriel and the likes of Peter Thiel are more aligned in their outlooks than he appreciates, given the latter is also concerned about system collapse and has been investing in bunkers to protect himself from that eventuality as best as possible?
13:06 Nouriel implies billionaires who want to escape the crisis are not being realistic.
“Those bunkers are not really sufficient, by the way, because if there is going to be either a nuclear winter or an environmental disaster, and you go to somewhere like New Zealand, or Tasmania, there is a small problem. There’ll be a billion people in Asia also trying to move there. And New Zealand or Tasmania don’t have the, the weapons of the army to prevent people from reaching their shores. So I think that the idea that some countries are safe, doesn’t consider the fact that you know, people are gonna want to go there.”
He also anticipates that China would take over Siberia.
14:18 Izzy asks if phenomena like Brexit and Trump — if they were a function of the non-sustainability of globalisation — would have happened regardless, irrespective of the politics.
14:44 Nouriel says he sees the backlash against liberal democracy coming from the fact there is economic malaise and a rise in inequality. And that’s why you have these populist and extremist parties, that rationalise this is happening because the elites control the system. That’s why you are getting figures like Erodgan, Putin, Orban and Kaczynski and the “neo-fascist” Meloni in Italy. Roubini recounts all the examples of totalitarianism and autocracy he perceives in the world, noting that in the end economic populism has already leds to economic disaster in places like Latin America.
17:01 Izzy tries to square that with Roubini’s own opening remarks in his book that the only way human civilisation has a chance of transcending the mega threats it faces is by “subordinating individual freedoms”.
There doesn’t seem to be an option that doesn’t involve the end of liberal democracy, even on the supposed liberal democratic side. 17:41 Nouriel says there are always going to be costs to countervailing action, but the difference is that the liberals see these costs as short run and the benefits in long run.
“The political economy of reforming change, is that you try to kick the can down the road, you put your head in the sand, like an ostrich egg, or as I say, you will push the snooze button over and over again. But then you create even bigger problems down the line. And that’s the political economy of doing stuff that is painful in the short run and gets benefit in the long run.”
The risk of not taking short-term painful action today is that we end up in a dystopian future which also includes the end of the planet and humanity in some scenarios. “And then there is a more utopian or less dystopian scenario where step by step, we’re trying to resolve these problems, and try to get to a better future.”
But Nouriel says the dystopian scenario right now looks like the more likely one. He says we’re in a slow-motion train wreck.
19:14 Nouriel then explains that since he lives in New York he is very much at risk in a nuclear exchange but he probably wouldn’t want to survive it if it happened. He would rather go down with the ship. Referencing Peter Thiel he notes:
“We’re going to be in a world in which there is a nuclear winter. They [bunker billionaires] want to live in an island and survive. I might as well just perish like everybody else. So I think that you know, frankly, living in that world is not worth living. So I’m not saying I’m gonna escape from it.”
21:03 Izzy tries to link Nouriel Roubini’s outlook to Peter Thiel’s again, noting that it isn’t unreasonable that people are going to want to try to survive. 21:22 Roubini says they are very ideologically different. He says even if Thiel worries about the future is very conservative, he believes in free markets and little governments, and doesn’t believe the solutions lie in collectivist action which Nouriel does.
21:37 Izzy cities an interview Thiel did where he likened the challenges we are facing to sailing through Scylla and Charybdis, where on one side too much mitigation leads us down an extremely authoritarian pathway where life is also not really worth living and the other side which is total collapse — and that he believes the objective should be finding a balance between the two. She asks Nouriel if he thinks that’s a fair analysis?
22:43 Nouriel says that many of the threats have a collective component and have to be addressed on a national and international level – so laissez-faire will not work. But at the same time he thinks there are too many divisions politically, that will prevent any international coordination. He goes on to discuss the problem as being tied to a lack of public goods provided by a global hegemon like the British Empire or the US. The likes of China and India, are unlikely to provide the necessary public goods because they are too inclined to be free-riders themselves.
“We need a new global hegemon and if the new global hegemony is going to be China, they have an economic system of state capitalism that isn’t ideal. The political system is extremely authoritarian and becoming more authoritarian is not ideal. And they’re flexing their geopolitical power throughout Asia and globally in a way that might be actually dangerous.”
25:48 Izzy points out that whoever becomes the global hegemon will have to be prepared to be unpopular which is not something the world easily tolerates. Like what Truss experienced.
26:14 Nouriel cites Churchill saying that democracy is the worst political system apart from the alternatives. He notes the many problems with authoritarian regimes.
28:03 Izzy suggests it’s impossible to avoid autocracy in that case. You either have autocracy via populism or by action taken on a global level that suppresses free will if it’s not in agreement with the elite global consensus. She asks if the solution is in better education? [Hinting at reeducation.]
28:45 Nouriel says there is no easy solution, but democracies, even if slow to react usually tend to go in the direction of dealing with the issues and resolving them. He says even in a democracy, I don’t think that the autocratic solution is the right one, eventually leads to economic and financial and other disasters, leaving aside the repression of individual rights and all the rest.
29:19 Izzy reverts to the topic of climate policies and how they risk amplifying all these civil democracy issues.
29:42 Nouriel says that’s why it’s important for young people to be most engaged in the issues, as they’re the ones that are most likely to vote for policies that imply costs in the short run, but open the door to longer-term survival.
30:18 Izzy wonders if Nouriel is suggesting that we need to indoctrinate the youth with cult-like thinking (i.e. more Greta-style movements) to get the right policies through.
30:38 Nouriel distances himself from the idea he is endorsing cults. He just wants political movements.
31:14 Izzy changes topics and asks Nouriel what he thought of the UK’s bond debacle and the fall of Truss, especially with respect to how it triggered austerity and a de facto anti-growth response in Rishi Sunak?
32:00 Nouriel says the UK made a huge mistake by voting for Brexit which was a self-inflicted wound. Stagflation is happening everywhere but it will be worse in the UK because of Brexit. The UK is total chaos, he says.
“We’re already in stagflation in the UK, inflation is double-digit and rising, even the Bank of England is expecting five consecutive quarters of negative economic growth.”
He says there’s no chance the UK can become Singapore on Thames, not least because Singapore is almost a socialist country, full of state enterprises. The better comparison would have been with Hong Kong, but now that China has swallowed Hong Kong that’s not very politically correct to say. Also it’s nonsense that the UK could have replicated the old Hong Kong model.
“If you want to have access to the European market, even in a free trade area with your own custom union, you have to accept pretty much all EU regulations on pretty much everything.”
He then criticises the idea that you could spend more while taxing less.
“They can talk as much as they want about low taxes, low spending, low regulation, it’s just nonsense talk, it’s not going to happen, there’s no chance.”
35:11 Izzy asks if that means austerity is the right answer for the UK? He says he would rather have a system like now, where there is a significant increase in taxes for those who can afford it. And then you maintain a social safety net, as opposed to one in which you try to dismantle it, and you have lower taxes.
35:58 Izzy points out the tax cut, which was a tiny drop in the ocean in the grand scheme, was mainly intended to be a lifeline to the highly leveraged and most interest-rate sensitive middle classes on PAYE incomes (who have the largest mortgages) not the uber wealthy billionaires.
37:31 Nouriel said he thought the bulk of the relief was going to the corporate sector. He deflects by criticising European energy policy more widely.
“If you want to transition to a green economy, you should let the market price of fossil fuel to be as high as you can. And then you can do a means test for the transfer of income, either to the poor and or to the middle classes that suffer because of their energy bills.”
But he notes pretty much everywhere tried to cap the increase in energy prices with some sort of subsidy.
38:48 Izzy asks if he thinks the energy cap will fail in the long run?
38:59 Nouriel says he is not a fan of the current policy.
40:06 Izzy wonders who is advising the governments in that case? Why are they all so aligned on the wrong policy reaction?
40:24 Nouriel suspects they are getting the right advice but not listening because they want to be populist. That’s why there’s a fight between what fiscal policy is doing and monetary policy is doing.
41:38 Izzy asks Roubini if he thinks the independence of the central banks is at risk?
41:50 Nouriel says they were never really independent. He also doesn’t think they are really responsible for the low inflation environment of the last few decades.
“I think the reason why inflation remains low has less to do with inflation targeting but with the fact that we had a whole series of positive aggregate supply shocks: globalisation and hyperglobalisation — and China, Russia, emerging markets, India joining the production of global goods and services in the global labour supply. We had massive migration from south to north, from poor to rich, where massive technological innovation, we had weaker labour in unions, keeping a lid on wage rot.”
Nouriel says these trends are now reversing, hence his long-term stagflationary outlook. This will be a period of fiscal dominance. But the debt won’t just be public – hence why the mother of all debt crises is coming. So it’s not that they’re not independent, it’s if they don’t buckle on rates there will be an economic and financial crisis. Since you cannot cut spending or raise taxes, the way to deal with the debt problem is to wipe it out via inflation tax. Nouriel thinks we will go to high single-digit inflation in a bid to stealth inflate the debt away.
47:05 Izzy says she agrees but finds it strange that popular consensus is so sure that the current rate hiking cycle will put us back on a deflationary path.
47:27 Roubini says he doesn’t agree with that consensus, because first of all, he still sees negative aggregate supply shocks at work, the lingering effect of COVID, Russia, Ukraine impact on commodity prices, the zero COVID policy of China. But there are also many other factors reducing potential growth and increasing costs of production.
“So Stagflation is gonna stay with us, even if the war in Ukraine ends and even if China changes is zero COVID policy.”
Nouriel then cites historian Niall Ferguson on how whenever we are at war we spend more on the military and carry bigger budget deficits, and that in the long run historically we always monetise the debt via inflation. Military spending is going to have to continue to contain China which means when combined with climate spending and mitigation of other threats, like pandemic threats, we are going to have spend even more not less in the near future. We will also have to pay for the structurally unemployed by AI and technology.
“So these are all wars, whether it’s real wars, or Cold Wars, or climate change, or pandemic, or the consequence of AI, or the consequences of inequality, they imply that the more spending, now we’re gonna raise some taxes, but my guess will be that the amount of increase in spending is going to be significantly higher than how much we’re willing and able to raise taxes, and therefore, all these wars imply, more spending, more deficits and then how are you going to finance it? We’re going to monetize it. There’s no other alternative.”
51:31 Izzy says it’s very fall of the Roman Empire.
51:39 Nouriel says there will also be barbarians at the gate because of geographic displacement connected to climate change.
52:02 Izzy suggests some reverse migration might also happen, a la the billionaires? 52:06 Nouriel thinks they won’t be safe unless they have a private militia of some sort.
52:14 Nouriel explains why despite the above he doesn’t think it will get to hyperinflation. Even with moderate inflation he predicts many of the zombie households, corporates, businesses, banks, shadow banks and governments are going to go bankrupt.
53:46 Izzy asks if the risk with spending our way through these challenges in the short term will just misallocate capital even more and create even more zombies? To what degree are growth-sucking zombies the product of too easy money to begin with? Directing huge amounts of money into areas that are not yet ripe for investment can encourage even more bubbles surely?
54:39 Nouriel says, governments are always inclined to err on the side of more spending. But the policy of central banks has always been that if the bubble is created on the way up, you don’t do anything about it, because doing so risks an economic crash. You combat it with liquidity to prevent insolvency where you can. This has led to the normalisation of zero-sum business models and day trading and crypto.
“Until now we were lucky because inflation was low, and every time there was a crisis, we cut interest rates, you got zero, negative rates. But now the party’s over, because you have inflation.”
59:09 Izzy says she agrees but wonders if the problem isn’t linked to the fact that we allowed the zombies to manifest in the first place? And to what degree was that a function of cheap money? And if it was, how could you have guarded against it?
59:41 Roubini says the worry we had was not to repeat the Great Depression. He agrees that whenever there is an economic and financial shock, there is an element of illiquidity. You don’t want solvent institutions to go bust. And therefore there is room for monetary easing, fiscal easing, credit easing. But we went too far and created a whole bunch of highly leveraged zombie institutions. So yes you want to be Keynes in the short run, but you want to be sort of Austrian over the medium term. And the problem has been we’ve been Keynesian for too long.
1:01:29 Izzy notes that most of the layoffs are happening in low-productivity industries, so maybe it is a worthwhile realignment? Isn’t that a good thing in the long run, if we see people transfer from low productivity theory, some sectors into more productive, positive some?
1:01:56 Roubini agrees that will be positive, but worries about the skills gap because the skills of the industries of the future are going to be different from those of today and many people have skills for the old economy.
1:02:33 Izzy disagrees, says that a lot of the biggest layoffs are happening in the tech sector or crypto and affecting people with modern skills. Coders. Maybe they were in the wrong sector?
1:02:44 Nouriel agrees there were too many smart people, even with PhDs, wasted in stupid zero-sum sectors.
1:03:09 The conversation turns to Sam Bankman-Fried and whether he illustrates the problem. Izzy asks Nouriel what he makes of the crypto collapse? Is it unfolding how he anticipated it would, or has he been surprised by any of the events? 1:03:40 Nouriel says that he has called crypto a bubble since 2017. He then rehashes his longstanding arguments against crypto and says it was always going to go bust. He adds that exchanges like FTX weren’t even exchanges, like broker-dealers, because they kept people’s assets on their balance sheet on the asset on the liability side. That means they bore a similar maturity mismatch that made exposed them to runs.
1:06:24 Izzy asks Nouriel if he was surprised by the elite level of corporate names that were revealed to be FTX creditors?
1:06:32 Nouriel says the VC guys think they are the smartest people in the world but they’re not. They all suffered from basic FOMO.
1:07:07 Izzy asks what the stupidest thing in crypto was in his opinion?
1:07:23 Nouriel talks about the farce of crypto companies pretending to want to bank the unbanked. At least Gordon Gekkowas honest when he said greed is good. He notes in the end the money all went to buying via villas in the Caribbean and around the world, boats Lamborghinis and aeroplanes. He cites an article in the FT that revealed that nightclubs and strip clubs in Miami were full of crypto guys.
“I’ve never seen in human history this scale of scams. I mean, during the internet bubble, there was a bubble. There were 20 pet dot coms. Only three of them maybe survived. But the idea of selling pet food to people online — people love their pets — was a totally legitimate business idea, right? Those who didn’t have a good business plan, they failed. But it was not a scam. These are scams to begin. They have absolutely no economic or business base of any sort.”
1:09:45 Izzy asks if Nouriel was surprised by the level of political donations SBF was tied to?
1:09:54 He says it was part of an influence strategy focused on hiring lots of former regulators and a form of legalised bribery. He says it wasn’t about encouraging better regulation but corrupting the system. Better to have no regulation and ban the whole thing, he says. 1:10:50 Izzy notes that regulation can sometimes be misunderstood as endorsement.
1:10:54 Nouriel says it’s just lousy regulation that encourages even more financial excesses.
1:11:20 Izzy asks Nouriel what he would advise regulators to do at this point?
1:11:33 Nouriel says he would be in favour of banning all crypto, and making sure that the traditional financial system is not exposed to crypto, period. 1:12:18 Izzy asks if he is still optimistic about blockchain?
1:12:23 Roubini says he was never optimistic about blockchain. He says he always had the view that blockchain is the most overhyped technology ever and that it is conceptually very flawed. He recounts the contradictions and problems with blockchain.
“First of all, 99% of these projects are not blockchain, blockchain in name only. Secondly, there’s a fundamental flaw in believing that you can create trust with technology.”
Nouriel then recounts why tracking things with blockchain is also pointless, invoking the garbage-in garbage-out problem and why it is that in the real world the supply chain system depends on inspectors.
“That’s why blockchain is fundamentally flawed. The idea of creating some system that uses technology to make validation trustless. It just cannot happen period. It’s fundamentally flawed. That’s why it’s just the biggest, overhyped technology ever.”
1:16:36 Izzy says she strongly agrees but is conscious she is running out of time. But she wants to ask Nouriel about how exposed the traditional corporate space is to blockchain being proven a waste of time?
1:17:11 Nouriel points out that most of the blockchain projects were at least only proofs of concept, and never got to the application rollout stage. He says people who are still saying that the underlying DLT technology and blockchain can change the world are talking nonsense. “Honestly, I don’t think that blockchain is going to go anywhere.”
1:18:37 To finish off Izzy wants to ask two quick questions. Does Nouriel think there is a risk that we are going to go into a war economy model and if so how soon?
1:18:58 Nouriel says that he’s sure we’re going to spend a fortune fighting this cold or colder or hot Wars as well as climate change and the side effects of AI.
“These are all significant wars, and we have to fight to maintain stability that is going to be very expensive, and will lead us to deficit and debt and inflation.”
1:20:21 Izzy asks if it’s in a war framework then aren’t these extreme financing tools justified?
1:20:31 Nouriel implies on if we’re prepared to monetise it.
1:21:10 Izzy notes that this time there is no one to turn to for Lend-lease style support.
1:21:20 Izzy gets to the last question which is what, if any, are the blind spots to look out for?
1:21:34 Nouriel says that the conventional wisdom a year ago has been proven wrong. Temporary transitory inflation turned out to be permanent. To save face policymakers then said “well, it’s all about policy, this monetary, fiscal and credit policy, excessive demand and overheating.” But this too was wrong. There were also negative supply shocks of various sorts. This matters, says Nouriel because if you have a negative supply shock, it’s harder to get a soft landing. Now the conventional wisdom is saying there will be a recession, and it will be short and shallow. This is also wrong. These were and remain blind spots.
“Every commercial system, every conventional wisdom, the last two years has been proven wrong.”
The idea that the central banks have directed us to a short and shallow recession is currently the biggest blind spot.
1:22:51 Izzy thanks Nouriel for joining her. And asks if he agrees that the biggest takeaway from the interview is that debt monetisation is now inevitable?
1:23:04 Nouriel says yes. “As I said real wars, wars against climate change, against pandemic, against the AI, against inequality – it’s all very expensive, and we’re gonna monetize that with high inflation.”
1:23:18 Izzy reminds readers to buy Nouriel’s new book Mega Threats and they say goodbye. Post Script Comment Izzy notes she had wanted to ask Roubini about his new role as chief economist of Atlas capital but didn’t get the chance. This is because the vehicle is pitching abstract investment concepts like “beyond returns” as well as investment indices backed by digital assets, ETFs and even Atlas’ own digital complementary currency.
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