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The Book in a Nutshell
Having foreseen the 2008 financial crisis, Nouriel Roubini now believes we are on the precipice of 10 “megathreats”, characterised by deep instability, conflict, and chaos. While from one recent generation to the next we have seen immense uplifts in prosperity, Roubini argues that this trend is about to come to a shuddering halt due to the coalescence of these new megathreats. From economic threats, like our debt burden and easy money trap, to geopolitical threats and environmental threats, each threat risks reinforcing the others. A Great Stagflationary Debt Crisis is upon us, which can only be avoided with immediate action, but as Roubini highlights, this is not the only crisis on our doorstep. As Roubini puts it, “Change is coming, like it or not. The megathreats we face will reshape our world. If you want to survive, do not been taken by surprise.”
Book Summary: The Key Ideas
#1: The mother of all debt crises. The worst debt crisis of our lifetimes lies ahead, and the potential solutions are limited or risk worsening the situation. The scale of this challenge is exacerbated by huge unfunded liabilities for ageing populations. Solutions will stoke significant divides and conflict.
#2: Easy money and the coming stagflationary crisis. Sustained low interest rates have encouraged colossal speculative bubbles and inflation in assets and goods. Containing this inflation is increasingly difficult due to our debt burden. Combined with recent supply shocks and potential new supply shocks, the result is likely to be a Great Stagflationary Debt Crisis.
#3: Currency meltdowns and the end of globalisation. Currencies are at war, and technology-driven alternative versions of currencies may pose a significant threat to the US dollar. This battle may also accelerate deglobalisation, where we are already seeing many countries look to re-shore or “friend-shore” manufacturing or key natural resources.
#4: The emerging threat of AI, climate change and new cold war. Artificial intelligence may finally prove the Luddites right, with new jobs failing to replace the jobs lost by advances in language processing, predictive capabilities, robotics, etc. Climate change may drive huge migration from hotter to cooler countries. And military risks loom between the two great powers, the US and China.
Book Notes: The Key Ideas in Detail
The below are more detailed notes on the key ideas from Megathreats by Nouriel Roubini, along with some quotations that caught my eye. These notes do not by any means cover the full breadth of the book. They are instead intended to serve as an introduction to some of the key ideas, from which to decide whether the book is worth further attention.
Key Idea #1: The mother of all debt crises
The worst debt crisis of our lifetimes lies ahead, and we have learnt nothing from its predecessors. Across the world, debt levels have soared to unprecedented levels, further exacerbated by stimulus measures during the COVID-19 pandemic. Private and public debt in many advanced economies has topped 400 percent of GDP. Even China is over 300 percent. This debt is reaching a level where it is unserviceable, with repayments smothering economic growth.
“A habitable, progressive world requires levels of debt that countries can pay without stifling growth.”
When governments fail to control debts sustainably, their options when the bill comes due are all challenging. Central banks will be faced with a choice to go bust or to inflate away the debt. Roubini suggests this impact may first appear in the eurozone, given the absence of national central banks. Meanwhile, Emerging Markets with high debt and weak currencies will also struggle. Failure to cover debt costs in foreign currency will devalue currency, causing domestic inflationary crises.
While stimulus might attempt to stop the rot, we can expect to see this debt permeate like contagion across borders and sectors. Governments will be forced to curtail vital services.
“Curing debt crises is possible but most solutions require strong medicine and excruciating rehab.”
Roubini considers seven strategies often employed to address public and private failure, but so many end up making the debt problem worse:
- Bailouts: Bailing out private companies (often zombie companies) creates a doom loop, transferring the risk to the public. Meanwhile, despite the conditionality that may come with bailouts of public debt, history shows that the bailouts rarely instil effective fiscal discipline (e.g. Argentina). Such interventions also breed moral hazard, privatising gains and socialising losses.
- Austerity: The global pendulum has swung from the Austrian view of cutting spending to manage debt to the Keynesian view of stimulating to avoid recession.
- Defaults: This is unpleasant for citizens as creditors suffer the consequences. Indeed, this is a particular risk for emerging economies with dollar-denominated debt.
- Inflation: For strong economies able to borrow in local currency and print to monetise their debt, the price is eventually inflation. By shrinking the real value of the debt, this is itself a form of default.
- Wealth tax: Taxing wealth may lead to increases in tax avoidance, failing to ease the debt burden.
- Labour tax: Taxing labour tends to be politically unpalatable.
- MMT (see notes here): Easy money leads to asset inflation and speculative bubbles.
Demographics also exacerbate our debt problem. Ageing populations present colossal unfunded liabilities in the future. This impacts most advanced economies, and China, Russia and South Korea face a similar demographic dynamic in the emerging markets. Faced with this challenge, debt accumulation is inevitable to support a growing pension and healthcare burden of an aging population.
One potential solution to this challenge is significant immigration, but as Roubini notes, this is politically sensitive and will likely breed discontent due to additional pressures on public services. What’s more, AI and robotisation may not even offer up the jobs that immigrants might have previously filled.
Key Idea #2: Easy money and the coming stagflationary crisis
With interest rates kept at zero for too long, central banks encouraged speculative and euphoric investment along with the build-up of private debt Now, as they undertake rate hikes to tackle inflation, we are witnessing the beginning of the bubbles bursting. But when bubbles burst and central banks step in by flooding economies with money and credit, they encourage the boom-bust cycle to repeat.
Central bankers’ fixation on a 2% inflation target, viewing deflation and low inflation as always bad, triggers a flawed approach from central banks. Increasing money supply and lowering rates while some goods deflate due to technological advancement is an error. It perpetuates and exacerbates the easy money that creates bubbles. It is trying to “cure a problem that requires no solution.”
“Easy money and credit and loose fiscal policies won’t save us from relentless boom-and-bust cycles. They will cast us into a debt supercycle. We need to adjust the rules to stop this debt trap.”
With easy money inflating credit and the price of assets and goods, our debt burden also makes it incredibly difficult to contain this inflation via rate hikes. The result is probable stagflation: a combination of high inflation and recession.
The fiscal and monetary stimulus during 2020-2021 served to trigger far-reaching inflation. The supply side made things worse: first via the COVID supply shock, and then Russia’s conflict with Ukraine and China’s continued zero-COVID policy.
With central banks tightening monetary policy too late, Roubini believes a hard landing is highly likely. What’s more, we may be confronting both a collapse in growth and high inflation due to other supply shocks, such as ageing populations, deglobalisation, reshoring of manufacturing, protectionism between global powers, cyberattacks, and further pandemics.
Roubini calls the looming crisis the Great Stagflationary Debt Crisis. Unlike the 1970s, economies face extreme levels of debt, high inflation and low or negative growth. This presents a unique debt trap for central banks.
Key Idea #3: Currency meltdowns and the end of globalisation
Central banks are increasingly being drawn into policy beyond price stability, first with unemployment and growth, and then with financial stability. More recently, we have begun to see central banks drawn into foreign and national security policy through weaponisation of currencies and freezing of foreign reserves. This mission creep spells trouble for the US Dollar. If China can effectively lead the next frontier in technology, its e-Remimbi could be a legitimate threat to USD.
The European Monetary Union (EMU) could also face break up, possibly triggered by Italy defaulting on its significant national debt. As fiat currencies struggle, the cryptocurrency alternatives are being touted as a way out, but Roubini suggests they do not possess the necessary characteristics of money.
At the same time, as monetary policy and fiscal policy have converged, this has also brought into question central bank independence. Politics and monetary policy should not mix, as Roubini notes.
The weaponisation of currency may also accelerate the end of the modern era of globalisation. Policymakers failed to anticipate the extent and consequences of offshoring production. While this brought lower prices, it carried heavy consequences for manufacturing communities. Rapid deglobalisation (reshoring) now poses a megathreat. As Roubini puts it:
“Deglobalization will stymie economic growth, disable the means to cope with massive debts, and grease the rails toward epic inflation and stagflation.”
Russia’s invasion of Ukraine has exposed strategic flaws in energy policy, which will drive much more autarkic policy in future as countries try to make critical natural resources more independent. “Friend-shoring” is likely to replace offshoring in many areas.
In its most extreme form, rapid deglobalisation will result in catastrophic economic depression. A “slowbalisation” would be preferable, with countries transitioning production to allies and many neutral countries continuing to play both sides.
Key Idea #4: The emerging threat of AI, climate change and new cold war
Roubini believes there is a high chance that modern Luddites will finally be correct. AI presents a unique threat to employment: new jobs may not replace old jobs. AI will impact both blue-collar and white-collar work, replacing manufacturing workers and knowledge workers. Language processing and predictive capabilities offer a unique threat unlike any before.
This will exacerbate wealth inequalities. Those that own AI capital will get richer while those that do not will feel the consequences for their wealth. Political solutions, such as UBI and taxing the machines, are likely to create fierce political divides.
Climate change could also drive significant conflict and poverty, particularly in Africa and South America where the brunt of adverse agricultural consequences will be felt. We can expect this to drive an unprecedented level of migration into cool, agriculture rich countries.
At the same time, major military risks linger. While the US expected China’s globalisation and financialisation to naturally lead it towards a market economy, it has on the contrary, continued to be authoritarian. This uncontained rise in power has transformed China into a military and economic superpower. China is now well positioned to lead the emergence of AI and other technological revolutions, while also having established a formidable army and military arsenal.
This new cold war could be of a different scale altogether than the first cold war. China’s trade with the US is orders of magnitude larger than Russia’s trade with the US was. Coupled with China’s desire to reunite Taiwan with the mainland, we face a unique balance of risks.