The global economy is still performing below par, and many economies are experiencing secular stagnation – a drop in the working population coupled with very high debt levels.
Of the four engines of the world economy, only the U.S. is doing reasonably well, says the notoriously gloomy Nouriel Roubini. Europe, meanwhile, has completely stalled as the eurozone is coping with both recession and deflation. Japan is slowing down sharply due to a fiscal consolidation that is coming “too fast, too soon,” and China’s economy will experience a very bumpy landing.
“We are in an extreme world right now. Six years after the financial crisis we still have zero interest monetary policy, quantitative easing,” Roubini said at the Alternative Investment Forum in Cayman in February.
For the economist, who teaches at New York University’s Stern School of Business, there is too much supply and too little aggregate demand in world economy. “That’s why we are still trying to fight deflation.”
There is excess capacity in the energy sector affecting oil and other commodities, excess capacity in certain housing markets, and massive infrastructure investments in China amounting to about half of the gross domestic product. At the same time, demand remains low because unemployment is still high in many places, inequality is rising and populations are aging.
“It is a combination of mistaken macroeconomic policies with not enough fiscal easing and a monetary policy that does not stimulate aggregate demand,” Roubini said.
He explained that the monetary policy had not led to inflation because the velocity of money has collapsed. Quantitative easing was done with the express goal of causing asset inflation, rather than goods inflation. The concern is that this asset inflation will lead to asset bubbles that are worse than the 2007/08 crisis, which Roubini famously predicted.
“We are feeding a bubble,” he said.
The immediate issues on the demand side are “a painful process of deleveraging” from too much private and public debt, aging of the population in advanced societies and a rise of income inequality.
Roubini’s fellow panelist, John Mauldin, who says Roubini makes him look like an optimist, disagreed on whether debt levels had been reduced.
“There has been zero deleveraging. We have too much debt, we just can’t pay it back.” Businesses are not investing and consumers are unable to borrow.
“This is a black hole,” Mauldin said.
He warned that emerging markets have issued about $9 trillion of U.S. dollar denominated debt, and as their currencies are falling in value against the dollar, it will become more and more difficult to pay them back.
And Europe only has two choices, according to the best-selling author: either “form a fiscal union and mutualize the debt” or “fall apart.” But Mauldin believes that because the euro is a political currency and not an economic currency, the political willingness to take the right steps will be there.
Mauldin agreed with Roubini on the problems deriving from an aging population. Pension funds in particular will have a hard time adapting to rising longevity, he said. “We are going to live longer, and you don’t have enough money in your pension plan.”
But longevity is also a function of technological and healthcare innovation, two of the areas that will drive growth and where productivity is high, Mauldin said.
Constance Hunter, chief economist at KPMG, argued that the “Internet of things” and machine-to-machine technology are going to transform “every single aspect of our economy and our lives.”
Even Roubini concurred that there are always new innovations and named as examples shale gas and oil in energy technology, stem cell research in the biotechnology and neuroscience space, the social media revolution in IT, 3D printing and nanotechnology in manufacturing, and the application of high tech in defense technology.
“There is a huge amount of innovation in these five areas.” Still, Roubini cautioned that one effect of this major technological innovation is that it is capital intensive and skill biased.
“Blue collar and increasingly white collar workers are going to lose their jobs. That’s one risk. Rising inequality will bring a backlash against this. Technology can increase inequality,” Roubini said.
“People need to be able to afford it.”
Hunter concluded that despite the pessimistic outlook, technological innovation will offer some hope. Yet, she said, we may “have to rethink the social contract.”