WEBVTT - Nouriel Roubini Predicts a Crisis 'Worse' Than the 1970s 0:00:10.280 --> 0:00:13.560 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:13.600 --> 0:00:17.720 I'm Tracy Alloway and I'm Joe. Joe. I'm thinking back 0:00:18.079 --> 0:00:22.360 to the spring of the depths, of the COVID nineteen 0:00:22.360 --> 0:00:25.079 pandemic and the big market sell off. I don't like 0:00:25.120 --> 0:00:27.360 thinking that. I mean, it was a terrible time. It 0:00:27.440 --> 0:00:29.360 was about why why are you? Why are you reminding 0:00:29.440 --> 0:00:32.000 us of that? Well, I remember we spoke to one 0:00:32.080 --> 0:00:35.919 particular guest in I think it was May of and 0:00:35.960 --> 0:00:38.680 he came on and basically said that we're going to 0:00:38.840 --> 0:00:42.440 see a bad economic recovery and we're going to see 0:00:42.560 --> 0:00:45.159 inflation as a result of what was happening. And I 0:00:45.200 --> 0:00:48.120 think at the time both you and I were a 0:00:48.159 --> 0:00:51.680 little a little skeptical. You know, at that particular moment, 0:00:51.760 --> 0:00:54.600 everyone was talking about deflation and the possibility of a 0:00:54.640 --> 0:00:58.160 prolonged depression. Really, yeah, you're totally right. And then also 0:00:58.480 --> 0:01:03.320 by like sort of late or even like summer, optimism 0:01:03.400 --> 0:01:05.520 started to grow. Oh yeah, we're gonna have this. We're 0:01:05.520 --> 0:01:07.120 gonna come out of this with the boom that we 0:01:07.200 --> 0:01:11.160 got the policy just right, that we're going to have all. 0:01:11.319 --> 0:01:14.360 You know, we avoided the mistakes of two thousand that's right, 0:01:14.400 --> 0:01:16.720 that's right, and the stock market was surging, and I 0:01:16.720 --> 0:01:18.760 think there was just a lot of optimism even outside 0:01:18.800 --> 0:01:20.640 the stock market that like, we're going to be on 0:01:20.680 --> 0:01:24.680 this new superior trajectory post pandemic. Yeah. And of course, 0:01:24.760 --> 0:01:28.480 now fast forward about two years and uh, we're talking 0:01:28.520 --> 0:01:32.440 about the pain of higher interest rates as the Federal 0:01:32.480 --> 0:01:35.040 Reserve tries to tamp down on inflation that is that 0:01:35.240 --> 0:01:37.960 it's highest. And I think four decades people are talking 0:01:37.959 --> 0:01:41.720 about stress in the financial market, the potential for something 0:01:41.760 --> 0:01:45.319 to break as these rate increases go through, and we're 0:01:45.360 --> 0:01:49.080 already seeing some stuff internationally start to break. So I 0:01:49.120 --> 0:01:51.440 think it's a perfect time to catch up with that 0:01:51.600 --> 0:01:56.720 original guest who did get a lot right in May 0:01:56.720 --> 0:01:59.320 when you know there was a lot of uncertainty. Yeah, 0:01:59.360 --> 0:02:02.560 you know something you mentioned the fears of that something 0:02:02.640 --> 0:02:04.280 is going to break, and I'm thinking, you know, our 0:02:04.520 --> 0:02:07.440 regular guest John Turk has We's written about this and others, 0:02:07.680 --> 0:02:10.720 this idea that what if, you know, the real economy, 0:02:10.800 --> 0:02:14.680 employment is holding up okay, but the financial system starts 0:02:14.680 --> 0:02:18.000 to creak and that something breaks in the financial system, 0:02:18.040 --> 0:02:20.680 creating this real tension for central banks that still want 0:02:20.720 --> 0:02:23.520 to fight inflation. It's a pretty confusing time, it is, 0:02:23.720 --> 0:02:27.160 So why don't we bring in Neurial Rubini. Of course 0:02:27.160 --> 0:02:29.840 we're gonna let him do a victory lap on the show, 0:02:29.880 --> 0:02:31.680 but we also want to talk to him about the 0:02:31.760 --> 0:02:34.600 risks that he's seeing now because he has a new 0:02:34.639 --> 0:02:37.919 book out. It's uh, it's coming out on October eighteenth. 0:02:38.160 --> 0:02:41.639 It's called Mega Threats tend dangerous trends that imperil our 0:02:41.680 --> 0:02:45.320 future and how to survive them. So hopefully the perfect 0:02:45.360 --> 0:02:49.000 person to be speaking to right now, Uh, Neurio Rubini, 0:02:49.040 --> 0:02:52.200 thank you so much for joining us. Great thing with you. 0:02:52.760 --> 0:02:55.280 That's a pleasure to do it again. So we should 0:02:55.320 --> 0:02:57.800 we let you have that victory lap. So, you know, 0:02:58.160 --> 0:03:01.840 how did what did you see in early that you 0:03:01.919 --> 0:03:07.280 think other people, notably perhaps certain policymakers might have missed? 0:03:07.720 --> 0:03:10.760 Well at that time, the entire talk was about the 0:03:10.880 --> 0:03:14.200 risk of not just an economic contraction but also of 0:03:14.360 --> 0:03:18.200 deflation because it was a shock to aggregate demand and 0:03:18.200 --> 0:03:22.239 a credit crunch. The thing what I saw that other 0:03:22.280 --> 0:03:24.680 people saw as well. You know, early on people like 0:03:25.320 --> 0:03:29.760 Larry Summers, Mohammed Lay and others talk that the amount 0:03:29.760 --> 0:03:33.360 of the stimulus monitor and fiscal will be excessive. Of 0:03:33.360 --> 0:03:35.920 course we didn't do enough on the physical side in 0:03:35.960 --> 0:03:39.160 two thousand and eight, but between the Trump and Biden 0:03:39.600 --> 0:03:42.680 with about five three do dollars of physical stimuls that 0:03:42.880 --> 0:03:47.400 is something like about d DP that was excessive. And 0:03:47.440 --> 0:03:51.160 of course the fact that went back to zero credit easing, 0:03:51.280 --> 0:03:56.120 quantity of easing back stopping money market, commercial paper, hill, 0:03:56.200 --> 0:04:00.520 high grade banks, don't banks, corporate households, you name it, 0:04:00.560 --> 0:04:03.800 everybody under the sun. I think the difference between me 0:04:03.920 --> 0:04:06.840 and people like Larry was that they were stressing that 0:04:07.000 --> 0:04:11.760 will be inflation because of a aggregate amendment shock, too 0:04:11.840 --> 0:04:15.440 much stimulus, and I agreed on that that half of 0:04:15.480 --> 0:04:19.480 the problem was bad policies to lose monetary, physical and 0:04:19.480 --> 0:04:23.960 credit ezing. But from early on I also realized that 0:04:24.040 --> 0:04:28.000 this will be a negative aggregate supply shock, the disruption 0:04:28.040 --> 0:04:31.520 that came to global supply chains. They shutdown of economic 0:04:31.560 --> 0:04:36.480 activity from services to initially manufacturing, the reduction in the 0:04:36.560 --> 0:04:39.520 labor supply, and then we ended up with a great 0:04:39.560 --> 0:04:44.839 resignation and those initial negative supply shock was amplified of 0:04:44.880 --> 0:04:48.320 course this year by the Russian invasion of Ukraine. This 0:04:48.400 --> 0:04:52.200 brutal invasion is led to a spike in oil and 0:04:52.800 --> 0:04:57.600 natural gas prices, food fertilizer, industrial methods. That's another negative 0:04:57.600 --> 0:05:00.240 supply shock. And the third one is the continue sation 0:05:00.279 --> 0:05:03.920 of the zero tolerance policy of China towards COVID. That's 0:05:03.920 --> 0:05:07.720 creating further bottlenecks. So most people were saying we're gonna 0:05:07.720 --> 0:05:12.080 get inflation because of excessive overeating, because of the bad 0:05:12.160 --> 0:05:15.359 policy and excessive stimulus. I think my contribution to that 0:05:15.400 --> 0:05:19.520 discussion was to emphasize that the aggregate supply shops and 0:05:19.680 --> 0:05:22.680 old enough in a grayer and I remember the two 0:05:22.800 --> 0:05:25.640 all shocks of seventy three and seventy nine that led 0:05:25.680 --> 0:05:29.400 not only to inflation but also to star inflation. So 0:05:29.440 --> 0:05:33.240 most people were worried about inflation and overeating and excessive growth. 0:05:33.480 --> 0:05:36.960 I started to worry about instead not only inflation but 0:05:37.080 --> 0:05:40.680 also recession because of the negative supply shops. So that 0:05:40.720 --> 0:05:43.720 was maybe the new twist that I gave to that debate. 0:05:44.320 --> 0:05:48.920 So looking at the situation today in October two thousand 0:05:49.000 --> 0:05:53.000 and twenty two, we still have obviously extremely elevated inflation, 0:05:53.400 --> 0:05:56.279 really no signs that it's turning the corner yet at all. 0:05:56.600 --> 0:05:58.560 Maybe a little bit if you look at headline of 0:05:58.760 --> 0:06:02.000 the elevated inflation and today, how much would you at 0:06:02.040 --> 0:06:05.640 this point attribute it to the persistence of these supply 0:06:05.720 --> 0:06:10.440 shocks that you identify, including the ongoing war, versus still 0:06:10.520 --> 0:06:13.479 paying the price in some way for what you characterize 0:06:13.600 --> 0:06:17.479 as excessive fiscal and monetary policy, because I think it 0:06:17.520 --> 0:06:20.000 matters when thinking about how much the FED is going 0:06:20.040 --> 0:06:23.520 to have to tighten to get the inflation back to 0:06:23.560 --> 0:06:27.080 its target. Well, it depends on the countries. I would 0:06:27.120 --> 0:06:30.400 say the solharmonic answer is half and half. But of 0:06:30.440 --> 0:06:34.120 course in Europe, given the exposure to ration energy, is 0:06:34.240 --> 0:06:37.599 more that shock. In the U S where in ters 0:06:37.600 --> 0:06:41.239 a monitor, fiscal and credit is in even worse than Europe, 0:06:41.680 --> 0:06:44.279 and Europe did a lot. In the UK. In addition 0:06:44.320 --> 0:06:47.200 to that, there was another negative supply sharks, self inflicted 0:06:47.640 --> 0:06:51.520 those the Brexit decision that was staculation ary reduced the 0:06:51.560 --> 0:06:55.440 growth and increased that cost of production. Same thing in China. 0:06:55.520 --> 0:06:58.080 Some of it is self inflicted. So I would say 0:06:58.080 --> 0:06:59.920 it depends on the country, but I would say is 0:07:00.080 --> 0:07:03.400 combination of of both of them. You had serious negative 0:07:03.400 --> 0:07:06.840 supply shops and you had really a policy steamus that 0:07:07.000 --> 0:07:11.000 was by any standard massively excessive across the world in 0:07:11.080 --> 0:07:14.520 all advanced economies. Now, in my book, what I point 0:07:14.560 --> 0:07:17.240 out is that while in the short term that at 0:07:17.320 --> 0:07:22.480 least three negative aggregate supply shops that are COVID initially Russia, 0:07:22.600 --> 0:07:26.280 Ukraine and now the China policy, I identify in the 0:07:26.320 --> 0:07:30.160 book wherever chapter about the great Coming Staculation, that there 0:07:30.200 --> 0:07:35.080 are eleven medium term aggregate supply shops that are negative. 0:07:35.240 --> 0:07:37.920 They're going to reduce potential growth and they're gonna increase 0:07:38.000 --> 0:07:40.440 cost of production. And if then you have a loose 0:07:40.480 --> 0:07:44.120 monitor and physical policy because I expected central banks gonna 0:07:44.160 --> 0:07:47.040 blink for a reason I can discuss, then went up 0:07:47.120 --> 0:07:51.120 like the seventies with inflation and stacculation and with a 0:07:51.240 --> 0:07:54.320 dead crisis as well. So it's gonna be worse than 0:07:54.360 --> 0:07:57.320 the seventies. So this is not just the short term phenomenon. 0:07:57.400 --> 0:08:00.960 People say they global supply bottom next my end, after November, 0:08:01.000 --> 0:08:03.920 when is gonna care about growth? I think there are 0:08:04.000 --> 0:08:08.480 many other forces. Is a protectionism and the globalization, French 0:08:08.520 --> 0:08:11.840 shoring and restoring of manufacturing from China to I causset 0:08:11.880 --> 0:08:17.000 Europe in US, aging of population, restriction of migration, decoupling 0:08:17.040 --> 0:08:21.840 between US and China. Geopolitical risk and depression that's gonna 0:08:22.080 --> 0:08:26.840 fragment the couple valcanized and the globalize, the global economy, 0:08:27.120 --> 0:08:31.800 the impact of global climate change, the impact of cyber warfare, 0:08:31.800 --> 0:08:35.679 the impact of the current pandemics, the backlash against income 0:08:35.720 --> 0:08:39.760 and wealth inequalities leading to policies pro labor your workers 0:08:39.760 --> 0:08:42.400 and so on, and of course digularization of the dollar, 0:08:42.679 --> 0:08:45.280 when eventually people are gonna get out of dollar assets 0:08:45.320 --> 0:08:47.800 because of the financial sanction and so on. Those are 0:08:47.840 --> 0:08:50.840 elevened forces that are medium termed have nothing to do 0:08:50.880 --> 0:08:54.080 with COVID in Russia, Ukraine. They're gonna be reducing growth, 0:08:54.440 --> 0:08:58.040 increased cost of production, and I think central banks will 0:08:58.080 --> 0:09:00.839 have to blink like the first exact police what happened 0:09:00.840 --> 0:09:03.040 in the the UK. If you're gonna have an economic crash, 0:09:03.280 --> 0:09:06.360 you're gonna have a financial crash. As you increase interest rates, 0:09:06.480 --> 0:09:10.760 you're gonna wimp out. Guaranteed. The Fed didd into thousand nineteen, 0:09:11.160 --> 0:09:13.120 the BO he has done it. Now the e c 0:09:13.240 --> 0:09:14.679 B is gonna have to do it. The Fed is 0:09:14.720 --> 0:09:17.840 gonna do it. It's gonna happen for sure, and therefore 0:09:17.880 --> 0:09:21.000 we're gonna have an engine of inflation expectation. I don't 0:09:21.000 --> 0:09:23.280 believe sent to a bank what they say, we're gonna 0:09:23.320 --> 0:09:26.079 do fight inflation at any cost, even if there is 0:09:26.120 --> 0:09:28.960 a recession, even if there's a hard landing. First of all, 0:09:28.960 --> 0:09:31.240 it's not going to be a short and shallow recession. 0:09:31.360 --> 0:09:33.560 It's going to be ugly, and then you have financial 0:09:33.559 --> 0:09:37.040 stresses and a financial debt crisis. At that point they're 0:09:37.040 --> 0:09:40.160 gonna wimp out and went out actually worse than the 0:09:40.200 --> 0:09:44.480 seventies because in the seventies where two straight treasury shocks 0:09:44.800 --> 0:09:47.920 and with inflational recession, but that ratio where a hundred 0:09:47.960 --> 0:09:52.040 percent of GDP for private and public. Second advanced economies 0:09:52.280 --> 0:09:56.360 after the GFC where the dead crisis mortgage housing bank 0:09:56.480 --> 0:09:59.920 that but we have deflation because it was a negative aggregate, 0:10:00.000 --> 0:10:02.400 the man shop and a credit crunch, so we could 0:10:02.440 --> 0:10:05.680 ease monitor and fiscal policies like we wanted. Today, we 0:10:05.720 --> 0:10:08.800 have levels of debt to GDP of three hundred and 0:10:08.880 --> 0:10:12.240 fifty pc of GDP globally, four d and twenty in 0:10:12.280 --> 0:10:15.640 advanced economies private in public, and we have these massive 0:10:15.679 --> 0:10:18.920 negative supply shops. So we're not gonna have only inflation. 0:10:19.200 --> 0:10:22.479 We're not gonna have only stagflation. We'll have a stagflationary 0:10:22.600 --> 0:10:25.960 debt prices the worst of the seventies and the worst 0:10:25.960 --> 0:10:29.440 of the positive superior sterio. I gotta say, you're not 0:10:29.520 --> 0:10:32.400 helping with my anxiety levels right now, I'm gonna go 0:10:32.400 --> 0:10:36.240 to I'm moving my portfolio to cash. One second pasitive 0:10:36.240 --> 0:10:40.720 positive podcast. She's gonna be wiped up by inflation. Pats 0:10:40.920 --> 0:10:44.560 and I can discuss they can hidge your insinflation. All right, So, um, 0:10:44.600 --> 0:10:49.200 this idea of a stag fla a great coming stagflation, 0:10:49.320 --> 0:10:52.240 I mean, stagflation already seems like the nightmare scenario for 0:10:52.280 --> 0:10:55.600 central banks if you have high prices and lower growth. 0:10:55.640 --> 0:10:58.640 But if you tack onto that a debt crisis plus 0:10:58.640 --> 0:11:03.560 stagflation just seems like incredibly difficult for any central pin 0:11:03.640 --> 0:11:08.480 to navigate. What is the appropriate policy response, especially if 0:11:08.520 --> 0:11:12.040 inflation is being driven by supply side bottlenecks as you 0:11:12.120 --> 0:11:16.800 described well. Some people say, if inflation is driven by 0:11:17.040 --> 0:11:21.319 negative supply shops, we shouldn't tighten too much because central 0:11:21.320 --> 0:11:24.760 bank can affect aggregate the man, not aggregate supply. But 0:11:24.880 --> 0:11:27.680 the reality is that like in the seventies, if you 0:11:27.760 --> 0:11:31.800 don't fight inflation, you have a the anchoring of inflation expectation, 0:11:32.200 --> 0:11:34.480 you have a wage price parallel, and then you end 0:11:34.559 --> 0:11:38.120 up in a nightmare. So unfortunately, even if the negative 0:11:38.120 --> 0:11:40.880 supply shop as opposed to aggreg the man you have 0:11:40.920 --> 0:11:43.720 to tighten monetary policy to make sure that you don't 0:11:43.760 --> 0:11:47.560 have an injine of inflation expectation. Otherwise you make the 0:11:47.600 --> 0:11:50.560 same mistake it was done in the seventies. They reply 0:11:50.679 --> 0:11:54.000 to these two negative supply shops with loose monetary policy 0:11:54.040 --> 0:11:57.000 and loose fist health policy. You went up instaculation. So 0:11:57.040 --> 0:11:59.720 the right response would be to fight it. But in 0:11:59.760 --> 0:12:04.000 the seventies we had the nasty recession sev seventy five 0:12:04.280 --> 0:12:08.000 and a double deepercession in eighteen eighty two when Walker 0:12:08.080 --> 0:12:10.959 came to power, and it caused the double dee precession 0:12:11.320 --> 0:12:14.920 to finally break the back of inflation expectations. And we're 0:12:14.920 --> 0:12:18.080 at the beginning of the American carnage because a lot 0:12:18.160 --> 0:12:21.240 of the industry went bass for good. But in the 0:12:21.280 --> 0:12:24.120 seventies we did not have a dead crisis in US 0:12:24.240 --> 0:12:26.320 or advanced The column is where the dead crisis of 0:12:26.320 --> 0:12:29.160 course in Latin America because they borrowed like crazy in 0:12:29.200 --> 0:12:31.839 the seventies, and when the FED were to twenty percent 0:12:31.920 --> 0:12:35.160 interest rates, of course Brazil, Argentina, Mexico, they all the 0:12:35.200 --> 0:12:38.000 faults and went bankrupt. So we had the stacturation, but 0:12:38.080 --> 0:12:41.840 not a dead crisis. Today, the problem we're facing is 0:12:41.880 --> 0:12:45.559 that if you fight inflation, not only you're gonna have recession. 0:12:46.120 --> 0:12:48.520 And the idea they're gonna have a short and shallow 0:12:48.600 --> 0:12:53.480 recession train vanilla garden variety is totally delusional. I mean 0:12:53.480 --> 0:12:57.520 it's totally delusional because we have amounts of death like 0:12:57.559 --> 0:13:01.480 we've never seen before. In previous rest actial like COVID GFC, 0:13:01.760 --> 0:13:04.720 we could do monitoring physcal easy because you have deflation. 0:13:05.160 --> 0:13:08.559 Now we're to tighten monitor and physical policy into a recession. 0:13:08.880 --> 0:13:12.880 Inflation is global and everybody is tightening, and therefore, as 0:13:12.880 --> 0:13:15.640 I pointed out, we get the worst of the seventies 0:13:15.760 --> 0:13:18.319 and the worst of the GFC. It's gonna be long, 0:13:18.559 --> 0:13:24.880 ugly protracted with financial stresses, financial stability, and that crisis. 0:13:24.920 --> 0:13:27.319 That's what we're facing right now. So what would be 0:13:27.320 --> 0:13:32.280 the optimal response? Try to avoid an injuring of inflation expectation. 0:13:32.559 --> 0:13:34.640 But you have two problems. If you do the right thing, 0:13:35.040 --> 0:13:38.160 One you have a recession to get nasty. Second, you 0:13:38.160 --> 0:13:41.840 have a financial and that crisis like you're not seeing before, 0:13:42.280 --> 0:13:45.680 and that's gonna lead central banks to wimp out. Because 0:13:45.720 --> 0:13:50.760 between causing an economic crash is severe and a financial crash, 0:13:51.040 --> 0:13:55.600 or blinking and whimping out and monetizing those deficits and 0:13:55.679 --> 0:14:00.680 wiping out the real value of nominal long term fits UH, 0:14:00.800 --> 0:14:04.440 nominal debt and blown duration, the part of list resistance 0:14:04.520 --> 0:14:07.960 politically is gonna be to monetize it and therefore to 0:14:08.040 --> 0:14:11.200 cause inflation and stat racial like the seventies. And the 0:14:11.240 --> 0:14:14.360 first example is exactly the b O E face with 0:14:14.920 --> 0:14:18.160 a financial shock. What they do They totally wimped out 0:14:18.440 --> 0:14:20.520 and they go back to M M T. So that's 0:14:20.560 --> 0:14:23.200 gonna happen across the board. So I don't believe central 0:14:23.240 --> 0:14:25.400 banks when they say we're gonna fight in fresh at 0:14:25.400 --> 0:14:29.120 any cost, because their delusion of either soft landing or 0:14:29.160 --> 0:14:32.480 a hard landing it is short and shallow. Two courts 0:14:32.360 --> 0:14:34.840 as a negative growth and then you return to growth 0:14:34.880 --> 0:14:37.600 and easy, that's not gonna happen. It's gonna get ugly 0:14:37.640 --> 0:14:40.360 the recession and you'll have a financial crisis. So how 0:14:40.360 --> 0:14:56.520 can they do it they're not gonna do it. Talk 0:14:56.600 --> 0:15:00.920 a little bit more about hiking rates and fighting inflation 0:15:01.080 --> 0:15:04.280 in a period of high levels of private sector debt. 0:15:04.400 --> 0:15:06.600 And I could see it going both ways, because on 0:15:06.640 --> 0:15:09.160 the other one hand, I could imagine that in a 0:15:09.240 --> 0:15:15.320 heavily indebted economy UH interest rate increases have a quick 0:15:15.320 --> 0:15:20.360 transmission mechanism and that that significantly impedes private sector activity 0:15:20.400 --> 0:15:23.080 and helps you fight inflation sooner. Or I could see 0:15:23.080 --> 0:15:25.920 it the other way that high levels of private sector 0:15:25.960 --> 0:15:30.720 debt created over sensitivity. Maybe the debt crisis scenario that 0:15:30.760 --> 0:15:34.320 you're talking about walk through a specifically, how it unfolds 0:15:34.360 --> 0:15:38.120 the intersection in the US of higher rates and high 0:15:38.240 --> 0:15:42.720 levels of indebtedness UM. In short, that it becomes very ugly, 0:15:43.280 --> 0:15:47.320 and it becomes very ugly because the indebtedness of the 0:15:47.400 --> 0:15:50.640 private sector in the US was very high and rising 0:15:51.440 --> 0:15:55.360 even after the GFC, because we had zero rates, quee 0:15:55.720 --> 0:15:58.360 credit easing, and so on, and then we doubled down 0:15:58.360 --> 0:16:01.680 on it UH during the COVID crisis. And of course 0:16:01.720 --> 0:16:05.240 during the GFC was household debt and banks, but then 0:16:05.280 --> 0:16:08.120 they build up in the next decade was of corporate 0:16:08.160 --> 0:16:13.240 debt and of shadow banks, leverage loans, ce laws, high yield, 0:16:13.320 --> 0:16:16.560 high grade, fallen aims of the new name it. And 0:16:16.680 --> 0:16:20.160 while the death of the household sector is now reduced, 0:16:20.560 --> 0:16:23.680 there are significant pockets of the household sector those who 0:16:23.680 --> 0:16:26.520 have low income and low wealth and the borrowing. They're 0:16:26.560 --> 0:16:29.760 gonna be under stress, especially as they get unemployed. So 0:16:30.000 --> 0:16:33.760 the biggest stress is going to be corporates and shadow banks. 0:16:34.000 --> 0:16:37.240 But eventually the official banks are linked to the shadow banks, 0:16:37.320 --> 0:16:39.520 and the household sector is going to also get in trouble. 0:16:39.760 --> 0:16:42.200 Those who have low income, they don't have much wealthy, 0:16:42.240 --> 0:16:44.520 have a lot of debt, and their income is fragile 0:16:44.560 --> 0:16:47.720 to a recession, so we'll have a dead crisis. So 0:16:48.040 --> 0:16:51.000 what's happening in this situation is that if you don't 0:16:51.040 --> 0:16:55.240 fight inflation. If you fight inflation, first of all, you 0:16:55.280 --> 0:16:57.120 have to jack up interest rates to the point in 0:16:57.160 --> 0:17:00.040 which there is a debt crisis, a recession, and and 0:17:00.120 --> 0:17:04.560 interests are so high that the zombie housle, corporate banks, 0:17:04.840 --> 0:17:09.879 shadow banks, government countries that are insolvent are gonna go bankrupt. 0:17:10.240 --> 0:17:12.880 And they were built out twice during the GFC. During 0:17:12.920 --> 0:17:16.760 COVID wed high that ratios, but we had low that 0:17:17.000 --> 0:17:19.919 servicing racial because of zero rates on the short end, 0:17:19.960 --> 0:17:22.760 on the long end, and all the other policy of easy. 0:17:22.880 --> 0:17:25.680 Now he said into a session, where to raise rates 0:17:25.840 --> 0:17:29.240 because there is inflation. So those who were swimming naked 0:17:29.359 --> 0:17:32.360 as the tiger cid, you'll see where they were. Those 0:17:32.359 --> 0:17:34.600 who had the emperor without clothes, you'll see where they are. 0:17:34.920 --> 0:17:38.280 And the zombies are gonna recognize. The zombies are gonna default. 0:17:38.560 --> 0:17:40.119 We're not gonna be able to build them out this 0:17:40.240 --> 0:17:42.600 time around. We'll have to raise rates, and they're gonna 0:17:42.640 --> 0:17:45.920 go bankrupt. Across the board. And I'm not saying everything 0:17:46.040 --> 0:17:49.000 and everybody in every country, but the amounts of debt 0:17:49.640 --> 0:17:54.119 private public across advanced economy and emerging market implies the 0:17:54.200 --> 0:17:59.159 severe debt crisis. Now, interest rates for the public sector 0:17:59.160 --> 0:18:02.960 are gonna rise. And in the UK with stupid fiscal policy, 0:18:03.280 --> 0:18:07.640 those spreads widened in significant terms. But then the private 0:18:07.640 --> 0:18:11.280 sector has spread over a riskless rates. Right, you have 0:18:11.400 --> 0:18:17.080 spread over treasury mortgages. Hi held a great consumer loanlans on. 0:18:17.600 --> 0:18:21.399 So if you are an insolvent agent, uh, it's not 0:18:21.520 --> 0:18:24.679 gonna be just increasing long term interested on treasury. It's 0:18:24.680 --> 0:18:28.200 gonna increase your cost of servicing your debt, but they spread. 0:18:28.240 --> 0:18:30.680 Widening on your own private debt is going to cause 0:18:30.880 --> 0:18:35.120 another's reason for the fault. And already highiled right now 0:18:35.280 --> 0:18:38.000 is gone from three hundred to over six hundred. The 0:18:38.160 --> 0:18:41.320 entire clo and leverage, your low market right now is 0:18:41.400 --> 0:18:44.240 shut down, literally shut down. And this is only the 0:18:44.280 --> 0:18:47.480 beginning of it of that stress on the private sector. 0:18:48.000 --> 0:18:52.280 So we're gonna see significant financial distress in the corporate sector, 0:18:52.600 --> 0:18:56.119 in the shadow banks, in parts of the household sector. 0:18:56.960 --> 0:18:59.600 So I mean, you just laid out basically the stuff 0:18:59.640 --> 0:19:03.320 that you think could break first as interest rates rise. 0:19:03.720 --> 0:19:06.480 Where do you see other pockets of weakness? And I'm 0:19:06.520 --> 0:19:11.240 thinking specifically about some of the international developments, the impact 0:19:11.400 --> 0:19:14.719 of the stronger dollar. We've seen that way already on 0:19:14.760 --> 0:19:17.280 a number of emerging markets. You have taken out dollar 0:19:17.359 --> 0:19:20.119 denominated debt that's getting a lot more expensive as rates 0:19:20.119 --> 0:19:22.919 go up and the dollar strengthened. At the same time, 0:19:23.520 --> 0:19:27.320 talk to us about the sort of international repercussions here. Well, 0:19:27.359 --> 0:19:31.520 the internationally percussions for emerging market is that many, not 0:19:31.600 --> 0:19:34.480 all of them, of these emerging markets are in deep, 0:19:34.720 --> 0:19:37.320 deep trouble. I don't want to lamp them together that 0:19:37.400 --> 0:19:41.680 are better credits, worse credits, better solving work. Sovereigns to 0:19:41.800 --> 0:19:44.440 you about forty countries, but I would say good two 0:19:44.480 --> 0:19:47.000 thirds of them are in trouble and then travel for 0:19:47.040 --> 0:19:52.239 several reasons. One, interests arising US in advanced economies, so 0:19:52.359 --> 0:19:56.119 their interest rates and their spreads arising even more to 0:19:56.720 --> 0:20:00.280 their currencies are weakening as the dollar is strengthening. And 0:20:00.359 --> 0:20:03.920 unless you are a commodity exporter, mostly the guys in 0:20:03.960 --> 0:20:08.080 the Gulf were making a fortune everybody else among emerging markets. 0:20:08.119 --> 0:20:12.520 And to be, with your exception a commodity importer, especially 0:20:12.520 --> 0:20:15.159 in Asia, but also in other parts of the world, 0:20:15.440 --> 0:20:17.359 and therefore you have also in terms of trade shop, 0:20:17.720 --> 0:20:21.399 so it's a it's a quadruple way. You have first 0:20:21.440 --> 0:20:24.639 of all, the rays of interstates in advanced economy pushing 0:20:24.640 --> 0:20:27.520 your interests higher. You have the weakending of your currency 0:20:27.720 --> 0:20:29.240 and you have a lot of dollar that and the 0:20:29.280 --> 0:20:31.760 real value goes higher. You have a negative terms of 0:20:31.760 --> 0:20:34.480 trade shock and the slowdown of growth and the recession 0:20:34.600 --> 0:20:38.200 US in Europe, in UK, in China. Effectively the be 0:20:38.280 --> 0:20:42.320 a recession weekends your export markets in your own economic growth. 0:20:42.640 --> 0:20:46.640 So it's the perfect storm for the weakest emerging markets, 0:20:46.840 --> 0:20:48.760 and I would say a good two thirds of this 0:20:48.880 --> 0:20:52.639 emerging market right now have these types of economic and 0:20:52.680 --> 0:20:55.679 financial fragility. Now, if we're gonna have a recession in 0:20:55.720 --> 0:20:58.600 the US, it's gonna be even worse in Europe in 0:20:58.640 --> 0:21:02.280 my view, for several reasons. Reason number one, Europe is 0:21:02.320 --> 0:21:05.960 more exposed to the Russian energy shock, and it's gonna 0:21:06.000 --> 0:21:08.760 get worse this world and they'll be a total cutoff 0:21:08.760 --> 0:21:11.880 and natural gas. Secondly, the dollar is strong and that 0:21:11.960 --> 0:21:16.119 reduces inflation. The eurous week that increases inflation. Inflation is 0:21:16.119 --> 0:21:20.840 already double gig in the Eurozone, let alone in the UK. Three, 0:21:21.240 --> 0:21:24.679 Europe is exposed to export to China and China is 0:21:24.680 --> 0:21:29.000 slowing down very, very, very sharply. And for within the Eurozone, 0:21:29.200 --> 0:21:32.119 you have this fragmentation risks of the risk of a 0:21:32.160 --> 0:21:35.280 widening of spreads of the periphery that this new tool 0:21:35.560 --> 0:21:39.040 t p I. But if the new Italian government follows 0:21:39.119 --> 0:21:42.160 policies that are on a collision course with Europe, they're 0:21:42.160 --> 0:21:45.560 not gonna qualify for the bailout that the CP is 0:21:45.600 --> 0:21:49.720 gonna make for those that have unwarranted widening of their spreads. 0:21:50.040 --> 0:21:53.639 As as opposed to those that are warranted by poor 0:21:53.680 --> 0:21:56.679 economic and physical policy. So things are going to be 0:21:56.760 --> 0:21:59.480 even worse in Europe that they are in the US. 0:21:59.600 --> 0:22:02.040 And the asket case, of course is the UK right 0:22:02.080 --> 0:22:05.359 now that is pricing like literally like an emerging market. 0:22:05.880 --> 0:22:09.600 Usually the fiscal stimulus in US, the dollar gets stronger, 0:22:09.920 --> 0:22:14.119 interested rise only little in the UK that the pound 0:22:14.200 --> 0:22:17.560 is collapsing and the interest rates are the roof, even 0:22:17.600 --> 0:22:20.160 with the support of the b o E. So it's 0:22:20.200 --> 0:22:23.320 really becoming an emerging market, is there? You know? The 0:22:23.320 --> 0:22:26.119 way you describe things so much as already baked, in 0:22:26.280 --> 0:22:28.760 particular with these trends that are in place with g 0:22:28.760 --> 0:22:32.119 globalization and these shocks that we've seen, the all supply 0:22:32.200 --> 0:22:36.240 chains and then the accumulated debts that we've seen in 0:22:36.240 --> 0:22:40.200 public and private. At this point, are there better policy 0:22:40.280 --> 0:22:45.320 paths than what you expect, UH leader policymakers to take? 0:22:45.320 --> 0:22:47.560 I mean, could there is there? What? What what is 0:22:47.560 --> 0:22:50.840 the wiggle rumor what is the what would what would 0:22:50.840 --> 0:22:54.040 you do? What would you advise policymakers and say the 0:22:54.119 --> 0:22:57.280 US and Europe to do well? You know, there's always 0:22:57.280 --> 0:23:01.800 a difference between normatives statements about how the world should 0:23:01.800 --> 0:23:05.600 be as opposed to positive statesmen about what is the 0:23:05.640 --> 0:23:08.600 world that's gonna be and likely to. So I'm making 0:23:08.680 --> 0:23:11.920 for now positive statesmen about the fact that we're gonna 0:23:11.920 --> 0:23:18.320 have a nasty recession, nasty extractlation, and another severe financial crisis. 0:23:18.600 --> 0:23:21.080 I think that's the baseline, and I think that the 0:23:21.119 --> 0:23:24.480 policy trade off like during the GFC, is too late 0:23:24.600 --> 0:23:27.639 right now, because if you fight inflation, you'll have a 0:23:27.640 --> 0:23:31.040 recession and financial crisis. And if you don't fight inflation, 0:23:31.400 --> 0:23:34.760 you're gonna have the answer inflation and you get inflation 0:23:34.800 --> 0:23:38.480 extaclation and still a financial crisis. Because you can wipe 0:23:38.480 --> 0:23:43.960 out with unexpected inflation the real value of nominal long 0:23:44.080 --> 0:23:47.720