Interview with Economist Nouriel Roubini “The Stock Market Is Deluding Itself”

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Prominent American economist Nouriel Roubini does not believe the global economy will recover quickly. He believes that the dire situation will produce a summer of protest in the U.S. and years of difficulties in Europe as well.

Interview Conducted by Tim Bartz

DER SPIEGEL: Mr. Roubini, the pandemic has brought the global economy to its knees, and millions of people have lost their jobs. Is the crisis as severe as the Great Depression of the 1930s?

Roubini: The crash is even greater than it was then. It took years from 1929 until the full extent of the crisis became visible. Compared to today, it was like a slow-motion train wreck. Now the world economy has collapsed within weeks, and in the U.S. alone, more than 40 million people are unemployed. Many believe that the economy will pick up again just as quickly, but that is a fallacy

DER SPIEGEL: You don’t believe in a V-shaped recovery despite the huge economic stimulus packages? After all, 2.5 million new jobs were created again in the U.S. in May.

Roubini: Of course, we will see an upswing in the second half of the year. But it will not be a real one, but a delusion. The economy has fallen so steeply that it is practically inevitable that it will pick up again at some point. But that won’t compensate for the crash in any way. Even at the end of 2021, the U.S. economy will still be below the level of early 2020; too much has broken down. And the unemployment rate will level off at 16 or 17 percent – during the financial crisis it was only 10 percent. The job creation in May was only 2.4 million after 42 million lost their jobs in the last few months. And the actual unemployment rate is much higher than officially measured.

DER SPIEGEL: The stock market obviously sees things differently, with shares already trading at the same level as at the beginning of the year.

Roubini: The stock market is deluding itself. Investors are betting that there will be further economic stimulus packages and a V-shaped recovery of profits. But for the people here in the U.S., that means nothing.

DER SPIEGEL: Since when have Americans not cared about the stock market?

Roubini: On Wall Street, big corporations set the tone, banks and technology companies in particular. They will survive the crisis because the state will never let them go under. They will kick people out, cut costs and in the end, they will have even more market power than before. But what we here call Main Street, small- and medium-sized companies, can’t do that. They just go bankrupt. I estimate that every second restaurant in New York City will have to close, but McDonald’s will survive. But that’s not all.

DER SPIEGEL: What else?

Roubini: The richest 10 percent of Americans hold 80 percent of stock market wealth, while 75 percent own no shares at all. There is a study by the Federal Reserve, according to which 40 percent of Americans do not have 400 dollars in cash to be prepared for emergencies. We are experiencing this emergency now. The system is sick, and people are taking to the streets because of it.

DER SPIEGEL: You mean the protests following the police killing of George Floyd also have a social component?

Roubini: Of course! In the area where I live, the Bowery in Lower Manhattan, three quarters of the demonstrators are white. Many of them are young and belong to the urban “Precariat,” the new underclass that has replaced the traditional working class, the “Proletariat,” in advanced service economies. The Precariat is made up of temporary workers, freelancers, people who work on an hourly basis, gig workers, contractors – even though they often have university degrees. Those who are not in regular full-time employment no longer receive state transfers after three months. These people can then no longer pay their rent and telephone bills, and electricity and water are cut off. It will be a long, hot summer.

DER SPIEGEL: That will significantly reduce Donald Trump’s chances at reelection, won’t it?

Roubini: You’re right. But Joe Biden will have to win by a very large margin for Donald Trump to leave Washington on his own. But I predict that’s not what will happen. Either Trump will barely hold on to office, even though support among the white working class that put him into office is waning. Or he will lose by a narrow margin, but will not accept the results.

DER SPIEGEL: And you seriously believe that he would then barricade himself in the White House?

Roubini: Of course. Trump does not go to the Supreme Court like Al Gore and request a recount of the votes if the election results are close in some districts. He will blame China, Russia, blacks or immigrants and act like the dictator of a banana republic. He will call his followers to arms – there are enough armed white fascists running around out there. He reminds them often enough of the Second Amendment, which allows Americans to own weapons.

DER SPIEGEL: A grim scenario. Trump will also likely blame the Federal Reserve for economic developments. He wants to see the Fed lower interest rates even further.

Roubini: The Fed has already done all sorts of things that it didn’t have to do. It has saved banks, financial investors, hedge funds and asset managers by flooding the markets with liquidity. That was the right thing to do in the short term to avoid deflation. But public debt is so high that governments and companies can only refinance themselves if interest rates remain ultra-low. The Fed has to make sure of that by buying bonds and thereby boosting their prices and depressing interest rates. In the long term, it will not get out of the act. The Fed is in the same situation as all major central banks worldwide.

DER SPIEGEL: You mean the central banks have lost their independence?

Roubini: Absolutely. Look: In December 2018, Fed Chairman Jerome Powell announced that he would raise interest rates and cut the central bank balance sheet by stopping bond purchases. As a result, the stock market slumped by 20 percent. Powell quickly backed off, and today the Fed balance sheet is twice as big as it was then. In the long run, this will lead to inflation.

DER SPIEGEL: How can that happen when so many people are unemployed, and the economy is not really getting off the ground?

Roubini: Because we will experience a negative shock on the supply side. It may sound technical, but it’s easily explained.

DER SPIEGEL: Go ahead.

Roubini: Globalization has kept labor and production costs low for years, if only because of the 2.5 billion cheap laborers from India and China. But globalization had already passed its peak after the financial crisis, and the pandemic has intensified the trend. We are witnessing renationalization, the disintegration of supply chains, a trade conflict between China and the U.S.

DER SPIEGEL: So you expect prices to increase across the board?

Roubini: Take the example of 5G technology: Nokia and Ericsson are 30 percent more expensive and 20 percent less effective than Huawei. So if a country decides against Huawei for 5G expansion, which there are good security policy reasons for doing, the prices of all kinds of end products, from 5G services to toasters and microwaves with 5G chips, will automatically rise. And that ultimately leads to inflation.

DER SPIEGEL: But then interest rates would have to rise.

Roubini: According to the textbook, yes, but that won’t happen. States and companies would otherwise blow their budgets and balance sheets to smithereens.

DER SPIEGEL: Have you been surprised by how much money Europeans are suddenly mobilizing to stabilize their economies?

Roubini: Not really. After all, it’s all about keeping the Eurozone together. Without an act of solidarity, Italy in particular, would collapse and leave the common currency zone. Then everything would be over.

DER SPIEGEL: With regard to the 500-billion-euro aid package that Germany and France are hoping to assemble together, German Finance Minister Olaf Scholz spoke of Europe’s Hamilton moment, a reference to America’s first Secretary of the Treasury Alexander Hamilton, who laid the financial foundation for a U.S. nation. Is Scholz exaggerating?

Roubini: Of course, he is exaggerating. The package is all well and good, but two crucial prerequisites are missing for a European federal state: First, the communitization of liabilities – Italy’s debt is still Italy’s debt. And secondly, a common budget of a significant size, i.e. of 20 or 30 percent of the gross domestic product and not, as is now the case, of just 2 percent.

DER SPIEGEL: By German standards, the decisions of the German government are revolutionary.

Roubini: You can’t always say no to everything! Berlin cannot be against the fact that the EU budget is growing and that the ECB is playing a greater role and at the same time be surprised when everything goes down the drain. Then Europe would be dead! Fortunately, Chancellor Angela Merkel realized in time what was at stake. And she is so popular at the moment that she can push these things through. I doubt that this would still be possible under her successor, no matter who becomes the leader of her party and chancellor.

DER SPIEGEL: But the next crisis is already lurking around the corner: Brexit. Will the British again request an extension of the transition period?

Roubini: I speak regularly with British government representatives and have the impression that they are clearly heading for a hard Brexit. London does not want a free-trade agreement like the one between the EU and Canada, the government really wants a clear cut. That is, of course, crazy. Trucks will pile up at the customs border, Europe’s stock markets will fall sharply, the British economy will as well, and the European economy will fall too, albeit not to the same degree.

DER SPIEGEL: Is there anything that gives you hope?

Roubini: Hope? I’d have to think. It was good that the governments reacted so quickly and massively to the pandemic and its consequences. But otherwise? I fear that the 2020s will be marked by doom and disaster. Perhaps the global economy will be more sustainable afterwards. But for now, it will be gloomy.

Der Spiegel

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