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Nouriel Roubini thinks mounting geopolitical and environmental risk are clearly visible to anyone who is willing to look

Nouriel Roubini thinks mounting geopolitical and environmental risk are clearly visible to anyone who is willing to look

By Nouriel Roubini*

In my 2010 book, Crisis Economics, I defined financial crises not as the “black swan” events that Nassim Nicholas Taleb described in his eponymous bestseller, but as “white swans.” According to Taleb, black swans are events that emerge unpredictably, like a tornado, from a fat-tailed statistical distribution. But I argued that financial crises, at least, are more like hurricanes: they are the predictable result of built-up economic and financial vulnerabilities and policy mistakes.

There are times when we should expect the system to reach a tipping point – the “Minsky Moment” – when a boom and a bubble turn into a crash and a bust. Such events are not about the “unknown unknowns,” but rather the “known unknowns.”

Beyond the usual economic and policy risks that most financial analysts worry about, a number of potentially seismic white swans are visible on the horizon this year. Any of them could trigger severe economic, financial, political, and geopolitical disturbances unlike anything since the 2008 crisis.

For starters, the United States is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran, and North Korea. These countries all have an interest in challenging the US-led global order, and 2020 could be a critical year for them, owing to the US presidential election and the potential change in US global policies that could follow.

Under President Donald Trump, the US is trying to contain or even trigger regime change in these four countries through economic sanctions and other means. Similarly, the four revisionists want to undercut American hard and soft power abroad by destabilizing the US from within through asymmetric warfare. If the US election descends into partisan rancor, chaos, disputed vote tallies, and accusations of “rigged” elections, so much the better for America’s rivals. A breakdown of the US political system would weaken American power abroad.

Moreover, some countries have a particular interest in removing Trump. The acute threat that he poses to the Iranian regime gives it every reason to escalate the conflict with the US in the coming months – even if it means risking a full-scale war – on the chance that the ensuing spike in oil prices would crash the US stock market, trigger a recession, and sink Trump’s re-election prospects. Yes, the consensus view is that the targeted killing of Qassem Suleimani has deterred Iran, but that argument misunderstands the regime’s perverse incentives. War between US and Iran is likely this year; the current calm is the one before the proverbial storm.

As for US-China relations, the recent “phase one” deal is a temporary Band-Aid. The bilateral cold war over technology, data, investment, currency, and finance is already escalating sharply. The COVID-19 outbreak has reinforced the position of those in the US arguing for containment, and lent further momentum to the broader trend of Sino-American “decoupling.” More immediately, the epidemic is likely to be more severe than currently expected, and the  disruption to the Chinese economy will have spillover effects on global supply chains – including pharma inputs, of which China is a critical supplier – and business confidence, all of which will likely be more severe than financial markets’ current complacency suggests.

Although the Sino-American cold war is by definition a low-intensity conflict, a sharp escalation is likely this year. To some Chinese leaders, it cannot be a coincidence that their country is simultaneously experiencing a massive swine flu outbreak, a severe bird flu, a coronavirus epidemic, political unrest in Hong Kong, the re-election of Taiwan’s pro-independence president, and stepped-up US naval operations in the East and South China Seas. Regardless of whether China has only itself to blame for some of these crises, the view in Beijing is veering toward the conspiratorial.

But open aggression is not really an option at this point, given the asymmetry of conventional power. China’s immediate response to US containment efforts will likely take the form of cyberwarfare. There are several obvious targets. Chinese hackers (and their Russian, North Korean, and Iranian counterparts) could interfere in the US election by flooding Americans with misinformation and deep fakes. With the US electorate already so polarized, it is not difficult to imagine armed partisans taking to the streets to challenge the results, leading to serious violence and chaos.

Revisionist powers could also attack the US and Western financial systems – including the Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform. Already, European Central Bank President Christine Lagarde has warned that a cyberattack on European financial markets could cost $645 billion. And security officials have expressed similar concerns about the US, where an even wider range of telecommunication infrastructure is potentially vulnerable.

By next year, the US-China conflict could have escalated from a cold war to a near-hot one. A Chinese regime and economy severely damaged by the COVID-19 crisis and facing restless masses will need an external scapegoat, and will likely set its sights on Taiwan, Hong Kong, Vietnam, and US naval positions in the East and South China Seas; confrontation could creep into escalating military accidents. It could also pursue the financial “nuclear option” of dumping its holdings of US Treasury bonds if escalation does take place. Because US assets comprise such a large share of China’s (and, to a lesser extent, Russia’s) foreign reserves, the Chinese are increasingly worried that such assets could be frozen through US sanctions (like those already used against Iran and North Korea).

Of course, dumping US Treasuries would impede China’s economic growth if dollar assets were sold and converted back into renminbi (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to US primary or secondary sanctions, namely gold. Indeed, both China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.

In a sell-off scenario, the capital gains on gold would compensate for any loss incurred from dumping US Treasuries, whose yields would spike as their market price and value fell. So far, China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the US Treasuries market, possibly leading to a sharp economic slowdown in the US.

The US, of course, will not sit idly by while coming under asymmetric attack. It has already been increasing the pressure on these countries with sanctions and other forms of trade and financial warfare, not to mention its own world-beating cyberwarfare capabilities. US cyberattacks against the four rivals will continue to intensify this year, raising the risk of the first-ever cyber world war and massive economic, financial, and political disorder.

Looking beyond the risk of severe geopolitical escalations in 2020, there are additional medium-term risks associated with climate change, which could trigger costly environmental disasters. Climate change is not just a lumbering giant that will cause economic and financial havoc decades from now. It is a threat in the here and now, as demonstrated by the growing frequency and severity of extreme weather events.

In addition to climate change, there is evidence that separate, deeper seismic events are underway, leading to rapid global movements in magnetic polarity and accelerating ocean currents.. Any one of these developments could augur an environmental white swan event, as could climatic “tipping points” such as the collapse of major ice sheets in Antarctica or Greenland in the next few years. We already know that underwater volcanic activity is increasing; what if that trend translates into rapid marine acidification and the depletion of global fish stocks upon which billions of people rely?

As of early 2020, this is where we stand: the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.

This list is hardly exhaustive, but it points to what one can reasonably expect for 2020. Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.


Nouriel Roubini is CEO of Roubini Macro Associates and Professor of Economics at the Stern School of Business, NYU. Copyright: Project Syndicate, 2020, published here with permission.

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21 Comments

Yet another commentator bullish on gold.

Except that Roubini is an exceptionally astute economist who predicted the GFC is such detail , you would have thought he arranged and planned it

So he's picking hard times ahead. You still bullish on housing?

Not necessarily "bullish on gold", but he did explain part of the reason for its price rise. He detests crptocurrencies.

There's an even better and possibly more recent photograph of Xi Jinping, grinning together with John Key, who was over there meeting the 21st century's Stalin 'in a personal capacity'. National should be able to supply a copy. Putin's Russia is in decline in almost every metric. Whereas John Key, as he always has been, is 'on the way up'. Follow the money.

Trump's lack of diplomacy skills, and his tendency for unpredictable and irrational behaviour significantly heighten the risks associated with current geopolitical tensions.

The future of the world in next three decades will be shaped by three forces:

the China block (East Asia + Confucius culture circle -- Japan, Korea, and Viet Nam) with an influential factor of more than 50% and increasing

the Anglo Saxon block (US, UK, Canada, AUS, and NZ) with an influential factor of 30% and decreasing

the EU block (Germany and France led) with an influential factor of 20% and maintaining

14
up

Not a single country in East Asia - or anywhere else in the world - counts itself as part of 'the China block'. Japan? South Korea? Vietnam? Where do you pick up this garbage? The truth is that the rest of the world - as the CCP's nature becomes increasingly apparent to all but the brain-dead or brain-washed - is moving against any future influenced or determined by the CCP. Sorry, xingmowang, but the CCP is out on its own.

10
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"the China block (East Asia + Confucius culture circle -- Japan, Korea, and Viet Nam)"...
Dude, they are still fighting over the islands and illegally occupation.. I don't think they are exactly friends

You confidently predict three decades ahead! Look back 3 decades - has everything been predictable? This century the ex-iron curtain countries of eastern Europe have grown rapidly - was that predicted when they were behind the iron curtain? Nobody in their wildest dreams in the 15th century would have predicted Europe to conquer the world let alone Britain to rule the waves a few centuries later. Today things move far faster and quality of technology matters far more than size of a population or the size of land mass so in 2050 I'm predicting Taiwan to rule the world, most of China's current population being under the ocean, the sea swamping Auckland changing NZ into a land of three Islands (I'll become a midlander). Not probable but more likely than the Vietnamese jumping into bed with China under its current ruling party.

dp

NO. The forces will be energy and the environment.

Xing open your eyes mate (sorry for the pun)... you tried to combine whaa? - how many are they, population based? even when forcefully you joined them? Japan-Korea-Vietnam. Back in your younger days of CCP brainwashed, clearly Geography & Demography are not part of the main propaganda.
Again, please add these population's based of: Russia, Africa, Latin America, Middle-East, Asean.. lastly? the Indian sub-continent - Add them all? then it's already eclipsed the whole of your favorites nationhood population numbers you've mentioned, now tell me.. Can you force them all to learn 'Confucius culture circle' - C'mon dude, which part of my statement you don't understand? China is for Chinese & vice versa.. it's never about the world to them. With Covid-19? world now started to realised, that .. sourcing production of everything from China is not a good idea. China current monetary strength is as good as the world willingness, to source goodies from them - What happened when the world shifted/decided that the next resourceful county to be somewhere else? - the past 70years of China progress merely from mass, cheaper, copy productions. But off course I'm not going to deny you that the current world Fireworks creativity came from China, the world crappy ramen noodles, all those plastics (by the way.. the oil to make them if not mistaken is being imported from Mid East) - Visited, India, Mid-east, Africa recently - none of them understand Chinese, let alone 'confuse' (no pun intended) culture you've mentioned.

Nothing appears to have changed since the Second World War the oldies back then taked the same three Power houses

Russian's TU160 is call the White Swan.. !

"A Chinese regime and economy severely damaged by the COVID-19 crisis and facing restless masses will need an external scapegoat..." right there, the West continues to miscalculate CCP. They didn't crash Hong Kong or Taiwan or SCS when it was in full strength. Why on earth will they do it after taking a major hit by the outbreak? It's a suicide to them. As an authoritarian regime, it's always easier to wave the iron fists internally to its own people than fighting external opponents. My predict is the leadership will try to make peace with the United States and the West after this outbreak.

China CCP could find that its population get fed up with it , and it does not hold together .

Most of the Chinese folk I have come across are extremely astute , they know that the CCP are corrupt and lie through their teeth , and are ruthless .

They only support it , because any other stance has severe consequences , in my opinion

On a positive note TB will be taking a beating. "British scientists have developed a face mask with 3D printed technology that could revolutionise how tuberculosis is diagnosed.
The face mask can reliably catch and retain live tuberculosis (TB) bacteria after 30 minutes of a patient wearing it."

https://www.thetimes.co.uk/edition/news/face-mask-worn-for-half-an-hour-...

Xlnt. They should make them for cattle. The present test for tb is not terribly reliable. And tb is back...some big outbreaks down country.

Nouriel Roubini seems to be praying for White Swan events because he cannot abide by the current success of the Trump Presidency. Thus the bit that more than likely the November elections will descend into mob action after the electorate is overwhelmed by foreign internet influences—oh so Muelleresque! Everything good that has happened is surely to be reversed. In other words this no skills administration has just had dumb luck—from taking out Iran’s “Osma Bin Laden” to ending the rush for the southern border, while undressing and revealing to the world the “real China” all accomplishments respected by the “populace”, and a proactively of which the last three previous Administrations refused as they were risk adverse, or beholden to special interests. Like Churchill Trump has had more success than the Establishment can stomach. When I am back in the States the hiring signs outside of Factories and Restaurants harbors back to the go go days of the late 90’s. And this time the hiring is American’s rather than the millions of South of the Border migrants that rushed the borders after NAFTA wiped out their communal farming. Mexico -unlike the Japanese Government who steadfastly protect their rice farmers- paid the no heed to their indeginous farmers, and now gangs rule the countryside because unit trains of 120 wagons full of Maze were driven from Iowa to Mexico City and fundamentaly changed the Mexican rural countryside wiping out small scale communal maze farming. All over the America’s Globalism has hit the poorest hardest.

Will be interesting to see if one or more white swans turns out to be just a goose.

Days to the General Election: 19
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