Thomas Homer-Dixon is one of the big shots of the thinking-about-going-to-hell-in-a-handbasket biz.
Michael Lawrence is one of the post-doc researchers at the Institute.
Background:Temporary crisis or sustained economic collapse? Even before the COVID-19 pandemic struck, the world had sunk into deep economic uncertainty. Just as the various shocks of the 1970s and 1980s upended post-war Keynesian economics and propelled the flip to monetarism,1 so too did the 2007-2009 financial crisis shake the foundations of monetarism. The consequent “Great Recession” provided few hints as to what macroeconomic paradigm would follow, but it did reveal the economic conditions with which a new framework must now contend: low economic demand; high economic inequality; high savings and low investment by the wealthy; and interest rates stuck near zero, thus enfeebling the chief lever of monetary policy (The Economist 2020a). “A profound shift is now taking place in economics,” The Economist (2020b) recently proclaimed, “of the sort that only happens once in a generation.”
The coronavirus has worsened this uncertainty, while compelling leaders around the world to implement radically unconventional economic policies. Governments have borrowed and printed vast amounts of money to fund the massive fiscal stimulus at the core of their pandemic response. Canada, for example, is running a budgetary deficit of CAD$328.5 billion in the 2020-21 fiscal year—high above the CAD$36.5 billion deficit of 2019—including an estimated CAD$225.9 billion spent in response to COVID-19. Equal to 15 percent of Canada’s gross domestic product (GDP), this figure represents the largest budgetary deficit (relative to GDP) incurred since reporting began in 1966 (PBO 2020). The International Monetary Fund (IMF 2020) estimates that global government debt will reach an unprecedented level equal to almost 100 percent of global GDP in 2020, up from 83 percent the year before.
But with both interest rates and inflation near zero, fiscal deficits that would previously have seemed catastrophic now appear to be sustainable, necessary, and even desirable. Whether they acknowledge it or not, governments are implementing core precepts of Modern Monetary Theory (see Box 1), which just years ago was derided as “radical” and “fringe” for its suggestion that governments can and should spend much more than they do, despite the resulting deficits (Pittis 2020a).
In the midst of an economic paradigm shift, and as governments gamble that unprecedented spending will see us through the pandemic without producing even greater economic catastrophe, renowned economist Nouriel Roubini has made a distressing prediction. Roubini first gained notoriety in 2006 when he proposed—to the bewilderment of many of his peers—that the US housing market was about to collapse (Levitz 2020). He was right, and a global financial crisis soon followed. Now, Roubini forecasts that the global economy will fall into a “Greater Depression”—a period even worse than the Great Depression of the 1930s—within the next decade. Whereas optimists project a V-shaped recovery from the coronavirus slump, and an emerging, more cautious consensus foresees a U-shaped recovery, Roubini predicts that, in the coming years, the graph of economic growth will take on an L-shape as the global economy makes a short-lived rally and falls into depression.
Roubini’s analysis deserves special attention, because he is a uniquely systemic thinker. Whereas other economic commentators focus narrowly on macro-economic factors (interest rates, unemployment, deficits, exchange rates, and the like), Roubini additionally considers factors such as geopolitical tensions, technological advances, political attitudes, demographic change, and environmental crises—as well as the interactions between these factors. Roubini also highlights causation across multiple scales of analysis, from the micro-scale of household finances upwards to industry trends, public policy, international relations, and ultimately the changing nature of globalization itself.
But tracing the relationships among such a range of factors is a daunting task. In this Brief, we therefore develop a systems map of Roubini’s argument that will allow us to better assess the risks of a Greater Depression and to identify some of the feedbacks that might drive the global economy into this crisis. Follow-up Briefs will further evaluate Roubini’s causal claims, show how they differ from the analyses of other prominent economists, and test their sensitivity to shifts in key underlying factors and trends.
Box 1: What is Modern Monetary Theory?
Modern Monetary Theory (MMT) offers one explanation of how money actually works and the consequent implications for government spending. The theory applies exclusively to monetary sovereign countries—those countries in whichthe government is the monopoly issuer of a fiat currency, such as the United States, Canada, Japan, the United Kingdom, and Australia. The currency of these countries is not tied to any other currency or commodity (such as gold); when these governments take on debt, they do so in their own currency. That currency has value because the issuing government decrees that it has value (by “fiat”), and because people act accordingly, as if it has value. These conditions grant monetary sovereign governments significant control over their money supply and the value of their currency.
At the crux of MMT is the difference between users of money (such as individuals and businesses) and issuers of money (monetary sovereign governments). Users of money must either earn money or borrow money before they can spend it, and spending too much can readily cripple them with debt. Users of money must therefore balance their budgets just like households do. Monetary sovereign governments need not. As the issuers of currency, they simply order money into existence by either printing currency (cash and bonds) or by increasing the numbers in banks’ digital accounts. These governments do not rely exclusively upon tax revenues or borrowing in order to spend. Taxation functions largely to create demand for the government’s currency so that people have an incentive to carry out the work that the government wants done—by building infrastructure and providing public services, for example. People need currency to pay their taxes, and the government issues such currency in ways that achieve its goals.
Many implications of MMT defy common sense, but only because that “common sense” assumes that governments must budget like a household does. Monetary sovereign countries, for example, cannot go broke; they cannot run out of money because they can always issue more. The question “how will the government pay for it?” is irrelevant. Unlike households, governments do not need to come up with the money (through taxation and borrowing) before they spend it; they can simply issue the currency they spend. The balance of the government budget—whether in the form of deficit or surplus—is not the measure of economic health and stability, and repeated calls for fiscal belt-tightening are misguided impediments to better economic policy.
MMT, however, does not promise a free lunch. Governments cannot spend indefinitely without running into big problems. But the limit to government spending is not the size of its budgetary deficit, as many believe; rather the limits are the “real resources” of the economy and inflation. Real resources define an economy’s productive capacity, and include its technology, the quantity and quality of its labor, capital, natural resources, and so on. Inflation decreases purchasing power of the currency, thus limiting what governments can achieve by issuing that currency. MMT proposes that governments should produce money at a rate that stimulates the full use of the country’s productive capacity, but it warns that exceeding that level triggers harmful inflation.
The feasibility and desirability of government spending is instead a matter of what that spending achieves—the extent to which it creates full employment, equitably distributes wealth, and triggers inflation, for example. Historically, deficits have been too small. Limited government spending leaves unused capacity (conventionally understood using such concepts as the “natural” rate of unemployment) and thereby misses opportunities to improve the economy and peoples’ well-being.
MMT comes up regularly in Roubini’s webcasts. He refers to the deficit spending that MMT advocates as “helicopter drops of money,” a term coined by Milton Friedman to castigate such proposals. Roubini argues that “quantitative easing” (QE)—one of the major policy responses to the Great Recession and a term used frequently today—is essentially the same thing as MMT. Both involve “monetized budget deficits,” wherein central banks finance government budget deficits by buying government bonds—basically by printing money that is channeled into the economy through public spending, transfers, tax breaks, and/or secondary bond markets. By financing the deficit through monetary policy rather than bonds issued in private markets, the government avoids raising the interest rate. The only significant difference between QE and MMT is that—rhetorically, at least—the deficits of the former are temporary while the deficits of the latter are more permanent. Presently, MMT is the de facto (though not official) policy of advanced economies in their response to the economic fallout of the coronavirus pandemic (see Roubini’s 6 October 2020 webcast, 1h 1m).
The economic harms of COVID-19 will be much worse for poorer countries, in part because they do not have monetary sovereignty. Their debts are denominated in foreign currencies. The recommendations of MMT are thus unavailable to poorer governments, which also lack the fiscal space to mount the economic stimulus at the core of rich countries’ response to the pandemic. So, these countries may face a “lost generation” due to low growth and rising poverty. International inequality (economic divergence between rich and poor countries) will almost certainly increase as a result.
This summary is based primarily on: Kelton 2020.
Analysis: Roubini’s argument
Roubini argues that ten trends—what he refers to as the ten “deadly Ds”—that emerged after the global financial crisis of 2007-9 are now pushing the world towards a Greater Depression, sometime in the next decade.3 “These 10 risks,” he contends, “now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair” (Roubini 2020a). The deadly Ds would trigger this depression even in the absence of the COVID-19 pandemic, but the pandemic has intensified the underlying problems and accelerated the crisis. And while Roubini argues that all ten trends are advancing today, not all are necessary for the global economy to fall into a Greater Depression. In this sense, a global depression is over-determined.....
