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The challenge of avoiding a great global depression – International

After the financial crisis of 2007-2009, misguided policies aggravated imbalances and widespread risks in the global economy. Thus, instead of addressing the structural problems revealed by the financial collapse and subsequent recession, governments generally kicked them forward; This created major downside risks that made another crisis inevitable. And now that it happened, the risks are getting worse. Unfortunately, even if the result of this year’s “biggest recession” was a lackluster U-shaped recovery, ten ominous and dangerous trends indicate that at some point in this decade there will be an “L-shaped” depression.

The first trend has to do with the deficit and its derived risks: debt and default. The official response to the covid-19 crisis involves a huge increase in the fiscal deficit, on the order of 10% of GDP or more, at a time when public debt levels in many countries were already high and even unsustainable.

To make matters worse, the loss of income for many households and businesses means that private sector debt levels will also become unsustainable, which can lead to a waterfall of defaults and bankruptcies. Coupled with rising levels of public debt, this is an almost certain guarantee of a more anemic recovery than the one that followed the recession of a decade ago.

A second factor is the demographic time bomb in advanced economies. The covid-19 crisis shows that much more public spending needs to be allocated to health systems, and that universal health care and other relevant public goods are necessities, not luxuries. However, due to the aging population of most developed countries, future financing of these disbursements will further increase the implicit debts of the financial systems. Health and social security, which are already underfunded.

Towards deflation

The third element is the increasing risk of deflation. In addition to causing a deep recession, the crisis is also creating a huge surplus in the markets for goods (unused machines and productive capacity) and labor (large-scale unemployment), in addition to driving a collapse in prices of raw materials such as oil and industrial metals. This makes deflation of debt probable, increasing the risk of insolvency.

A fourth (related) factor will be the loss of currency value. The attempts of the banks to combat deflation and anticipate the risk of a rise in interest rates (as a result of the immense accumulation of debts) lthey will lead to even more heterodox and extensive monetary policies.

Immediately, to avoid depression and deflation, governments will have to appeal to the monetized fiscal deficit. But with time, permanent negative supply-side shocks resulting from accelerated deglobalization and renewed protectionism, will make stagflation almost inevitable.

With millions of people losing their jobs or working and earning less, the disparities in income and wealth in the 21st century economy will deepen.

A fifth issue is the digital disruption of the economy in general. With millions of people who will lose their jobs or work and earn less, The disparities in income and wealth of the 21st century economy will widen. To protect themselves from future disruptions in supply chains, companies in advanced economies will repatriate production from low-cost regions to more expensive local markets. But instead of favoring local workers, this trend will accelerate automation, creating downward pressure on wages and giving more support to populism, nationalism and xenophobia.

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Deglobalization

This brings us to the sixth important factor: deglobalization. The pandemic it is accelerating already very advanced tendencies towards balkanization and fragmentation. The decoupling between the United States and China will increase, and Most countries will respond with even more protectionist policies to shield local companies and workers from international disruption. The post-pandemic world will be characterized by stricter restrictions on the movement of goods, services, capital, labor, technology, data and information. It is already happening in the pharmaceutical, medical equipment and food sectors, where in response to the crisis governments have begun to impose export restrictions and other protectionist measures.

The anti-democratic outpost will reinforce this trend. Populist leaders often capitalize on economic weakness, large-scale unemployment, and rising inequality. Under conditions of greater economic uncertainty, there will be a strong drive to blame foreigners for the crisis. Industrial workers and large swaths of the middle class they will become more permeable to populist rhetoric, particularly with regard to restricting migration and trade.

This brings us to an eighth factor: the geostrategic confrontation between the United States and China. With the Trump administration bent on blaming China for the pandemic, Chinese President Xi Jinping’s regime will insist on asserting that the United States is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data and monetary deals will intensify.

To make matters worse, this diplomatic split will create conditions for a new cold war between the United States and its rivals, not only China, but also Russia, Iran, and North Korea.

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The United States has already surpassed the figure of 38.6 million unemployed and the Federal Reserve believes that the rate could exceed 25% of the economically active population, or more

To complete, with the proximity of a presidential election in the United States There are plenty of reasons to expect an increase in clandestine cyber warfare, which can even lead to conventional military conflicts. And as the technology It is the key weapon in the fight for the control of the industries of the future and in the fight against the pandemic, the American private sector will be increasingly linked to the industrial and national security complex.

A final risk that cannot be ignored is environmental disruption, which, as the crisis caused by the covid-19It can cause much more economic damage than a financial crisis. Successive epidemics (HIV since the 1980s, SARS in 2003, H1N1 in 2009, MERS in 2011, Ebola in 2014-16) are, like climate change, disasters created basically by human action, derived from bad sanitary conditions, the abuse of natural systems and the increasing interconnectivity of a globalized world. In the years to come, Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly.

These ten risks, which were already great before covid-19, now threaten to fuel a perfect storm capable of plunging the entire world economy into a decade of despair. Perhaps when the 1930s arrive, technology and more competent political leadership can reduce, resolve, or minimize many of these problems and produce a more inclusive, cooperative, and stable international order. But the happy ending depends on finding a way to survive the impending “major depression.”

NOURIEL ROUBINI – © PROJECT SYNDICATE
(*) Professor of economics at the Stern School of Business at New York University and President of Roubini Macro Associates. He was a senior economist for International Affairs on the White House Council of Economic Advisers during the Clinton administration. He has worked for the International Monetary Fund, the US Federal Reserve. USA and the World Bank.

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