Why this is the era of mega threats to the world

Growth was strong except for the stagflationary 1970s, economic cycles were contained and recessions were short and shallow; And even then, there was no debt crisis in advanced economies, because private and public debt ratios were low. There was no implicit debt from the pension and health care systems as the supply of young workers was increasing while aging. Strong regulation and capital controls tamed boom-bust cycles and kept major financial crises at bay. The major economies were strong liberal democracies free from excessive partisan polarisation. Populism and authoritarianism were confined to a fearful group of poor countries.

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Fast forward to the end of 2022, and you will see that we are immersed in new mega-threats. The world has entered what I call a geopolitical depression, with (at least) four dangerous revisionist powers (China, Russia, Iran and North Korea) challenging the economic, financial, security and geopolitical order Which was built by America and its allies after WWII.

The threat of not only war between superpowers but also nuclear conflict is increasing rapidly. In the coming year, Russia’s war of aggression in Ukraine could escalate into an unconventional conflict directly involving NATO. And Israel (and perhaps the US) may decide to launch attacks against Iran, which is well on its way to building a nuclear bomb.

With Chinese President Xi Jinping further consolidating his authoritarian rule, and the US tightening its trade sanctions against China, the new Sino-US Cold War is getting colder by the day. Worse, it could very easily heat up over the status of Taiwan, which Xi is committed to reunifying with the mainland, and which US President Joe Biden is committed to defending. Meanwhile, nuclear-armed North Korea is drawing attention once again by firing rockets over Japan and South Korea.

Even negating the threat of a nuclear conflict, the risk of an environmental apocalypse in the future is becoming increasingly serious, especially given that most talk about net-zero and ESG investments is just greenwashing- or greenvishing. Greenflation is already in full swing, as it turns out that gathering the metals needed for the energy transition requires very expensive energy.

The link between environmental destruction and zoonotic diseases is also increasing the risk of new pandemics. Wildlife carrying dangerous pathogens are coming into closer and more frequent contact with humans and livestock. This is why we have already experienced more frequent and virulent epidemics and pandemics since the early 1980s. The problem will increase further in the coming times.

Economic condition is not better. For the first time since the 1970s, we are facing high inflation and the prospect of a recession: or recession. And when it does come, the recession will not be short and shallow but long and severe, as we too will be facing the mother of all debt crises due to the rising private and public debt ratio over the past few decades. Low debt ratios saved us from this in the 1970s. And although we had a debt crisis in the Great Recession, we also had deflation. It was a demand shock and debt crisis that could have been met with massive monetary, fiscal and credit easing.

Today, we are experiencing the worst elements of both the 1970s and 2008. Several consecutive negative supply shocks have coincided with debt ratios that are far higher than during the Great Recession. As inflationary pressures force central banks to tighten monetary policy, even if there is a recession, the cost of debt service will skyrocket. And aging also implies massive unfunded public sector liabilities. Everyone should be preparing for what may be remembered as the Great Stagflationary Debt Crisis.

Again, while central banks seem more hawkish, we should be skeptical of their willingness to fight inflation at any cost. Once they find themselves trapped in a debt trap, they will have to blink in the blink of an eye. With the debt ratio so high, fighting inflation would lead to an economic and financial crash that would be considered politically unacceptable. Major central banks will find they have no choice but to back-pedal. So inflation, currency depreciation, boom-bust cycles and financial crises will become more severe and frequent.

At the same time, geopolitical conflicts and national-security concerns will continue to fuel trade, financial and technological wars, accelerating the process of globalization. Protectionism and Sino-US disintegration will further fragment the global economy, supply chains and markets, making a wide range of goods and services more expensive. The ‘friend-shoring’ has begun.

Over time, advances in AI and automation will destroy more and more jobs, even as policy makers build higher protectionist walls in an effort to fight the last war. By restricting immigration and demanding more local production, advanced economies will provide a greater incentive for companies to adopt labor-saving technologies that can perform not only routine but also cognitive and creative work.

These mega-threats will further contribute to income and wealth inequality, which is already fueling the rise of radical and aggressive populist regimes around the world. One of the reasons we have come to this perilous point is because we have buried our heads in the sand for too long. Now, we need to make up for lost time. Without decisive government and private sector action both domestically and globally, the period ahead will be less like the four decades after World War II than the three decades between 1914 and 1945. What began with World War I and the influenza pandemic gave way to the Great Depression, massive trade and currency wars, inflation (even hyperinflation) and deflation, and financial and credit crises that led to massive Recessions and defaults happened. Eventually, authoritarian regimes emerged, culminating in World War II and the Holocaust. If we are not prepared for a similar sequence, it may be because it has already begun. ©2022/Project Syndicate

Nouriel Roubini is Professor Emeritus of Economics at New York University’s Stern School of Business and author of ‘Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them’.

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