What happens to someone who builds a reputation for himself as a sworn pessimist, a prophet of doom, and then discovers that actually everyone sees bad times ahead? That is approximately what happened last week to Prod. Nouriel Roubini, who has become famous for his gloomy analyses.
Roubini, who gained fame for having predicted the financial crisis of 2008 as early as 2006, sees a severe economic slowdown on the horizon now as well. In an interview I held with him a week ago on Friday, Roubini said that the highest probability was of a hard landing in the coming year. In the picture that he draws, inflation will turn out to be much more obstinate than prevailing opinion on the market believes, central banks will have to raise interest rates higher than expected, and the result will be "a recession for most of 2023, in the US, the euro bloc, Britain, and most of the advanced economies." It’s not for nothing that Roubini is dubbed "Dr. Doom".
But on Sunday last week, it emerged that Roubini is not alone, at least as far as pessimism about the coming year is concerned. Roubini made the concluding speech at a conference held at Reichman University, and he was preceded on the podium by series of speakers most of whom were of the view that the war on inflation would turn out to be harder than expected. Prof. Rafi Melnick, president of the university and a past member of the Bank of Israel Monetary Committee, explained that a "momentum of inflation" had been created, and that current levels of interest rates were not sufficient to restrain it. Prof. Leo Leiderman, chief economist at Bank Hapoalim, also said that "it will be very hard to engineer control of inflation without a recession and financial crisis." And so on and so forth.
The exception in the group was Avi Tiomkin, an adviser to hedge funds and also the donor after whom the Tiomkin School of Economics at Reichman University is named. Tiomkin said that normal economic models could not be applied to the extraordinary events of the coronavirus pandemic, when governments shut down and reopened their economies. 2020, he said, was a "fake recession", after which came "fake recovery" and then "fake inflation". There are already signs that inflation is on the way down. So is there room for optimism? No. For all that, Tiomkin expects a severe recession in the next half year.
How does that add up? In a conversation I held with him later on in the week, Tiomkin compared the economy to a skier who ascends to the summit of the mountain using a drag lift. If you make the mistake of thinking that you have gathered enough momentum to keep going by yourself and let go of the lift rope before the end of the ascent, the result will be that you come crashing down. And that is what is going to happen to the major Western economies, after the central banks and government have stopped supporting them through low interest rates and expansionary fiscal policies, which are the forces that pushed them upwards in the last few years: they have lost momentum, and are about to take a tumble.
Will we yet yearn for the inflation of 2022?
Roubini’s forecast of a deep recession still seems relatively pessimistic, let’s say in comparison with a survey that Reuters carried out among 48 economists in December. Most of them spoke of a "short, shallow" recession. But what currently concerns Roubini is not just the coming year. According to him, we are on the threshold of a new era, and, contrary to the consensus view, he believes that even after 2023 and 2024 we won’t return to what we knew before.
The economic environment that has prevailed for decades, of low inflation, stable growth, moderate crises, and rising stock prices (what is known as "The Great Moderation") has disappeared. Instead of that, we are entering a period of stagflation (economic stagnation with inflation) and instability. Roubini has written a new book with the title "MegaThreats: Ten Dangerous Trends That Imperil Our Future, And How to Survive Them" in which he lists the causes of this situation, from the ageing of the population to superpower rivalry.
But truth be told, those who have become accustomed to widening globalization, more and more cheap products, and continuous growth, can already feel the change. I asked Roubini about that in a telephone conversation. "Until I travelled to the US for advanced studies in the early 1980s, I had never worried about a war between the superpowers or a nuclear war," he responded. "I had never heard of global warming. I had never heard of a global pandemic. The last one was in 1918. I didn’t worry about de-globalization. We were in a process of globalization, and then hyper-globalization, when the former Soviet Union, China, and the emerging markets joined the global market. Debt levels were low, and there was no danger of a debt crisis."
After the crises of the 1970s "there came thirty years of ‘The Great Moderation’, when there were no severe financial crises, because there was regulation, capital restrictions, financial suppression, and there wasn’t poisonous ‘financialization’ of the economy. And most of the West, or course, lived under liberal democratic regimes, in which there were parties of the left and right, but not the radical polarization that we see in the world today. Of course, those living in Israel went through the Six Day War, the Yom Kippur War, and so on, but for most of the West it was a stable world."
In Roubini’s view, most of these trends have been overturned. "Today, there’s concern about war between the superpowers, climate change, disease, artificial intelligence destroying jobs, de-globalization, boom and bust cycles in the economy and in financial markets. We even have to worry about the future of liberal democracy. Young people of generation Z, and even earlier generations, are much more fearful about the world, which has become less stable, more chaotic and violent, and less certain," he says.
For Israelis, Roubini has a message that is half encouraging, half discouraging. "It may be that Israelis are better prepared for this reality, because they have experience of coping with risks, uncertainty, and threats." Nevertheless, he warns, "For the average person in the US, or Europe, it’s a much more dangerous world. And even for Israel, some of the risks developing in the region, or in the world, are of a different nature from what Israelis have experienced."
Roubini doesn’t just point to the risks. He also has something to say about the ability to adapt to them. "For each of the mega-threats, there’s a solution," he says. "There are things that can be done, at the national and international levels. But there are also things that can be done at the personal level." Such as? Roubini suggests that students should focus on the hard sciences, which will serve them in the future labor market, and that alongside them they should also study the humanities, which will give them the ability "to read, to write, to think critically." They need to be ready to undergo retraining in the course of their careers. "They won’t have the same work in the same industry, in the way that I was able to be an economist all my life. There will be disruption in workplaces, and in whole industries." All the same, not everything can be done alone. "People need to be caring and work as a group in order to make the world better and more stable."
The greatest danger to Israel: Extreme social division
"In a certain sense, Israel is a success story," Roubini says. "Because the threats facing it, Israel has managed to form a society with greater solidarity than in the individualistic US. And the hope is that this solidarity can continue. The greatest risk for Israel is not the external risk, but internal division that will tear society apart in a way that will weaken Israel in the long run. It will be terrible if that happens."
Published by Globes, Israel business news - en.globes.co.il - on January 15, 2023.
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