WEBVTT - Nouriel Roubini Sees A Bad Recovery, Then Inflation, Then A Depression 0:00:11.119 --> 0:00:14.600 Hello, and welcome to another episode of the Thoughts Podcast. 0:00:14.720 --> 0:00:18.720 I'm Tracy Allaway and I'm Joe. WI isn't thal So, Joe, 0:00:18.840 --> 0:00:24.640 you know all those economic recovery shape letters that everyone's 0:00:24.680 --> 0:00:31.120 talking about. Yes, W V U, L lowercase v M, 0:00:31.680 --> 0:00:37.080 the square root sign. OK, I've seen them all. There's 0:00:37.080 --> 0:00:40.199 some really esoteric ones out there. So what do you 0:00:40.240 --> 0:00:43.440 think is the most sort of parish out of all 0:00:43.479 --> 0:00:48.479 those shapes or letters or symbols or whatever. That's a 0:00:48.520 --> 0:00:52.040 good question. I mean probably I guess the L or 0:00:52.120 --> 0:00:55.480 the U something like that. I mean anything that doesn't 0:00:55.600 --> 0:00:58.560 isn't premised on there being some sort of snap by. Also, 0:00:58.680 --> 0:01:01.280 maybe just the eye just as straight letter down, they 0:01:01.400 --> 0:01:04.760 just never never comes back. I suppose that's a possibility 0:01:04.800 --> 0:01:07.720 to that people don't talk about. I'm glad you said 0:01:07.800 --> 0:01:11.640 I so, I actually hadn't heard that many people talking 0:01:11.680 --> 0:01:14.280 about this letter. But yes, there is an eye shaped 0:01:14.360 --> 0:01:17.959 economic recovery which is a straight line going down. So 0:01:18.240 --> 0:01:21.919 it's really not an economic recovery at all. And um, 0:01:21.959 --> 0:01:24.720 it's probably the most parish of all the forecast. And 0:01:24.840 --> 0:01:27.479 the person we're going to speak to today is someone 0:01:27.600 --> 0:01:33.680 who has written about that. I possibility yes, so, um, 0:01:34.000 --> 0:01:37.080 I'm looking forward to our talk today. It's someone who's 0:01:37.280 --> 0:01:39.880 going to be very well known to our audience who 0:01:39.959 --> 0:01:42.240 in the past, and I don't even know if it's 0:01:42.360 --> 0:01:45.319 rightly or wrongly. I'm not even sure where he uh 0:01:45.400 --> 0:01:49.800 if he always embraced the nickname, but nonetheless his nickname 0:01:50.920 --> 0:01:54.360 doctor Doom became many people would have heard it during 0:01:54.400 --> 0:01:57.000 the last crisis. Yeah, and I think as soon as 0:01:57.040 --> 0:01:59.600 you say the name doctor Doom, everyone knows who we're 0:01:59.600 --> 0:02:02.880 going to be talking about. But it's Neureal Rubini, the 0:02:02.960 --> 0:02:08.959 chairman of Rubini Macro Associates, and he's known well, he's 0:02:09.000 --> 0:02:12.440 known for forecasting the previous financial crisis back in two 0:02:12.440 --> 0:02:17.359 thousand eight, but he's also known for pretty bearish prognostications. 0:02:17.440 --> 0:02:20.880 And uh, it's been very parish of late, has it not. 0:02:21.240 --> 0:02:24.000 Things have not been great, So I guess I would 0:02:24.040 --> 0:02:27.680 say that that is a safe call. Alright, understatement of 0:02:27.720 --> 0:02:30.839 the year. Okay, Well, without further ado, then let's bring 0:02:30.880 --> 0:02:33.880 on neur Real Rubini. Neurial, it's so great to have you, 0:02:33.919 --> 0:02:36.880 thanks so much for coming on the show. Great to 0:02:36.919 --> 0:02:40.359 being with you today. It's a pleasure, so Neurial, Joe 0:02:40.400 --> 0:02:42.520 and I were sort of joking just then, But you 0:02:42.560 --> 0:02:46.840 do have the Doctor Doom moniker. Do you feel I 0:02:46.840 --> 0:02:51.079 guess vindicated isn't the right word given current events, But 0:02:51.280 --> 0:02:54.080 do you feel that you are living up to that 0:02:54.200 --> 0:02:59.680 doom reputation? Well, usually I say that I'm doctor really 0:02:59.720 --> 0:03:02.679 is not Dr Doom. If you look at the last decades, 0:03:03.400 --> 0:03:06.160 I have not been negative all the time. Whether a 0:03:06.320 --> 0:03:08.799 risk of episodes, I pointed them out. When there was 0:03:08.880 --> 0:03:12.600 economic and market recovery, I pointed it out as well. 0:03:12.800 --> 0:03:16.200 So it's not as if I'm permanently at perma bear. 0:03:16.400 --> 0:03:20.560 I think that would be a mischaracterization of my views. Um, 0:03:20.600 --> 0:03:24.960 so call me Dr Realists. Something I'm curious about is, 0:03:25.000 --> 0:03:28.360 you know, we see these economists forecast right now. They're like, okay, 0:03:28.480 --> 0:03:34.000 Q two GDP is going to plunge, and then maybe 0:03:34.040 --> 0:03:36.360 we'll have a small recovery in Q three, and then 0:03:36.400 --> 0:03:38.680 maybe we'll have a real bust recovery keyboard, whatever it is, 0:03:39.240 --> 0:03:42.600 How do you go about the process of making a 0:03:42.640 --> 0:03:49.000 recovery forecast? How does anyone while separating them that recovery 0:03:49.040 --> 0:03:51.280 from the policy response, Because of course we got the 0:03:51.360 --> 0:03:53.720 Cars Act at the end of March, and that probably 0:03:54.040 --> 0:03:58.200 helps slow down the crash somewhat, But it seems hard 0:03:58.320 --> 0:04:00.960 to make any sort of forecas usked about Q four 0:04:01.080 --> 0:04:04.240 or Q one of next year without having of you 0:04:04.560 --> 0:04:08.960 on how robust uh the policy response from both the 0:04:09.000 --> 0:04:11.920 Fed and fiscal authorities will continue to be throughout the 0:04:11.960 --> 0:04:15.120 course of this year. Well, usually when there is a recession, 0:04:15.440 --> 0:04:18.240 it's very hard to make a forecast about the length 0:04:18.240 --> 0:04:22.159 of it, and the shape of the recovery by definition, 0:04:22.360 --> 0:04:26.720 is a change in regime, and even traditional economic forecasting 0:04:26.760 --> 0:04:30.440 models essentially break down because those models don't tend to 0:04:30.440 --> 0:04:33.920 predict recessions. So once you are in a recession or 0:04:34.000 --> 0:04:37.000 financial crisis, you have to ask yourself in a more 0:04:37.360 --> 0:04:40.560 i would say qualitative way rather than a quantitative one, 0:04:41.200 --> 0:04:43.320 what is going to be in the shape of the 0:04:43.320 --> 0:04:46.760 economic recovery. So, for example, you know, I wrote a 0:04:46.760 --> 0:04:50.719 recent paper with my global economic outlook with my research colleagues, 0:04:50.760 --> 0:04:55.560 and we argued that there are three scenarios. One is 0:04:55.920 --> 0:04:58.920 what we call the greater recession will be more like 0:04:59.000 --> 0:05:03.080 a YOU shape coovery. Second one is a downside scenario 0:05:03.200 --> 0:05:07.400 quality depression as shaped. And then there is a upside 0:05:07.400 --> 0:05:11.159 scenario of a V shape recovery. Now, markets for the 0:05:11.200 --> 0:05:15.120 last few weeks, especially US equities, seem to be pricing 0:05:15.600 --> 0:05:18.480 a V shaped recovery in that paper, and a lot 0:05:18.560 --> 0:05:20.960 of time to go on every point of it. But 0:05:21.120 --> 0:05:26.520 we present about fourteen separate factors why we believe that 0:05:26.880 --> 0:05:29.720 the recover is going to be YOU shaped rather than 0:05:29.800 --> 0:05:33.239 V shaped. Now, those predictions are not based on a 0:05:33.279 --> 0:05:37.840 formal econometric models, because by definition those forecasting models are 0:05:38.000 --> 0:05:40.919 useless when we are in the depth of recession. But 0:05:41.000 --> 0:05:43.960 you're trying to understand what's going to be the economic 0:05:44.040 --> 0:05:48.520 dynamic of the behavior of the private sector, households and corporates, 0:05:48.640 --> 0:05:50.920 what's going to be the policy response, And of course 0:05:51.200 --> 0:05:54.360 any prediction you make on the shape of the recovery 0:05:54.400 --> 0:05:59.200 of economies and markets depends on the policy response. We 0:05:59.240 --> 0:06:02.240 know a lot of the policy response, how strong it 0:06:02.320 --> 0:06:04.960 has been in the United States, are strong, but not 0:06:05.080 --> 0:06:09.159 as strong in Europe and Japan more constraining emerging markets. 0:06:09.200 --> 0:06:13.200 So an economic forecast, of course makes also predictions about 0:06:13.200 --> 0:06:18.600 the policy pat monetary policy, fiscal policy, credit policy, regulatory 0:06:18.640 --> 0:06:21.520 policy in this case of course help policy, because we 0:06:21.560 --> 0:06:25.120 have to decide how fast or how slowly to reopen 0:06:25.440 --> 0:06:28.640 and you feed that one into your essentially model in 0:06:28.720 --> 0:06:32.040 terms of predicting the shape of the recovery. So certainly 0:06:32.080 --> 0:06:35.200 the shape of the recovery is not independent from the 0:06:35.240 --> 0:06:38.480 policy response, and you can make sense of that policy response. 0:06:38.880 --> 0:06:41.960 We we're already front loaded in one month in terms 0:06:41.960 --> 0:06:46.000 of unconventional amountary fiscal policy. What it took about three 0:06:46.120 --> 0:06:50.200 years during the global financial crisis to occur. The entire 0:06:50.240 --> 0:06:54.159 tool kit of unconventional tools that affect created between two 0:06:54.160 --> 0:06:57.839 thousand and seven thousand and nine have been redeployed in 0:06:57.920 --> 0:07:01.240 less than amounts because were there and they were available, 0:07:01.360 --> 0:07:04.719 and they made the decision of of going in front 0:07:04.720 --> 0:07:07.719 clothing and they created even new ones, like, for example, 0:07:07.800 --> 0:07:11.360 purchasing corporate bonds is something that the fact did not 0:07:11.440 --> 0:07:14.080 do during the global financial crisis, And not only the 0:07:14.480 --> 0:07:18.240 started to purchase high grade investment grade, but they've also 0:07:18.280 --> 0:07:21.720 now gone into willingness to purchase hid something they might 0:07:21.720 --> 0:07:24.800 do is very risky, but changes completely, for example, the 0:07:24.880 --> 0:07:29.480 dynamic of the recovery of spread products, including corporate bonds 0:07:29.560 --> 0:07:32.360 high grade than yield. I want to dig into the 0:07:32.440 --> 0:07:35.200 central pink response, but before we do, if we zoom 0:07:35.200 --> 0:07:38.880 in on the US and talk about your forecast, which 0:07:38.920 --> 0:07:42.560 is this U shaped recovery sort of length the road 0:07:42.640 --> 0:07:45.600 back to economic health. What do you think is the 0:07:45.640 --> 0:07:50.320 biggest factor in driving that scenario. Is it health policy 0:07:50.480 --> 0:07:53.720 or is it economic and monetary policy? I guess another 0:07:53.760 --> 0:07:56.560 way of asking that question is whether or not economic 0:07:56.640 --> 0:08:02.760 and monetary policy can fully offset the impact of the coronavirus. Well, 0:08:02.800 --> 0:08:05.920 I do take the policy respond as being very aggressive 0:08:06.120 --> 0:08:10.400 both monetary credit and physical and that everything else equal 0:08:10.640 --> 0:08:14.800 is positive for making sure that this recession is only 0:08:14.880 --> 0:08:17.480 two quarters Q and and Q two and then there 0:08:17.560 --> 0:08:19.960 is a recovery. But I think that there are many 0:08:20.040 --> 0:08:23.120 factors that lead me to essentially express the view that 0:08:23.240 --> 0:08:27.920 my baseline said sixty percent probability is a U shaped recovery, 0:08:28.040 --> 0:08:30.280 and I signed only a twenty percent probability to the 0:08:30.400 --> 0:08:33.400 V shaped recovery of the economy. The markets is a 0:08:33.440 --> 0:08:36.439 different story. I think the main factors that would point 0:08:36.440 --> 0:08:39.199 out are that on the health side, we know there's 0:08:39.240 --> 0:08:42.000 going to be a second wave. The second wave could 0:08:42.000 --> 0:08:46.320 occur already in July and August, depending on how fast 0:08:46.360 --> 0:08:49.079 we reopen, and there is a temptation to reopen to 0:08:49.240 --> 0:08:52.200 fast Cyconly, there will be another second wave or a 0:08:52.200 --> 0:08:54.600 third wave in the winter when we are not going 0:08:54.679 --> 0:08:57.840 to get a vaccine, and when the cold weather comes back, 0:08:58.400 --> 0:09:01.000 we're gonna have it again. How severe is going to be, 0:09:01.080 --> 0:09:03.080 we don't know, but we don't we know there's not 0:09:03.120 --> 0:09:05.600 gonna be a vaccine by then, and depending on how 0:09:05.679 --> 0:09:08.160 much we flattered the curve, it could be severe or 0:09:08.240 --> 0:09:11.040 less severe. But I think that the fundamental reason why 0:09:11.080 --> 0:09:13.200 I believe it's going to be you is that you 0:09:13.240 --> 0:09:16.720 have two critical agents in the economy in the private sector, 0:09:17.120 --> 0:09:20.120 households and corporations, and both of them are going to 0:09:20.160 --> 0:09:22.840 be stressed. The household sector is going to be in 0:09:22.840 --> 0:09:26.360 a situation which is effectively millions of people that have 0:09:26.400 --> 0:09:29.200 lost jobs. Even when there is a reopening, many of 0:09:29.240 --> 0:09:31.320 them are not going to regain their jobs, or if 0:09:31.320 --> 0:09:34.000 there again, their jobs are going to be part time jobs, 0:09:34.040 --> 0:09:38.160 in formal workers, gig workers, contractors, so their income generation 0:09:38.240 --> 0:09:40.800 is going to be much weaker. So you have consumers 0:09:40.800 --> 0:09:44.880 that are one shell shocked, two they're still scared of 0:09:44.920 --> 0:09:50.199 the virus. Three their income challenged for their asset crashed. 0:09:50.679 --> 0:09:54.400 Five their burden with a huge amount of that mortgages, 0:09:54.720 --> 0:09:59.800 auto loans, student loans, consumer loans, credit cards, and anybody 0:10:00.120 --> 0:10:04.800 sensible should be more precautionary in their consumption and saving behavior. Right, 0:10:04.960 --> 0:10:08.080 there will be a massive increase in a precautionary savings 0:10:08.120 --> 0:10:10.920 for any level of income. And your income is going 0:10:10.960 --> 0:10:13.840 to be certain lower than before. So you have lower income, 0:10:14.080 --> 0:10:16.080 you spend less, you save more. Why do you save 0:10:16.160 --> 0:10:21.199 more because you know of us households allegedly have less 0:10:21.200 --> 0:10:23.880 than four hundred dollars of cash in the case of 0:10:23.880 --> 0:10:26.560 an emergency. So after what has happened, with the risk 0:10:26.600 --> 0:10:30.480 of another shock coming from the corona, you're losing your job, 0:10:30.600 --> 0:10:34.200 not regaining it. Better safe rather than sorry. So I 0:10:34.320 --> 0:10:38.079 expect that the savings rate of the household sector is 0:10:38.120 --> 0:10:40.600 going to be sharply up, and the investment of the 0:10:40.600 --> 0:10:44.280 household sector, what's investment for household is purchases of homes 0:10:44.600 --> 0:10:46.439 is going to be sharply down. Moved you own to 0:10:46.480 --> 0:10:49.520 buy a home, you know, even with the lower mortgage rates, 0:10:49.520 --> 0:10:51.400 and your credit score is going to be worse. So 0:10:51.440 --> 0:10:54.440 you have higher saving your lower investment for households. Same 0:10:54.520 --> 0:10:57.720 story for the corporate sector. The corporate sector, as we know, 0:10:57.960 --> 0:11:01.280 was highly leveraged, leverage rational we have not seen in 0:11:01.320 --> 0:11:03.960 the last forty years. For the corporate sector. This is 0:11:04.000 --> 0:11:07.160 an accident waiting to happen, and every corporate will have 0:11:07.240 --> 0:11:11.679 to survive reduce leverage. How you survive by reducing leverage 0:11:11.720 --> 0:11:14.760 by cutting costs, labor costs and other costs. So you 0:11:14.760 --> 0:11:17.000 have to increase your saving rate and you have to 0:11:17.080 --> 0:11:20.760 cut on your capax option value of waiting. Right, there's 0:11:20.760 --> 0:11:22.920 a lot of capacity. You don't know how recovery is 0:11:22.920 --> 0:11:25.760 going to be, so you're gonna have an increasing savings 0:11:25.760 --> 0:11:30.040 of the corporate reduction of capax. So the financial balances 0:11:30.080 --> 0:11:33.400 of both households and corporates is the difference between their 0:11:33.440 --> 0:11:36.360 savings and the investment. And they're going to improve improve 0:11:36.400 --> 0:11:38.520 because they have to save more and they have to 0:11:38.520 --> 0:11:43.840 cut spending on capax on residential While that's individually rational 0:11:44.120 --> 0:11:48.160 in equilibrium, higher saving and lower investment means that depressed 0:11:48.200 --> 0:11:52.200 economic recovery, even if the physical authority and even the 0:11:52.240 --> 0:11:56.360 monitory authority are doing monitoring physical stamuls. So you have 0:11:56.400 --> 0:11:59.800 one positive coming from the policy, but the deleveraging thes 0:11:59.840 --> 0:12:03.520 to curve in the private sector leads you to this thing. Now, 0:12:03.760 --> 0:12:07.600 during the global financial crisis, the households were highly leveraged, 0:12:07.840 --> 0:12:10.880 and that this deleveraging. But the corporates were not as 0:12:10.960 --> 0:12:14.200 leverage this time around. With high leverage of corporate and 0:12:14.320 --> 0:12:16.720 high leverage of households, so both of them have to 0:12:16.760 --> 0:12:20.960 be leveraged by increasing savings reducing investment. That's a recipe 0:12:21.000 --> 0:12:24.120 for a you shaped recovery. There are many other factors, 0:12:24.120 --> 0:12:26.079 but that's a key argument. But why it's going to 0:12:26.160 --> 0:12:28.040 be a you rather than a V And I think 0:12:28.040 --> 0:12:31.520 it makes a compelling argument when you talk about sort 0:12:31.559 --> 0:12:36.600 of the quasitive behavioral ramifications of this. So households will 0:12:36.640 --> 0:12:40.840 have just watched their incomes vanish at a shocking speed, 0:12:40.960 --> 0:12:45.800 same with corporate revenues. Are there other periods in the past, 0:12:45.880 --> 0:12:50.360 either specific economic events in US or global history, that 0:12:50.600 --> 0:12:55.640 show how sudden shocks to the economy leave lasting changes 0:12:55.840 --> 0:13:01.320 in business or household inclination to in to spend well. 0:13:01.360 --> 0:13:04.400 The difference between this recession and all the other ones 0:13:04.600 --> 0:13:07.400 is that even the Global Financial Crisis, even the Great 0:13:07.400 --> 0:13:11.439 Depression were slow motion train wreck. It took three years 0:13:11.440 --> 0:13:14.040 for output to fall this match for an employmenty to 0:13:14.040 --> 0:13:17.920 go these up, for stock market to fall, fift for 0:13:18.080 --> 0:13:21.400 credit spreads to rise you know at you know, double 0:13:21.480 --> 0:13:24.080 digit levels and so on and so on. This kind 0:13:24.080 --> 0:13:27.160 of a shock instead is like an asteroid hitting Planet 0:13:27.200 --> 0:13:29.640 Heard and not just one country but the entire world 0:13:29.880 --> 0:13:32.760 and shutting down economic activities. So we have never had 0:13:32.760 --> 0:13:36.840 this experiment. We've had experiments, of course, of asolated cases. 0:13:36.920 --> 0:13:39.680 There is a hurricane, you know, in Puerto Rico or 0:13:39.720 --> 0:13:42.600 in somewhere in the Caribbean, or a major natural disaster. 0:13:42.720 --> 0:13:45.920 Of course you have that shock limited to that particular 0:13:46.400 --> 0:13:49.720 you know, region of the world or town or whatever, 0:13:50.040 --> 0:13:52.680 and you have those dynamics of course of a massive 0:13:52.920 --> 0:13:55.880 shock that this economic and financial and otherwise. But this 0:13:56.000 --> 0:13:59.920 is something that's pretty much Planet Heard, so it's very different. 0:14:00.040 --> 0:14:04.080 But even if it's different, you can make inferences intelligently 0:14:04.200 --> 0:14:07.480 based on economic behavior and the dynamic of what's happening 0:14:07.520 --> 0:14:10.360 to income, to jobs and so on. They're gonna lead 0:14:10.400 --> 0:14:13.520 you to understand what's the shape of the recovery. I mean, 0:14:13.520 --> 0:14:16.600 there was already after the global financials, an example, a 0:14:16.600 --> 0:14:20.760 tendency for firms not to hire full time workers with 0:14:20.880 --> 0:14:24.840 full benefits right those jobs were gradually going away. Was 0:14:24.880 --> 0:14:30.200 all gig workers, part time workers, contractors, freelancers, our workers, 0:14:30.280 --> 0:14:33.040 and so on and so on. Given the shock has occurred, 0:14:33.080 --> 0:14:35.680 right now, we know that twenty six billion Americans have 0:14:35.800 --> 0:14:38.160 lost their jobs. Probably at the peak is going to 0:14:38.200 --> 0:14:41.760 be more like thirty five million people. These people are 0:14:41.760 --> 0:14:43.600 not going to get their jobs back. I mean, I 0:14:43.680 --> 0:14:46.760 live in New York City. Take anybody who worked in 0:14:46.880 --> 0:14:49.800 a restaurant or in hospitality and so on. Even when 0:14:49.840 --> 0:14:53.560 you reopen a restaurant, you'll be back in in rent 0:14:53.640 --> 0:14:56.280 by three months, four months. You have to pay back. 0:14:56.440 --> 0:14:58.920 They're not going to cancel it. You'll have to have 0:14:58.960 --> 0:15:03.920 every other table empty for security. And these restaurants live 0:15:03.960 --> 0:15:06.520 on a margin of you know, five time percent. There 0:15:06.600 --> 0:15:08.400 is no way half of the old restaurants in New 0:15:08.480 --> 0:15:10.920 York are gonna be gone for good. Half of the 0:15:10.920 --> 0:15:13.240 retail stores in New York and will be gone for good. 0:15:13.520 --> 0:15:15.520 Even if there is a reopening of these things, the 0:15:15.640 --> 0:15:18.480 opening means nothing. There was an article yesterday in the 0:15:18.520 --> 0:15:21.760 Financial Time saying that they reopened all the shops in Berlin. 0:15:22.160 --> 0:15:25.720 By the way, in Germany they heat too. Income has 0:15:25.720 --> 0:15:28.440 been much less because we're not firing everybody. That this 0:15:28.520 --> 0:15:32.160 system of sharing, right, so you have not had mass unemployment. 0:15:32.400 --> 0:15:35.120 So the stores are open and nobody's going there because 0:15:35.120 --> 0:15:38.200 everybody's scared and everybody's worried about their future. It was 0:15:38.240 --> 0:15:41.200 gonna buy a car, who's gonna buy a home, Who's 0:15:41.240 --> 0:15:43.440 gonna take a vacation, Who's gonna go on an airplane, 0:15:43.520 --> 0:15:46.160 who's gonna take a cruise? I mean, these are changes 0:15:46.400 --> 0:15:49.000 that regardless of where they opened. A close a store, 0:15:49.400 --> 0:15:51.480 or an airplane or a cruise ship are going to 0:15:51.640 --> 0:15:54.600 change behavior. The issue is not whether we reopen, but 0:15:54.720 --> 0:15:57.600 once we're reopened, whether they're gonna show up. In my view, 0:15:57.760 --> 0:16:00.720 most people are not gonna show up. What does that 0:16:00.800 --> 0:16:04.240 imply for inflation? Because on the one hand, you have 0:16:04.320 --> 0:16:08.000 people who are probably saving more and spending less you 0:16:08.080 --> 0:16:10.600 put it. But on the other hand, you have central 0:16:10.600 --> 0:16:13.400 banks who are sort of throwing the kitchen sink and 0:16:13.480 --> 0:16:16.520 everything right now, and some people are even talking about 0:16:16.560 --> 0:16:20.360 debt monetization. So how do you see net net inflation 0:16:20.400 --> 0:16:25.680 shaping up? Well, last November, before this crisis even was 0:16:25.800 --> 0:16:29.160 on the horizon, I wrote a long paper saying, if 0:16:29.200 --> 0:16:33.560 and when the next recession will occur, monetary and physical 0:16:33.600 --> 0:16:37.680 policy is going to become even more unconventional and I said, effectively, 0:16:37.920 --> 0:16:41.720 we're gonna have a monetization of large physical deficits, what 0:16:41.840 --> 0:16:47.160 people call otherwise modern monetary theory melicopter drop of money 0:16:47.280 --> 0:16:50.720 or people's kew ee, or the new euphemism that people 0:16:50.760 --> 0:16:55.560 like Bernanco Stan Fisher uses coordination of monetary physical policies. 0:16:55.600 --> 0:16:59.520 So what's clear that once a recession occurs, policymaker cannot 0:16:59.520 --> 0:17:02.600 sit there doing nothing, pretending they don't have the policy bullets. 0:17:02.720 --> 0:17:05.000 And we're seeing it. We've had now budget deficit in 0:17:05.040 --> 0:17:07.760 the US are going to be twenty of GDP, and 0:17:07.800 --> 0:17:10.680 the FACT is saying unlimited qui. And this morning the 0:17:10.760 --> 0:17:13.440 BJ is saying unlimited qui, and the c B is 0:17:13.480 --> 0:17:16.000 not yet saying unlimited qui, but they're gonna soon be 0:17:16.040 --> 0:17:19.680 a unlimited Q. So you have massive monetization of physical deficits. 0:17:19.840 --> 0:17:23.040 So we're going even more unconventional now. In the short run, 0:17:23.560 --> 0:17:28.879 this shock is a recessionary and is leading to deflation 0:17:29.040 --> 0:17:31.760 because while there is a supply shock, the shock to 0:17:31.840 --> 0:17:33.879 agree with the man is bigger. And then you have 0:17:33.920 --> 0:17:37.640 a massive slack in goods market, tons of capacity machines 0:17:37.800 --> 0:17:40.520 that are not working, and tons of people, tens of 0:17:40.600 --> 0:17:43.840 millions who are not working, so that is deflationary in 0:17:43.880 --> 0:17:48.400 the short run, and therefore monetizing physical deficit prevents one 0:17:48.800 --> 0:17:54.080 economic depression to prevent a deflation from setting in. However, 0:17:54.640 --> 0:17:57.119 the point that I've made in that paper and is 0:17:57.160 --> 0:18:00.680 repeated now is that over time, I fear that the 0:18:00.800 --> 0:18:04.280 one of the medium term consequences of these crisis is 0:18:04.280 --> 0:18:08.760 gonna be permanent negative supply shocks. We're gonna have more 0:18:09.119 --> 0:18:12.639 the globalization. We're gonna have more decap litween US and China, 0:18:12.920 --> 0:18:16.320 with more melchanization of global supply chains because they're not 0:18:16.440 --> 0:18:18.879 safe if they're all conspted on on. China will have 0:18:18.960 --> 0:18:23.080 more fragmentation of the global economy with more populist parties 0:18:23.359 --> 0:18:27.120 in power say I'm going to protect my workers, my firms. 0:18:27.320 --> 0:18:30.719 So more protection is more tariffs, more restriction to trade 0:18:30.800 --> 0:18:35.160 in goods, in services, in capital, in labor, in technology 0:18:35.200 --> 0:18:38.919 and data and information. That's a negative supply shock that 0:18:39.080 --> 0:18:44.480 over time reduces potential growth and reduces actual output. It's 0:18:44.520 --> 0:18:48.080 like the negative all shocks that we had in the nineties, seventies, 0:18:48.080 --> 0:18:50.720 seventies seventy nine. Think of it as a negative supply 0:18:50.800 --> 0:18:54.280 shock that reduces potential growth and increases cost of production. 0:18:54.600 --> 0:18:56.359 Now what happened in the seventh is when we're did 0:18:56.400 --> 0:18:59.960 to all shocks, we monetize them. Monetary policy was done 0:19:00.000 --> 0:19:03.119 a curve and we physicalize them. But the extent, by 0:19:03.119 --> 0:19:06.199 the way of those physical stabulus and monetary stabulus was 0:19:06.280 --> 0:19:09.520 limited compared to today, where we're running budget deficit of 0:19:09.600 --> 0:19:13.399 twenty of GDP and we're fully monetizing with QUI. At 0:19:13.440 --> 0:19:16.080 that time you were just behind the curve in terms 0:19:16.080 --> 0:19:19.080 of monetary policy. You're not that negative policy rate's let 0:19:19.080 --> 0:19:22.000 along QUI. So the extent of the monethor and physical 0:19:22.080 --> 0:19:25.960 stabulus is ten order of magnitude bigger than the seventies. Now, 0:19:26.000 --> 0:19:29.879 you throw monetize physical deficits in an economy where over 0:19:30.000 --> 0:19:33.399 time you have negative supply shocks, and then you end 0:19:33.480 --> 0:19:38.920 up with not stagged deflation like today's stagnation and deflation 0:19:39.119 --> 0:19:42.280 when you get with stagflation that occurred in the seventies, 0:19:42.480 --> 0:19:45.680 where effectively, when you monetize physical deaths were negative supply shock, 0:19:45.960 --> 0:19:49.320 you get inflation and recession over time. Now, this is 0:19:49.320 --> 0:19:52.040 not a story for two thousand and twenty. It may 0:19:52.080 --> 0:19:54.400 not even be a story for two thousand and twenty one. 0:19:54.720 --> 0:19:57.879 But I do believe that the policies over the medium 0:19:57.960 --> 0:20:00.240 term are going to lead us back to start the nation. 0:20:00.280 --> 0:20:02.600 And once you're in start deflation, then you're in a 0:20:02.720 --> 0:20:06.119 nightmare because you have a negative growth and you have inflation. 0:20:06.480 --> 0:20:10.200 When you have started deflation, recession and deflation, it's easy. 0:20:10.520 --> 0:20:12.480 You have to stimulate the column to get you out 0:20:12.480 --> 0:20:15.439 of a recession and out of a deflation, So you 0:20:15.480 --> 0:20:18.600 need to do montor physical stimulus. Once you have inflation 0:20:18.680 --> 0:20:22.280 together with economic stagnation, then you have a problem because 0:20:22.280 --> 0:20:25.040 you can of these monetary policy if you care about inflation. 0:20:25.480 --> 0:20:27.840 So we're gonna get there, but it's gonna take two 0:20:27.920 --> 0:20:46.400 or three years. So we've basically seen for decades now arguably, 0:20:46.440 --> 0:20:49.879 so it's the very early eighties and Vulcar era, the 0:20:49.960 --> 0:20:55.040 sort of gradual opening up of the global economy, expanding supply, 0:20:56.080 --> 0:21:01.640 liberalizing policy, etcetera. And this is the moment to something 0:21:01.720 --> 0:21:04.800 that it reverses all those trends about forty years to 0:21:04.920 --> 0:21:09.000 some extent. What this this virus and the aftermath will 0:21:09.400 --> 0:21:13.359 will finally be the reversal of the nerview. Well, the 0:21:13.400 --> 0:21:17.200 reversal started to occur after the global financial crisis, because 0:21:17.240 --> 0:21:22.640 the era of hyper globalization started either in nineteen seventy 0:21:22.680 --> 0:21:25.800 nine when then shall being opened up China, or nineteen 0:21:25.920 --> 0:21:28.520 eighty nine, when, of course the Berlin Wall collapse and 0:21:28.560 --> 0:21:31.959 the Outer Court and collapse and the opening up of Russia, 0:21:32.000 --> 0:21:35.320 Soviet Union and Eastern Central Europe. So we had four 0:21:35.400 --> 0:21:40.360 decades of globalization, more trading goods, in services, in capital 0:21:40.320 --> 0:21:44.800 and labor, technology, data information, you name it. We reach 0:21:44.920 --> 0:21:48.159 peak globalization in my view, already ten years ago because 0:21:48.400 --> 0:21:51.639 after the global financial crisis there was a slowdown of 0:21:51.680 --> 0:21:55.399 global trade. There was the beginning of protectionist policies or 0:21:55.400 --> 0:21:59.600 inward oriented policies. So peak globalization probably already ten years ago. 0:21:59.840 --> 0:22:05.280 By certainly these crisis implies much more diglobalization, much more 0:22:05.320 --> 0:22:08.199 decoupling within US and China. The cold world is going 0:22:08.240 --> 0:22:11.080 to become colder than two city trap is gonna get 0:22:11.119 --> 0:22:16.399 worse whatever, total balkanization of global supply chains first in 0:22:16.520 --> 0:22:20.280 technology than manufacturing, than in services. You know, you cannot 0:22:20.320 --> 0:22:23.359 rely anymore on China. You have to reach shore. And 0:22:23.440 --> 0:22:25.920 by the way, if you reach shore economic activity, you're 0:22:25.920 --> 0:22:29.000 not going to create jobs because you're restoring economic activity 0:22:29.119 --> 0:22:32.320 from places where costs are low, say China and Asia, 0:22:32.600 --> 0:22:35.359 two places where labor costs are high. So it's gonna 0:22:35.480 --> 0:22:38.919 lead either to use more gig workers and pay them nothing, 0:22:39.400 --> 0:22:42.440 or to use machines. So the process of automation and 0:22:42.600 --> 0:22:45.920 robotization is going to accelerate, so we'll have more activity 0:22:45.920 --> 0:22:48.240 in the US is going to help. Capital is gonna 0:22:48.280 --> 0:22:51.200 still screw labor like it has for the last decades. 0:22:51.400 --> 0:22:54.320 So these trends are gonna get worse. But certainly is 0:22:54.400 --> 0:22:56.840 a world in which will have more restriction to everything, 0:22:57.440 --> 0:23:01.119 and even supply of safe supply chains of food are 0:23:01.200 --> 0:23:04.240 gonna be disrupted globally because every country says, hey, I 0:23:04.320 --> 0:23:07.119 want to keep my food for myself in case coronavirus 0:23:07.200 --> 0:23:10.080 comes back. Well, have restriction to exportation of food. Of course, 0:23:10.080 --> 0:23:14.360 we'll have restriction to exportation of pharma products and medical equipment. 0:23:14.600 --> 0:23:17.119 Everybody's gonna want to keep it for themselves. And we 0:23:17.240 --> 0:23:20.119 of course have given the tech war between US and China. 0:23:20.440 --> 0:23:22.920 The entire text sector is going to the couple, and 0:23:23.000 --> 0:23:25.160 we'll have a splinter night, and we'll have two completely 0:23:25.640 --> 0:23:29.280 system for tech and internet and five G and you 0:23:29.440 --> 0:23:33.800 name it going ahead. So there'll be massive Balkanization of 0:23:33.880 --> 0:23:37.440 the global economy. That's a massive negative supply shock the 0:23:37.560 --> 0:23:42.440 permanently reduces potential growth and is eventually given them North 0:23:42.520 --> 0:23:47.840 and fiscal policy stactulation ary over time. M hm. So, 0:23:48.040 --> 0:23:49.960 one of the things that always strikes me whenever I 0:23:50.040 --> 0:23:52.560