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Nouriel Roubini

Dr. Nouriel Roubini, Professor of Economics, New York University’s Stern School of Business (February 8, 2022)

Is crypto a currency? For Noriel, the answer is no.

It’s not a unit of account or a scalable way to make payments.

Bitcoin allows for 5-7 transaction per second. Visa allows for 50,000 transactions per second.

Bitcoin is so volatile that nobody is using is as store of value because it is so volatile.

There is no way to tell relative prices when multiple different tokes are used. If you have to buy Pepsi with a Pepsi-token and buy Coke with a Coke-token then it’s impossible to tell the relative value (unless you convert the values to fiat, haha).

Most money for the past few decades has been digital. There is nothing special about digital currencies.

Billions of people make bilions of transactions every day in China using Alipay and WeChatpay. In India and Pakistan then have digital payment systems.

In the US, there is Venmo, PayPal, and Square.

Assets generally provide income or utility. Stocks provide dividends. Housing gives you a place to live.

Gold has been used as jewlery for thousands of years and is used in industry. It’s also been a store of value.

Bitcoin doesn’t have any income, doesn’t have services or use (no means of payment), and isn’t a stable store of value.

Every time the stock market falls, crypto fall even more. They’re correlated with other risk assets. They’re not a hedge against inflation.

Impossible trinity, you can’t have a currency with all three of these characteristics:

  • scalable
  • secure
  • decentralized

If your credit card gets hacked, you can call the fraud department and get refunded. You are secure.

Crypto isn’t scalable. Crypto isn’t secure (you can lose your money forever). It’s not decentralized because the mining industry is dominated by an oligopoly.

Massive wealth inequality in crypto. Studies show the gini coefficient for crypto is 0.86, higher than North Korea.

Crypto is centralized with a relatively small group of insiders.

Nouriel Roubini: Outlook for the Global Economy (November 19, 2021)

Link.

Economic trifecta:

  • extremely loose monetary/fiscal policy
  • high debt
  • supply shocks

The outcome is what Nouriel calls the “stagflationary debt crisis”.

Public + private debt to GDP ratio was 220% in 1999, 360% today, 420% and rising in advanced economies and 330% and rising in China.

Government spending as a share of GDP will likely rise.

Willingness and ability to raise taxes on the rich is constrained.

So you’ll want to reduce the real value of debts with inflation.

Central banks now care about financial stability. That means in good times we don’t tighten and we backstop everyone in bad times.

There has been a massive mission creep in the Fed. They used to just care about inflation. Now they care about financial stabilty, climate change, income inequality, etc.

20 years ago, the only policy tool was short term rates. Now there are tons of different tools that the Fed is using.

We will need significant, unexpected inflation to wipe out a significant chunk of accumulated debts.

For the last 30 years there were factors that were keeping inflation low and those factors are now reversing:

  • we’re in the process of deglobalization and protectionism
  • we have Balkanization of global supply chains
  • aginig populations in developed and emerging markets
  • we’re restricting migration from the poor south to the rich north
  • US / China cold war

Global climate change impacts:

  • not enough water (even in California)
  • financing for fossil fule investing is reduced (which will eventually lead to an oil shock)

The is a massive backlash against income and wealth inequality.

In the 1970s we had stagflation, but debt ratios were one third of what they are right now.

He sees this as a slow motion train wreck. These factors won’t hit in the next 2-6 months, but we will start seeing the impacts in the next couple years.

Roubini: See Persistent, Mild Stagflation (October 12, 2021)

Link.

There have been supply issues that have caused a significant increase in headline inflation.

He believes that inflation will persist for several quarters.

Central banks will have a difficult position because they’ll have slower growth and inflation well above target.

If the Fed is behind the curve and inflation expectations rise, then nominal interest rates will rise.

Lots more growth / tech stocks in the US that are “long duration” stocks and much more sensitive to long term interest rates.

Noriel’s asset recommendations:

  • short duration bonds
  • TIPS
  • commodities
  • high quality infrastructure investment

Supply of fossil fuel should be in a relative fall over the next few years cause we’re trying to decarbonize.

He sees a risk of oil over $100 in the next few months, depending on if Europe has a cold winter.

Nouriel Roubini Sees Global Debt Trap Driving Inflation

Link.

Roubini predicted the 2008 housing bubble.

Debt levels, both private and public, are much higher than they were before.

Roubini’s concern is that we’re in a debt trap.

The Fed won’t be able to unravel unconventional monetary policy.

In normal times, we don’t reduce debts or deficits. Then a crisis hits and deficits grow even more. Debt grows in good times and in bad.

We’ll wipe out the value of fixed rate debt with higher inflation.

Inflation will wipe out the real debt.

  • Governments are pressured to increase spending around the world
  • There are constraints on taxing the rich more

Roubini sees inflation and debt crises forthcoming. Cause interest rates will be rising and indebted companies will suffer.

What he predicts:

  • Deglobalization & protectionism
  • balkanization of global supply chains
  • aging of economies
  • restriction of migration from south to north
  • decoupling between US and China
  • global climate change
  • pandemics
  • cyber warfare
  • rising inequality implies government policy that’ll help workersaging of economies
  • restriction of migration from south to north
  • decoupling between US and China
  • global climate change
  • pandemics
  • cyber warfare
  • rising inequality implies government policy that’ll help workers. This puts upward pressure on wages.

He’s worried about stagflation.

For the last 30 years, there have been global forces keeping inflation low. He thinks these forces are reversing.

He expects a huge amount of technological innovation in America. AI, machine learning, robotics, automation.

Over time, this will increase productivity, but it’ll also increase inequality.

He worries that central banks are on a mission creep. From inflation => growth => financial stability => income inequality => global climate change, etc.

Highly unconventional Fed policy will cause inflation over time.

A stagflationary debt crisis is on the way (July 28, 2021)

Link.

The stagflationary debt crisis is on the way here.

Stagflation is high inflation and low economic growth.

Last time we had stagflation was the 1970s. Now, debt ratios, both public and private, are much higher.

After the Global Financial Crisis (GFC), we had a debt crisis, but low inflation. In the 1980s, we had recession to fight inflation, but we didn’t have debt problems. We could have the worst of both worlds now:

  • the stagflation of the 1970s
  • the debt crisis after the GFC

Roubini lists 9 major, long term, negative supply shocks.

Because of inequality, we have deglobalization.

We will now see Balkanization of global supply chains.

The populations are aging, not only in the US and Europe, but also Korea, China, and Russia.

We’re restricting migration from south to north and that was something that kept a lid on wage pressures in advanced economies.

We’re going to have a decoupling between the US and China as a result of the cold war becoming colder.

Global climate change is also stagflationary.

Cyber attacks will cost firms hundreds of billions.

There is a backlash against inequality and there will be a lot more pro-worker legislation going forward.

The massive fiscal stimulus went to the lower end labor workers and puts them in a position of strength. They don’t have to accept a low wage job at the moment because they’re getting unemployment benefits.

Going forward there will be shifts from capital to labor and from profits to wages.

The Fed is in a debt trap:

  • They should be tapering right now to avoid inflation getting out of control

  • They can’t tighten right now because debt levels are high and tightening would cause a crash in the bond market, crash in the stock market, and huge recession / depression

The Fed will choose inflation rather than tightening and crashing the economy. The Fed isn’t evil, they’re just in a damned if you do, damned if you don’t type situation.

The Fed will not be able to exit this unconventional monetary policy.