MEGATHREATS? MAYBE, BUT NOT INEVITABLE
I recently read "Megathreats: The Ten Trends That Imperil Our Future, and How to Survive Them" by Nouriel Roubini (made famous as the predictor of the 2008-9 housing crisis). It is purposefully, "alarming. Roubini lists 10 "Megathreats:"
- The mother of all debt crises -- he points out that public and private debt is 350% of Gross World Product. He forecasts that defaults like Argentina (9 times since 1816 independence) will be commonplace.
- The bailout trap -- when banks go bad, government bails them out; when autos go bad, government bails them out; when utilities fail...you get the point.
- The demographic time bomb -- western civilization (and Japan) are rapidly aging. Old people don't produce, and young people don't save.
- The easy money trap leading to cycles of booms and busts.
- Currency meltdowns
- Border closings and deglobalization -- immigration into the north from the south has kept labor rates low for 50 years; that's over now
- Artificial Intelligence (AI) and job destruction -- "I do not see a happy future where new jobs replace the jobs that automation snatches."
- The new Cold War -- with China
- The climate catastrophe and global pandemics (accelerated by climate change)
Pretty bleak, but for fun, I thought I would present counterpoints to each of these. I wish to profess up front that my general response to Roubini is the "return of liberal democracy and capitalism," somewhat in the tone of Francis Fukayama.
makes the US economy so robust is manifold, and one modestly imitated
legal and economic policy is personal and corporate bankruptcy. It
works. Ideas are tried and many fail and capital is re-generated back
into the economy. Whether national defaults (Argentina has not benefited
from defaults) or corporate defaults, the legal and market mechanisms
impose a process and discipline. Austerity, higher rates, shorter and
longer durations, all are used to control and rehabilitate the
defaulter. It should be employed globally. This is how you manage through "the mother of all debt crises." Rates offered become more disciplined by true risk of default. Debt is restructured. Companies and households go through bankruptcy. All banks in the world have a larger capital cushion than ever before thanks to the Great Recession of 2008-9 and new regulatory requirements. Final point -- the World Bank and the IMF, which would oversee a global (meaning non-US) debt crisis, are modeled after US banks and "austerity" programs are just bankruptcy reorganization in disguise.
- This is related to the first. Couple of points -- banks and autos revived and returned government capital after the Great Recession of 2008-9. Remember TARP? According to the Treasury, the government’s investments in TARP earned more than $11 billion for taxpayers. The government also contends that TARP saved more than 1 million jobs and helped stabilize banks, the auto industry and other sectors of business. But more recently, the excesses of the COVID19 direct payments programs are clearly the leading cause of inflation in the USA. The concept of a Universal Basic Income has been set back considerably by the largesse of fiscal policy and the inflationary demand over supply it has caused. It also has restricted the labor market, leading to labor shortages WITH lower unemployment. I do not see this being a "go to" solution in the future.
- This is real, and it relates to #7. Any country which has more deaths than births is mathematically doomed to declining GDP. There is no historical exception. The USA needs a regular, legal flow of immigrants into the country to increase population and births (and address the labor shortage in lower paying jobs). The counter argument to this megathreat is that all of us will work, voluntarily or involuntarily, well past 65, 70 and even 75. Why? Because we are living longer and boredom, no social contact, and sloth are all shown to lead to death.
- The Federal Reserve blamed COVID19 inflation on "supply shocks." They said it was transitory because they believed that supply lines would be restored. Demand means more supply will be found. A few problems here. First, inflation in the USA is only partially supply, and that portion is compromised by #7 "deglobalization" as supply sources are being "on-shored" -- like computer chips. Second, most of USA inflation is demand generated -- see my comments in fiscal largesse. But the Federal Reserve could not criticize fiscal stimulus. They had been calling for it for nearly 10 years (since the great recession). They should have started reducing the monetary supply and raising interest rates a year before they began (this year). They messed up -- and they may mess up again even worse if they raise too far too fast and lead us to a recession worse than needed to reset the system.
- And this is what happens if the Fed drives us into sustained lower domestic output with sustained higher rates. We reduce demand, but we wait while supply catches up. But there is a discipline to business unlike any period of capitalism. There is a resistance to generating too much supply on the "hope" for demand. This is the negative spiral. The Fed goes too far. The business community slows investment and supply restructuring. Things get ugly for 3-5 years (like the 70s on steroids). But what could happen? The Fed slows down. They do not reverse. They raise rates every 90 days, and return to 50 and then 25 and then 10 basis points. This will lead to greater investment and capital expenditures, but we will still need to sort out immigration.
- Honestly, the only currency that can "meltdown" is the Euro, and you might as well call it the Deutschmark. Germany is not going to let that happen. Things could get ugly with natural gas this February if Germans freeze to death. That could really test the EU and Euro, but if we survive winter, then I find this threat less than frightening.
- I've already opined on immigration. What I will say here is that the decline of liberal democracy (less so capitalism) may stall in the face of the egregious authoritarian behavior of Russia and other former Soviet states (and perhaps even a little bit here in the USA). Global trade went too far and increased risk. What will happen now is greater competition and balance as supply lines are created domestically in the G7 and G20, and then trade will resume but with a domestic hedge. This will be good for both parts of the supply chain -- competition.
-- not just AI -- is the panacea for most of these threat. Green fusion
energy changes life as we know it. Yes, it is decades away. Will fossil
fuels have a resurgence after the mid-terms? Yes. Will they allow
Russia to stay in the Ukraine indefinitely? Yes. But "green" is not here
now but will "save the planet" in our children's (and certainly grandchildren's) lifetimes. I do not like "AI" -- this is machine
learning. Algorithms optimize to a set of code. There are real downside
elements to this. I have published articles on the decline
of Google and Facebook, because these algorithms are so exacting they become increasingly less valuable. I would argue that
the bigger threat is whether we address our education. We need LIBERAL
ARTS. We need humanities and STEM. We need to dismantle the educational
approach to create "workers for factories" coming out of WWII. We can
and we must.
- The restrictions on chips and AI and quantum physics by the Biden administration is draconian. It will set China back no less than 5 but no more than 10 years, maybe more. This is for military and economic technology development. It also means that trade will suffer. My good friend, Colonel Catlett spoke to me about the US focus upon China more than a decade ago. I for one believe that we have caused many of our Sino-American issues and therefore they can be fixed. I believe we were too lax on establishing IP protections, and thinking through the 100 year implications of trade together and with the rest of the world. That is possible, and I will not go into more detail here.
- If the Earth kills us because we lived on it as sentient meat, then I shout "Viva Darwin!" If we cannot figure out how to adapt, then we die. If we cannot figure out how to make things better, and we cannot leave a dying planet, then we die. I for one, think that mRNA is a testimony to human innovation. I have not read "Code Breakers" by Walter Isaacson, about its development, but it is next on my list.