Three Pillars of the Coronavirus Apocalypse (w/ Nouriel Roubini)
ASH BENNINGTON: Can you talk to us about some of the data that you're seeing, what's led you to these conclusions? Importantly, what could lead you to reverse your conclusions in that it could potentially be a shorter, shallower, less severe recession that you anticipate? What are you looking at that brought you to these conclusions, and what could lead you to reverse them? NOURIEL ROUBINI: Now, before I go to that one, let me finalize the point. The argument about a greater recession becoming greater depression is based essentially on three key columns. Column number one is the health response is wrong. We're doing mitigation, we're not doing suppression. Even if we're doing suppression, the virus is going to mutate and by next winter, we're supposed to go back to growth after recession of three quarters, we could have another spike in the pandemic, even under suppression. If we're not going to have suppression, but only mitigation, it's going to be a nightmare as any epidemiological model suggests. [Indiscernible] we're going to go back another recession. Yes? ASH BENNINGTON: I'm sorry. What's the difference between those two points, mitigation versus suppression? NOURIEL ROUBINI: Well, mitigation is this voluntary social distancing, isolation, stay at home. We're going to shut down maybe businesses in New York and California, but the rest of the country can all stay open, stores, business, economic activity, restaurant. We're doing mitigation is actually mitigation light. Suppression means sorry, guys. We shut down every economic activity apart from basic essentials. You stay at home compulsory, you cannot work unless you work from home, you cannot go out unless you go and buy food and medicines and take a walk for half an hour just to refresh a day and no more. I'm going to monitor you and we're going to punish you. If you do otherwise, fines, arrest, whatever. Like in China, they used drones and robots and literally an app that gives everybody a green, yellow, or red card. It's big brother in China, we don't want to go there, but the reality is they have to find an enforcement. If you don't enforce it and you're basing yourself on people doing it voluntarily, it's going to be mitigation, mitigation light. We're not doing even mitigation or doing mitigation light in the US, let alone suppression. Suppression was what China did for three months and what Italy is doing right now. We're not doing it. That situation is going to go like wildfire this year. Then once we control it, and summer comes, the winter is going to come, the virus is going to mutate. We're not going to have a vaccine for 18 months. These antiviral therapeutics are in limited supply. We don't even know whether they work, guaranteed by next winter, we'll have another spike in the pandemic. That's why people say it'd be a three quarter recession, Q1, Q2, Q3, but then by the fall, we're going to start growing again. What if by default, we have another round of this pandemic, then we're going to go into a depression. Two, by next year, if we're going in and out of the recession is continuing, then we'll have to do another 10% of GDP fiscal stimulus and monetize it. Then we end up into the inflationary situation that I warned about that leads us to stagflation. Then you have a nightmare of stagflation. Three, as I pointed out in a number of pieces recently, there's a wide range of geopolitical risk, literally, a global rivalry between US, China, Russia, Iran and North Korea and this camp, they're going to try to disrupt the US economy, the US political system, we'll have the first global cyber war in this country this year, and it's going to create geopolitical chaos or politically, even violence after the US election, let alone the risk of a war between US and Iran in the Middle East. There's this trifecta or Bermuda triangle of the wrong health response, and the fact that the virus is going to come back next winter, of running out of policy bullets, once we monetize fiscal deficit forever, and then geopolitical shocks that are negative supply, and they lead us to a geopolitical depression. That's a recipe for a greater depression. ASH BENNINGTON: How do you quantify some of those risks in order when you look at-- when you talk about things like, example, cyber war or the potential for a hot war in the Gulf, how do you quantify what those risks look like? NOURIEL ROUBINI: Well, right now, markets are completely disregarded. In the case of a war between US and Iran, they're saying, we killed Soleimani. They sent a bunch of rockets, we restrain ourselves. Now, Iran is contained and they're not going to do anything. I think that is the wrong analogy of what's happening in Iran, and I happen to be a Persian Jew, I understand how the Iranian think, and I told you simply and I could discuss it for hours. If Trump is reelected, the regime in Iran is dead because four more years of sanctions and other pressure means they collapse, and their regime wants to stay in power. The only one goal there is to stay in power. That's a fair amount. It's not going to be an external shock that leads to regime change, but an internal revolution. Suppose that Iran escalates a situation in Middle East to proxies, initially attacking Israel and Saudi Arabia, creating chaos with his own proxies, and then [indiscernible] US in a conflict, what's going to happen? Oil now is at below 20, it's going to spike 250. The stock is going to crash, and the recession is going to become more severe, like '73, like '79, like '99. Once that happens, there's not going to be a regime change in Iran. Why? Even if we bombed the hell out of Iran in that war with an aerial campaign, the regime stays in power. You need to have 1 million boots on the ground in order to have regime change in Iran. We're not going to have 1 million people, American soldiers going and invading Iran, it's going to be air campaign. Once you bomb Iran, even half of the country is against the regime is going to support the regime, because they're nationalist. If you attack them, even those who hate Khomeini are going to support in the same way they went and rallied by the millions when we killed Soleimani. We're not going to have regime change in Iran, Iran can cause a spike in oil prices, a collapse of the stock market bigger than this one and a more severe recession. Once that happens, regime change is going to occur not in Iran, but it's going to occur in the United States. Look at the three previous geopolitical shocks in the Middle East, '73, '79 in 1990. After these shocks were the recession, stock market crash and inflation. Guess what? Carter beat Ford in '76, Reagan beat Carter, and Clinton beat the Bush. Three times you had a geopolitical shock in the Middle East with an oil price spike, and you had regime change not in Iran, in two of those three cases, you had the regime change in the United States. That's what happened. If we're going to have that shock, Trump is dead, literally, politically. The Iranians know it, and even if they're weaker right now, in my view, not now but by the early summer, they're going to escalate the tension in the Middle East, and mark my word, there'll be a war between US and Iran. ASH BENNINGTON: That's also a very sobering assessment.