(Original title: 21 exclusive interview with “Doctor Doom” Roubini: The United States is about to enter a severe recession, and the financial crisis may follow)
“The United States may eventually face a real hard landing, rather than a short and shallow recession, and it will trigger a financial crisis, not just an economic crisis.” On March 25, Professor Roubini Macro, New York University Nouriel Roubini, chairman and CEO of the research company, said in an exclusive interview with a reporter from the 21st Century Business Herald. At that time, he was attending the 2023 annual meeting of the China Development Forum in Beijing.
He said the recent banking crisis triggered by Silicon Valley Bank will have a major impact on the U.S. economy, making banks more cautious in lending to households and businesses, while tightening credit will slow economic activity.In his view, a “hard landing” is already the baseline scenario for the U.S. economy, and it could get worse.
“We’re going to have a deeper economic crisis, a deeper recession and more financial stress. This is because more companies and households will be unable to pay their debts in a recession, which will also make the debt crisis worse. The debt crisis The more severe it is, the deeper the recession will be, and it’s a negative feedback loop,” he said.
Roubini believes that the Fed and other central banks are already in a dilemma: if they raise interest rates to fight inflation, it will lead to recession; if they do not raise interest rates in order to stimulate the economy, they may end up in higher inflation. But now, the central bank’s trade-off has changed from a “dilemma” to a “trilemma”-to achieve price stability, stable growth, and financial stability.“It’s an impossible task and we don’t have the tools to achieve these goals at the same time. So we are facing the double risk of an economic crisis and a financial crisis,” he said.
As for whether the Fed will slow down the pace of raising interest rates in order to “rescue the market”, he said that if the Fed does so, it may trigger the risk of a decoupling of inflation expectations and a wage-price spiral. “Saving the financial system could lead to price instability; trying to achieve price stability could lead to financial and economic instability.”
Roubini became famous for accurately predicting the outbreak of the US subprime mortgage crisis in 2006, and because the subprime mortgage crisis evolved completely in accordance with his “12 Steps to Financial Disaster”, he became a popular economic forecaster all over the world. . Due to his repeated pessimistic predictions, he has been called the “Doctor Doom” of Wall Street.
Economic hard landing is the baseline scenario for Europe and the United States
“21st Century”: How do you view the scope of the European and American banking crisis and its impact on the global economy?
Roubini:It’s not just SVB, there are other banks in the U.S. that are under pressure, and Credit Suisse is also under pressure, and Deutsche Bank is also causing discussion. The reason for these financial stresses, I believe, has to do with rising interest rates. The higher the interest rate, the lower the price of the long-term bond. Therefore, any institution that holds large amounts of long-term government bonds has losses on its balance sheet. Not all of those earnings losses have happened yet, but the numbers are going to be big for us, over $600 billion for Bank of America alone. These banks have only $2 trillion in capital, so that means a third of their capital is at risk by holding these bonds.
So, paradoxically, higher interest rates mean lower bond prices than ever before, making pension funds, insurance companies, investors, sovereign wealth funds, central banks and commercial banks with large amounts of these assets suffered losses. In the specific case of Silicon Valley Bank and other regional banks, it has a narrow deposit base, mainly from technology companies or rich people, etc., and most of the deposits are not insured. Whenever a bank loses earnings, a run occurs, and when a run occurs, the bank fails. Now, the fallout from the incident has spread to European banks.
Its effect on the economy is to tighten credit, making all banks more cautious in lending to businesses and households. This will slow down economic activity. In my view, a hard landing, a recession, is already the baseline scenario in the US and Europe, and that baseline is going to get worse.We will face a deeper economic crisis, a deeper recession and more financial stress. This is because more companies and households will be unable to pay their debts in a recession, which will also make the debt crisis worse. The worse the debt crisis, the deeper the economic recession will be, which is a negative feedback loop.
“21st Century”: How do you evaluate the Fed’s response to the crisis?
Roubini:First, the Fed wanted to avoid a panic and prevent a contagion of bank runs. That’s why even non-insured deposits at Silicon Valley Bank and several other banks are protected. But if they fully guaranteed all deposits, there would be a huge moral hazard problem. Banks and their managers and shareholders have already taken too much risk, including market risk, duration risk, credit risk, and they will take more risk in the future, and the actions of the Fed will create more financial instability.
So central banks have to choose between lender of last resort (avoiding panic in markets) and not creating a moral hazard problem (leading to more risk taking, more leverage, more debt, more financial instability) the right balance. This is a difficult trade-off that all central banks face. This is a problem that every country is facing, not only the United States, Europe, but also China.
“21st Century”: Will the Fed slow down the pace of raising interest rates now?
Roubini:The central bank, which has already hiked rates aggressively, may slow down the rate hikes as the credit crunch has tightened financial conditions. But the current situation is that in advanced economies such as the United States and Europe, as well as in some emerging markets, inflation is still too high. Therefore, to save the financial system, the goal of stabilizing prices will have to be abandoned. That said, we may not raise interest rates far enough from what we would otherwise use to fight inflation, raising the risk of a decoupling of inflation expectations and a wage-price spiral. So trying to save the financial system might lead to price instability, and trying to achieve price stability might lead to financial and economic instability.
European and American Central Banks From “Dilemma” to “Triple Dilemma”
“21st Century”: You just mentioned that the baseline scenario for the United States is already a hard landing. Can you talk about specifically, apart from the banking crisis, what are the main headwinds currently facing the US economy?
Roubini:Europe, the US and advanced economies are already facing rising inflation, driven both by overly loose monetary and fiscal policies during the COVID-19 pandemic and by a string of bad luck. For example, the negative impact of the epidemic on supply (shocks to production, labor supply, and global supply chains), the impact of the Russia-Ukraine conflict on commodity prices, and the inevitable decline in China’s production capacity in the process (until the recent return to normal) . So we are already in a very fragile position: supply shocks drive up inflation and drive down growth, creating stagflation risks.
Originally, the central bank was facing a “dilemma”. Fighting inflation with rate hikes would lead to a recession, especially in the presence of a negative supply shock, leading to a more severe hard landing. On the contrary, if the central bank is more concerned about economic growth and chooses not to raise interest rates (to avoid economic recession), then there will be a decoupling of inflation expectations, wage-price spirals, and eventually high inflation.
But now this dilemma is turning into a “trilemma” choice. When you raise interest rates, asset values fall, which creates losses for creditors and increases the actual borrowing burden for debtors. From the borrower’s point of view, whether it is households, small businesses, large corporations, commercial banks, other financial institutions, or even the entire government will be in debt crisis. therefore,What we are now facing is the choice of “trilemma”: we must achieve price stability, stable economic growth, and financial stability. It’s an impossible task, and we don’t have the tools to do it all at the same time. Therefore, we are facing the double risk of economic crisis and financial crisis.
This is not just a problem in developed economies such as the United States and Europe. The International Monetary Fund and the World Bank say between 60 and 80 less developed countries and emerging markets have external debt-servicing problems. In China, the ratio of private and public debt combined to GDP is 330%, including debt of the real estate sector, debt of central and local governments and financing instruments, debt of state-owned financial institutions, debt of state-owned enterprises wait. Therefore, the US, Europe and other emerging markets are facing the same debt problems, including China, which need to be resolved to avoid the risk of a bigger financial crisis and a hard landing of the real economy.
“21st Century”: If the US economy has a hard landing, how deep will the recession be? Some analysts believe that even if a recession occurs, it will not be a typical recession, it may be very shallow, and the US economy will rebound soon. What do you think?
Roubini:The honest answer is we don’t know. The prevailing view is that this will be a soft landing, a short and shallow recession, possibly a few quarters of negative economic growth, and then inflation will fall, the Fed and other central banks will cut interest rates, and the economy and financial markets will begin to recover.
But I don’t quite agree. Currently, there is too much debt in the system, which could trigger a debt crisis, which would make the recession worse, which would lead to more defaults, creating a vicious cycle. In addition, the Russia-Ukraine crisis may continue, continuing to push up commodity prices. There could also be other geopolitical risks, such as an Israeli attack on Iran leading to a spike in oil prices. At present, the commodity market is already tight and there is not enough supply, which may cause prices to continue to rise; the labor market is also tight, with low unemployment, coupled with an aging population and immigration restrictions, wage inflation may continue, resulting in Services inflation has become higher. There are many things that could go wrong and make this recession worse, creating more financial stress in banks and other parts of the financial system. Financial stress leads to deeper recessions, which in turn lead to more financial stress. so,The US could end up facing a real hard landing rather than a short and shallow recession and triggering a financial crisis rather than just an economic crisis.
Global economy at risk of entering recession
“21st Century”: Do you think the global recession will happen soon?
Roubini:In my opinion, this year, advanced economies such as the United States and Europe are likely to experience recession, emerging markets will experience slower growth, and the most vulnerable emerging markets will experience debt crises and enter recession. China is now emphasizing a return to economic growth, but even that faces challenges. China’s growth model is export-oriented. If the global economy enters a recession, exports to developed economies such as the United States and Europe will slow down. Not only that, but the global recession will hurt China even more. More credit-backed investment for growth would push up debt even further, raising further potential risks. China is dealing with an aging population which will slow down potential economic growth from 10% growth to 3% or 4% at best. Unless the private sector becomes more dynamic and productive, China continues to boost confidence in the private sector for now. Therefore, all major economies in the world, such as the United States, Europe, Japan, China, and emerging markets are facing economic, monetary policy, and financial challenges, so the risk of global recession is real.
“21st Century”: You mentioned the weaponization of the dollar in today’s forum. Do you think this will impact the dollar’s dominance in the global system?
Roubini:The U.S. dollar has been the world‘s primary reserve currency for the past few decades. I think that due to geopolitical tensions, China may have to consider developing its own currency into an international reserve currency, from an economic, monetary, financial, trade, technological standpoint, to be used as a unit of account, payment Means, store of value. This is not an easy task, because China must make its capital market more mature, it must liberalize its capital account, and it must have a more flexible exchange rate. It will also take time for the renminbi to become an important reserve currency, and it will not happen overnight. So, I don’t think the role of the dollar will collapse, it will continue to be the global reserve currency.
But instead of the unipolar global monetary system of the past, we are likely to move towards a bipolar system in the coming decades. My point is that the division, fragmentation, and decoupling of the world economy are not only reflected in trade, investment, technology, data, information, etc., but also have an impact on the monetary system. We may be heading in that direction and the world will be more divided.
“21st Century”: How do you see the future of US-China relations?
Roubini:If the current situation worsens, the world economy will become more fragmented, there will be more restrictions on the trade of goods and services, and more obstacles to the flow of capital, labor, technology, and information. We can hope it doesn’t get worse, but it will require restraint and patience on both sides. The two sides can cooperate in some ways, compete in some ways, and confront each other in others. Both sides can work to reduce the confrontational part, maximize cooperation and maintain a level playing field. Maybe we can avoid further escalation and worse. I don’t know if we manage the US-China relationship in a more constructive way, but I do hope we can, because the future of the world will depend on where the relationship between these two countries goes, and it’s not just economically important, it’s about Peace, prosperity, progress and security in the world. It cannot be allowed to get out of control, resulting in less cooperation and more confrontation, which is dangerous for the world.
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