What Leaders Need to Know About a Looming Recession – and Other Global Threats

ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.

A lot of us are feeling pretty anxious right now. We’re coping with a pandemic, political unrest, war, natural disasters, and now a growing chorus of experts are predicting a looming global recession.

Today’s guest is among those expecting economic pain over the next few years. He says a confluence of trends from skyrocketing public and private debt and bad fiscal policies to demographic shifts in the rise of AI to climate change and geopolitical tensions are pushing the world toward catastrophe. They do call him Dr. Doom for a reason. But he also has suggestions for how political and business leaders can prepare for and navigate through these challenges drawn from decades of economic research and his experience accurately predicting, advising on, and observing responses to the 2007-2008 global financial crisis.

Nouriel Roubini is the author of Mega Threats: 10 Dangerous Trends that Imperil our Future and How to Survive Them. Nouriel, thanks so much for being here.

NOURIEL ROUBINI:  Thank you for having me.

ALISON BEARD: So I do want to dive into some of these specific trends, but first, why is this a time of mega trends where all countries, all businesses, most people are facing the same big problems?

NOURIEL ROUBINI: Well, I think there is a bit of a quantum shift in the world and the world economy. When I was growing up in the ’60s and ’70s, I did not have to worry about climate change destroying the world. There were no global pandemics that I remember. I didn’t worry about AI essentially wiping out every job in the planet, or having major war between great powers. Economic cycles and financial cycles were relatively moderate. We didn’t have huge amounts of private and public debt or implicit liability coming from aging.

But all these things are changing today and we’ve had about 75 years of relative peace, prosperity, and welfare in the world after World War II. But now there are shifts that are what I call mega threats. These are serious threats that are economic, monetary, financial, but also social and political, –environmental, health related, technological, related to trade, globalization or deglobalization, on top of inflation, taxation, boom and bust and excessive debts. And they’re all interrelated with each other. It’s like a 10 by 10 matrix and that’s why they’re so dangerous.

ALISON BEARD: I’d love to pick apart a few of them, particularly the economic problems, just because business is so worried about recession now. You start with a chapter called The Mother of All Debt Crises. So why are we facing that and what role have corporations played in it?

NOURIEL ROUBINI: Well, if you look at the data about the public debt and private debt, private being the debt of households, of corporates and of financial institutions, the numbers in the 1970s for the world were about 100% of global GDP. By 2000, the number was about 200% of GDP. As of last year, the number is 350% of GDP and rising. It’s more like 420% of GDP in advanced economies. 330% of GDP in China.

And this buildup of debt is because every time there is a problem, we try to steal some of our growth from the future. Governments that are unwilling to raise taxes or cut spending, they borrow and they issue debt. Household, corporations, financial institutions, when money was cheap and interest rates were very low, they tended to borrow too much and overleverage. So we are in a mountain of debt in which in the world in many countries and in many sectors, you have what I call zombie households, zombie corporations, zombie banks and other financial institutions, zombie governments and zombie countries.

Now, when interest rates were zero or negative, because we had easy money even the zombies would survive because while their debts were high as a share of their income, their debt servicing ratios, how much interest they had to pay on that debt, was low. But now that central banks have to increase interest rates to fight inflation, then those debt servicing ratios are rising significantly and those institution and individual are going to be zombie are going to go bankrupt.

There will be massive defaults. And we have never had such a debt load in the world in history ever before. Even in US, the debt ratio today is higher than the one that it had during the Great Depression and it’s higher than the one we had after World War II. And today we’re not coming out of a great depression or a major war, but we have debt ratios that are absolutely unsustainable.

ALISON BEARD: And so you’re predicting a period of stagflation. Why are you so confident that you know we will be in this era when prices continue to rise even as the world economy stalls?

NOURIEL ROUBINI: Well, in the short run, the rise in inflation and the fallen economy growth is driven by a number of short term negative supply shocks. One was of course COVID and the shutdown of economic activity, the blockages of global supply chains, the reduction in the labor supply and all the disruption that occurred with the first wave of COVID. But this year we also had two other additional negative supply shocks that reduced economic growth and increase the cost of production. One is of course the Russian invasion of Ukraine, this brutal invasion that’s led to spike in energy prices, oil and natural gas, of food, fertilizer, industrial metals. And finally, the zero tolerance policy of China towards COVID implies again shutting down of economic activity that creates additional supply bottlenecks. In the medium term, there are other negative supply shocks, at least 11 of them, that they all reduce potential growth, they increase the cost of production.

Therefore the supply side, you have this saturation forces they have to do with deglobalization and the rise of protectionism, reassuring of manufacturing from low cost China to high cost Europe and United States, what’s called French shoring. We have aging of populations in advanced economies, but also in some major emerging markets like China, Russia, South Korea. Young people produce, they save and they consume less, while old people they tend to dissave, consume and they don’t produce. That’s inflationary and is stagflationary. In the past, however, with migration to controlling wage growth, but now there is a political backlash against migration and that’s going to be another source of stagflation repression.

We have additionally a decoupling right now between US and China, decoupling in trade, in goods, in services, moments of capital, labor, data, information, technology. That decoupling is going to also reduce growth and increase the cost of production. We have broader geopolitical tensions, what I call a geopolitical depression because you have on one side a number of revisionist powers like China, Russia, North Korea, and Iran who are challenging the economic, political and geopolitical order that the US, Europe and the West created after World War II.

That’s going to lead to a fragmentation of the global economy, balkanization of global supply chains, decoupling and deglobalization. We have of course global climate change that in many ways is also stagflationary. When we don’t have water and there is desertification, then food prices rise. And now you have massive droughts from India to Pakistan to Europe to sub-Saharan Africa to Central America, but also a good third of the US from Colorado to California is in the middle of a massive drought and one third of all vegetables and two thirds of all fruits and nuts in the US are produced in California. And there is an impact of global climate change also on energy prices who are rightly bashing big oil and fossil fuels because we want renewable. But now there is underinvestment into fossil fuels. But the increase in the production of renewable energy is not sufficient to compensate for the fall in fossil fuels.

Moreover, this is not going to be the last pandemic COVID-19. For many reasons, we’re going to see them more virulent and more frequent. And as we know and we’ve seen in the last two years, pandemic reduced growth, increased cut of production and the cause speculation. We also have cyber warfare that’s going to damage economic activity and increase the cost of production as firms and governments want to protect themselves. And finally, there are two other factors that’s stagflationary. There’s a backlash against income and wealth inequality. And now fiscal policy are becoming, rightly so, pro workers, pro labor, pro unions pro unemployed people. That’s going to increase wage growth. And finally, we’re now weaponizing the US dollar as a tool of foreign policy and national security, maybe rightly so, but that might lead to the dollar not become any longer the global reserve currency.

Those frictions are going to increase cost of production when you have global trade. So you have 11 forces that are medium term and they’re all stagflationary. And on the demand side, we have so much debt and deficits, the central banks are in what economies call a debt trap. They cannot raise interest rates to fight inflation because that’s going to lead to an economic crash and a financial crash.

And if you have negative supply shocks and you have easy money with easy fiscal policy like the ’70s, you end up with inflation and you end up with stagflation. But I think things are worse than the ’70s.

In the 1970s we had negative supply shocks to all shocks but we had low debt levels. So we had inflation and stagflation, but in advanced economies we didn’t have a debt crisis. After the global financial crisis where the debt crisis is too much debt of household mortgages of banks, but we had deflation because there was a negative demand shock and you had the credit crunch. Today instead, we have the combination of the worst of the ’70s and the worst of the post GFC period because we have debt levels like never before and we have now the stagflation and negative supply shocks.

ALISON BEARD: Even though we are living clearly through unprecedented times, is there anything we can learn from what we did right or wrong in previous crises? Like the Great Depression, like the ’70s, like the global financial crisis of the late 2000s?

NOURIEL ROUBINI: Oh, certainly there are lessons and there are lessons that have to be learned and applied. For example, in the 1970s when there were these negative supply shocks, central banks and fiscal authority, instead of tightening monetary fiscal policy, they wanted to maintain growth and that led to an engine of inflation expectation and led then eventually to high inflation, double digit, and recession.

Now central banks today say, we learned the lessons of the ’70s and we’re going to do the right thing and fight inflation. But there are two problems. One is that fiscal authorities have large fiscal deficits that put more pressure on demand and fuel the inflation and inflation expectation. And eventually, central banks cannot essentially not to monetize this deficit, otherwise you’ll have a debt crisis. So we have a situation in which we know what’s the right thing to do, having tight fiscal policy, tight monetary policy – but there is so much debt in the system that central banks will have to wimp out. They talk hawkish today, but there is a debt trap, too much private debt and too much public debt.

So if they increase interest rates sufficiently to bring inflation back to 2%, not only you’ll have a recession and a severe recession, not a mild one. And we’re headed right now in US, in Europe, around the world towards a recession as central banks are fighting inflation, but we also end up into a debt crisis. You’ll have a crush as we are starting now in the stock market, in the bond market, in the credit market.

And there is so much also private debt of house, of corporations, of shadow banks, of some financial institution that you’ll have an economic crash and you’ll have a financial crash. Therefore, while central banks know the history of the ’70s, I believe they’re going to wimp out and blink because doing the right thing and fighting inflation is going to lead to an economic crash and a financial and a debt crash. So the solutions are not really viable given those constraints.

ALISON BEARD: And so what is your advice to business leaders right now? What can private companies do to prepare for these problems to weather the storm?

NOURIEL ROUBINI: Well, first of all, I would say that in the United States but also in other advanced economies, there was a huge buildup of corporate debt. So money was cheap and everybody was over borrowing. But now the party is over. And now we’re going to see which among the corporate sector were swimming naked because the tide is receding, and therefore, those zombie corporations, the traction of the corporate sector is highly leveraged is going to go bust. So the last one is you have still time to try maybe to deleverage, maybe to sell assets if you can as you are reducing your debt load because your debt servicing costs are going to become huge and this time around the Fed and other central banks are not going to be able to bail you out.

Because in the last two crises, we had deflation and therefore we could go to zero rates or negative or QE. This time around we have inflation and therefore into this recession and into this financial pressure, we have to increase interest rates. We cannot cut them. And therefore, there’s not going to be the bailout that we saw with the GFC crisis and the COVID crisis. So you have to prepare yourself and have a balance sheet and a P&L that is robust to these economic and financial shocks.

ALISON BEARD: Is there anything that you’d like to see the corporate world do proactively to temper some of these huge problems that we’re facing rather than reacting to them?

NOURIEL ROUBINI: Certainly there has been a lot of talk about ESG in the last few years about corporate responsibility. And some of these problems, of course, are deriving from the behavior of the corporate sector. Some of the inflation, for example, is driven by this concentration of corporate power. There is too much oligopolies and there is concentration of power that provides pricing power. There is also the problems coming from global climate change and the private sector is to play a role in terms of decarbonizing and reducing greenhouse gas emission.

Otherwise, there will be a disaster because lots of this emission come from the private sector, especially the corporate sector. Sometimes corporates instead of fighting for freer trade, they want protections because they want to protect their own domestic market. That’s not something positive either. So yes, the corporate sector has to be much more responsible. I tell the CEOs that if they are only caring about maximizing their short term profits and they don’t care about the broader stakeholders and their community and society at large, there will be a backlash.

There is already a backlash against free trade and globalization because the corporate sector’s done better than the average worker. There will be eventually backlash even against technology as there are disruption of jobs. So making sure that these technologies don’t lead to massive technological unemployment is a serious type of concern. There is an increase in income and wealth inequality that is now leading to populous parties of extreme right and left coming to power all over the world. So these are the kind of things that we have to think about and there has to be much more real corporate responsibility because otherwise there will be an economic and financial disaster and the backlash against private sector, private corporations and market-oriented economy.

We want market oriented economy but the government in a status to provide a wide range of public goods so that those are left behind, they have a safety net. And if you don’t have that safety net, the backlash against free market and the private economy is going to become much more severe even in the United States.

ALISON BEARD: I do wonder at this time when we are facing economic headwinds, every business leader, every manager is worried about their P&L hitting their targets for this year and next. How do you balance worrying about that and facing that challenge and navigating it with these longer term threats that you’re talking about?

NOURIEL ROUBINI: Well, it’s a difficult challenge because of course every CEO has to think about surviving and thriving if there is going to be a recession. And the first response where there is a reduction in revenues and sales is to try to cut costs. So the temptation is to cut labor costs by firing workers. But your labor cost is somebody else’s labor income and somebody else’s labor income is their consumption. And when the corporate sector reacts to an economic downturn by slashing jobs, that labor income collapses, consumption collapses, and then the recession becomes more severe.

In some other countries like in Europe, where there is a different adjustment of the labor market and it’s not as easy to fire worker in a coming downturn, or what we saw even during COVID where most firms were retaining their workers rather than firing them, may lead to less of an economic contraction than if you have a total free for all laissez-faire system. So those are the kind of things that firms and corporations should be aware. Of course, they have to care about their P&L and balance sheet, but their individual action collectively as collective macro effects that actually can be making that economic downturn and recession more severe rather than less severe.

ALISON BEARD: And when you point to, for example, the 11 causes of stagflation or the 10 mega threats, how do leaders prioritize which problems they should attack first?

NOURIEL ROUBINI: Well, many of these problems cannot be addressed at a level of individual firm. Even if you’re Xi Jinping, even if you’re Biden, you need the not only national policies, but also international cooperation. We cannot resolve climate change alone in China or the US. We cannot deal with global pandemic at the national level. We cannot deal with the threats of AI just at the national level. We cannot deal with financial crisis, economic crisis at the national level. These are all global factors that have global externalities.

The trouble is that the incentives at the individual level, at the firm level, at the national level is to think only about your own individual or firm or corporate or national advantage rather than thinking about the important national and global solutions. And that’s why we created the International Monetary Fund. We created a World Bank, we created a World Trade Organization, and a whole bunch of other international multilateral institution.

The trouble is that when there was one single superpower for a while, the United States, its global interest allowed it also to be a hegemon providing global public goods like global security, free trade and movement of capital, taking care of health issues and so on. But now we live in a world of many great powers. You have the US, you have China, you have Europe, you have rising India, you have declining but still dangerous Russia. And these great powers disagree on their own economic model, on their political model, on their social model. And there’s also geopolitical rivalry always going to be the most powerful country in the world who’s going to dominate AI in the industries of the future.

So in a world in which there are so many rivalries it is no surprised that US and China are not agreeing on cooperating on COVID, on climate change, on financial crisis and all these other global public goods. There is a rivalry that doesn’t allow us to do the right thing. That’s a problem.

ALISON BEARD: At the end of the book, you present sort of one scenario that is close to dystopia, but then you present another scenario that is not so bad. And you say that to achieve that we need to make sure the economy grows five to 6% a year and that we develop technological solutions to some of these issues you’re talking about, particularly climate change.

When it is so difficult to get to global cooperation, when individuals and corporations are incentivized to act in their own best interest, how do we make sure that happens?

NOURIEL ROUBINI: Well achieving the utopian scenario or the less dystopian scenario in which we control and manage these mega threats and we prevent them from getting out of control and sinking the entire world, you need on one side sensible economic policies at the national level and some degree of international cooperation. You need individuals and firms doing their own share in resolving the problem rather than exacerbating them. But then you need something else. And the something else in my view is technological innovation, because for the last 100+ years, technological innovations have increased productivity growth, have increased economic growth, and as the economic pie has become bigger, many problems become easier. Problems of debt, problems of unemployment, problems of providing a social safety net and so on. So eventually we need to have another major burst of technological innovation that increases productivity growth in order to be able to start to address these problems in a more cooperative way.

The challenge however we’re facing is that while there is a lot of talk about how technology is changing the world, in their macroeconomic numbers, we don’t yet see the increase in productivity that is coming from all this tech innovation. And it’s something that economic historian find a puzzle. There are all these apps, there are all these innovations, but the aggregate productivity numbers are still very low for US and other advanced economies, less than 1% per year, when it used to be like 2% in the ’70s, ’80s, even in the ’90s. Maybe there’s a lag between the innovation and when we’re going to see these increase in productivity growth. Maybe there are other reasons. Maybe we’re mismeasuring the true amount of value added and output is created by many apps and goods that are semi-free.

But there is another challenge, I think, that is important. While technological innovation can increase the economic pie, as I suggested before, is capital intensive skilled buys a labor saving? So there will be winners and losers in the same way there were winners and losers when there was globalization and trade. And the risk is that if we don’t deal with the distributional effects of technology, we’re going to have a backlash also against technology. Sometimes we fight the last war. Now we’re fighting against globalization. But hypothetically, suppose that tomorrow we close our borders, there is no worker can come in so there’s no migration. Suppose that we impose huge tariffs and we’re not importing any goods from the rest of the world. Leaving aside economic damage of these things that are meant to protect jobs and firms, in the next 10 years, the job destruction is not going to come from migration or trade, it’s going to come from technology.

Once we have, for example, autonomous vehicles and cars, 5 million jobs that are related to the truck industry and related activities, all the Uber and Lyft drivers are going to be without jobs. The disruptions are going to become much more severe because of technology even if we had closed borders. And technology is going to destroy many more jobs in the next few decades than happened through migration or through trade or globalization.

ALISON BEARD: I feel like every time I’m asking you to be more optimistic and tell me what we can do to fix the problem, you say, well we could do this, but it’s going to be very, very hard. So what gives you hope?

NOURIEL ROUBINI: Well, you have to be realistic and sometimes if you are slightly pessimistic about the future and you warn people, maybe that’s going to lead to a sense of urgency of not kicking the can down the road or sticking your head in the sand like an ostrich. And on many of these threats until now, we have ignored them because many of them are slow motion train wrecks. It’s not like an asteroid that might hit the earth in the next six months and then we have to do something about it. Climate change, financial crisis, technology, global pandemics are all things that gradual over time that lead to an erosion of economic wealth and so on. And because we discount the future and the future threats and we don’t want to accept the cost in the present, we kick the can down the road.

And by the way, all these 10 threats, they feed on each other. So you could have a negative feedback loop that leads to one shock leading to worse shock on the other side and everything going wrong as opposed to a positive feedback like the one I discuss in the chapter about the more utopian kind of a future.

Young people probably care about environment more than the elderly because the elderly are not going to be around. So maybe they’re going to start to put pressure on policy makers to do the right thing. Probably the new generations are the ones going to be suffering because of AI, because of global climate change, because of deglobalization, because of pandemic, because of populous backlash against democracy, because of economic and financial crisis.

ALISON BEARD: It sounds like if we’re going to rely on the younger generations, we need to invest in education though. So maybe that’s one area for business to help.

NOURIEL ROUBINI: Yes, certainly in the past, education, human capital, skills is what allows you to survive and thrive as there are technological changes, trade and other global forces that lead to entire firms or even sectors to go up and down. You need to have a different type of education because the traditional situation where you had a career and a job and you could expect to have it for 50 years and not being disrupted either by trade or by technology, is not. The future’s going to be faced by young people. They’ll have to change career and jobs several times during the day, their own lifetime, and therefore the education they get has to be according to that.

If I was a young person, I would tell them study on one side some STEM related subject as your major, but then have also minor of course in liberal arts because being able to read, write, think critically and think outside of the box is also going to be important.

So you need a combination of the two, that’s how you probably survive the coming onslaught. We have to be aware that we could end up again in another great depression unless we address some of this severe problem. We have to look at history to make sure that we don’t go back to the dark ages and then be ready and be prepared and having some consensus. We’re too divided around the world. But if we fight each other, nobody’s going to survive the kind of threats that are ominous that are coming to us, these mega threats. The only way to survive a storm is to build a shield and a shield that’s to be collective rather than individual.

ALISON BEARD: Terrific. Well, it has been slightly depressing, but I do think that awareness, as you said, is the first step. So as long as we know what we need to overcome, we can try to overcome them. Thanks so much for the conversation today.

NOURIEL ROUBINI: Thanks very much for having me. It was a real pleasure.

ALISON BEARD: That was Nouriel Roubini, author of the book, Mega Threats: 10 Dangerous Trends that Imperil Our Future and How to Survive Them.

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This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Hannah Bates is our audio production assistant, and Ian Fox is our audio product manager. Thanks for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Alison Beard.