Why this is the age of mega threats for the world

At least, four dangerous revisionist powers (China, Russia, Iran and North Korea) are challenging the economic, financial, security and geopolitical order. Photo: AP
At least, four dangerous revisionist powers (China, Russia, Iran and North Korea) are challenging the economic, financial, security and geopolitical order. Photo: AP

Summary

  • We face a similar confluence of factors that led to disaster a century ago in addition to new perils we’re failing to contain.

A variety of mega-threats is imperilling our future. Not just jobs, incomes, wealth and the global economy, but also the relative peace, prosperity and progress achieved over the past 75 years. For four decades after World War II, climate change and job-displacing artificial intelligence (AI) was not on anyone’s mind, and terms like ‘deglobalization’ and ‘trade war’ were on nobody’s lips. Global pandemics weren’t even an afterthought; the last major one was in 1918. After the 1970s détente between the US and the Soviet Union and the opening of the US to China, the already low risk of a conventional or nuclear war between great powers fizzled out.

Growth was robust, economic cycles were contained and recessions were short and shallow, except for during the stagflationary 1970s; and even then, there were no debt crises in advanced economies, because private and public debt ratios were low. There was no implicit debt from pensions and healthcare systems as the supply of young workers was growing while ageing was moderate. Sound regulation and capital controls subdued boom-bust cycles and kept major financial crises at bay. Major economies were strong liberal democracies that were free of extreme partisan polarization. Populism and authoritarianism were confined to a benighted cohort of poorer countries.

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Fast-forward to late 2022, and you will notice that we are awash in new mega-threats. The world has entered what I call a geopolitical depression, with (at least) four dangerous revisionist powers (China, Russia, Iran and North Korea) challenging the economic, financial, security and geopolitical order that the US and its allies created after WWII.

There is a sharply rising risk not only of war among great powers, but of a nuclear conflict. In the coming year, Russia’s war of aggression in Ukraine could escalate into an unconventional conflict that directly involves Nato. And Israel (and perhaps the US) may decide to launch strikes against Iran, which is on its way to building a nuclear bomb.

With Chinese President Xi Jinping further consolidating his authoritarian rule, and with the US tightening its trade restrictions against China, the new Sino-American cold war is becoming colder by the day. Worse, it could all too easily turn hot over the status of Taiwan, which Xi is committed to reuniting with the mainland, and which US President Joe Biden appears committed to defending. Meanwhile, nuclear-armed North Korea has once again been seeking attention by firing rockets over Japan and South Korea.

Even discounting the threat of a nuclear conflict, the risk of an environmental apocalypse in the future is becoming increasingly serious, especially given that most of the talk about net-zero and ESG investing is just greenwashing—or greenwishing. Greenflation is already in full swing, because it turns out that amassing the metals needed for the energy transition requires a lot of expensive energy.

There is also a growing risk of new pandemics, owing to the link between environmental destruction and zoonotic diseases. Wildlife that carry dangerous pathogens are coming into closer and more frequent contact with humans and livestock. That is why we have already experienced more frequent and virulent pandemics and epidemics since the early 1980s. The problem will worsen in the future.

The economic situation is no better. For the first time since the 1970s, we are facing high inflation and the prospect of a recession: or stagflation. And when it comes, the recession will not be short and shallow but long and severe, because we may also be facing the mother of all debt crises, owing to soaring private and public debt ratios over the last few decades. Low debt ratios spared us from that in the 1970s. And though we had debt crises in the Great Recession, we also had deflation. It was a demand shock and credit crunch that could be met with massive monetary, fiscal and credit easing.

Today, we are experiencing the worst elements of both the 1970s and 2008. Multiple persistent negative supply shocks have coincided with debt ratios that are even higher than they were during the Great Recession. As inflationary pressures force central banks to tighten monetary policy even though a recession looms, debt service costs will skyrocket. And ageing also implies massive unfunded public-sector liabilities. Everyone should be preparing for what may come to be remembered as the Great Stagflationary Debt Crisis.

Then again, while central banks sound more hawkish, we should be sceptical of their professed willingness to fight inflation at any cost. Once they find themselves in a debt trap, they will have to blink. With debt ratios so high, fighting inflation will cause an economic and financial crash that will be deemed politically unacceptable. Major central banks will feel as though they have no choice but to back-pedal. So inflation, currency debasement, boom-bust cycles and financial crises will become more severe and frequent.

At the same time, geopolitical conflicts and national-security concerns will continue to fuel trade, financial and tech wars, accelerating the deglobalization process. Protectionism and Sino-American decoupling will leave the global economy, supply chains and markets more fragmented, making a wide range of goods and services more expensive. ‘Friend-shoring’ has begun.

Over time, advances in AI and automation will destroy more and more jobs, even if policymakers build higher protectionist walls in an effort to fight the last war. By restricting immigration and demanding more local production, ageing advanced economies will create a big incentive for companies to adopt labour-saving technologies, which can increasingly perform not just routine but also cognitive and creative work.

These mega-threats will contribute further to income and wealth inequality, which has already been fuelling the rise of radical and aggressive populist regimes around the world. Part of the reason we have come to this dangerous point is that we have long kept our heads in the sand. Now, we need to make up for lost time. Without decisive government and private-sector action both domestically and globally, the period ahead will be less like the four decades after World War II than like the three decades between 1914 and 1945. What started with World War I and the influenza pandemic gave way to the Great Depression, massive trade and currency wars, inflation (even hyperinflation) and deflation, and to financial and debt crises that led to massive meltdowns and defaults. Ultimately, authoritarian regimes emerged, culminating in World War II and the Holocaust. If we are not poised for a similar sequence, it may be because it’s already begun. ©2022/Project Syndicate

Nouriel Roubini is professor emeritus of economics at New York University’s Stern School of Business and the author of ‘MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them’.

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