Global Economic Crisis

In a chilling yet cogently delivered live Twitter lecture on likely economic trends stemming from the Covid-19 pandemic, NYU professor and economist Nouriel Roubini gave a harsh yet realistic overview on the unfolding crisis. Professor Roubini was one of the few economists to predict the global financial crisis that occurred more than a decade ago.

The views Roubini relayed in his Twitter presentation can be summed up as follows:

1. The health policy response will determine whether or not the world faces a severe recession or a greater depression. A global recession worse than the 2007-09 global financial crisis is already baked into the cake. However, perusing a mitigation strategy to contain the coronavirus pandemic will ensure the global economy heads into a severe depression. Only a suppression strategy as implemented by China initially and now Italy can prevent the worst economic damage. Though a suppression strategy that shuts down the economy for 2 or 3 months is very painful, a mitigation strategy will ensure that Covid-19 spreads like wildfire, leading to a temporary reopening of the economy followed by further and deeper shutdowns. Roubini urges policymakers to adapt draconian suppression measures as the only alternative to far more calamitous economic collapse.
2. The right policy responses will be crucial to preventing a greater depression. The current wave of unprecedented monetary and fiscal measures, adapted in a very short timeframe, are correct. In particular , very large fiscal deficits equivalent to ten percent of GDP, which in turn are fully monetized by the central banks, are necessary in the short-term. However, such extraordinary measures are unsustainable in the long-term, and will lead to stagflation.
3. The health emergency crippling the global economy is not the only shock confronting it. Roubini identified a geopolitical depression exacerbated by revisionist powers (China, Russia, Iran and North Korea) seeking to further destabilize the United States through cyber warfare. In particular, the emerging cold war between China and the U.S. is leading to decoupling of supply chains and de-globalization, which will increase costs of production and hence inflation.
4. Professor Roubini sees a great risk that Iran’s regime will initiate a full-scale war with the United States as the only means of preserving itself from being overthrown, if Trump is reelected and the economic sanctions lead to its collapse. Such conflict will close the straits of Hormuz, leading to a massive spike in oil prices.

In summary, a sobering and harshly realistic analysis of the global economic crisis now underway.