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Dr. Doom: 3 ways coronavirus recession could become a depression

  • The “Dr. Doom” economist Nouriel Roubini talked about the economic impacts of the coronavirus pandemic on a call with Influence for Good this week. 
  • On the call, he laid out three things that he sees tipping the coronavirus-induced recession into a “Greater Depression” than the one seen in the 1930s. 
  • Here are the three risks that he sees to the US and global economy going forward.
  • Visit Business Insider’s homepage for more stories.

Nouriel Roubini, nick-named the Dr. Doom economist for his pessimistic views, has consistently warned that the coronavirus could lead to a “Greater Depression” in the US, pushing past the base-case assumption of economists that a recession will hit or is already underway. 

But for that to happen, Roubini sees three main things that would need to unfold first. He outlined these events on a call this week with Influence for Good, where he spoke about the effects of COVID-19 on the economy and what he sees for the future. 

This “trifecta” or “Bermuda triangle” of events is what would lead to a Greater Depression, Roubini said. 

1. The wrong health response 

“What’s happening in the United States is totally crazy,” Roubini said. This week, President Donald Trump indicated that he’d like to reopen the US economy by Easter, on April 12

Comparing how other countries such as China and Italy have dealt with the pandemic shows why restarting the economy too soon is a bad idea, according to Roubini. 

“If you shut down everything for three months, you stop the pandemic, new cases go to zero, you have one or two quarters of really bad economic activity, and then you go back gradually to normal,” Roubini said, adding that’s what needs to be done. 

But, “if you essentially kick the can down the road like Italy did, and you don’t do radical compulsory lockdowns,” it ends up with a situation that is a “total medical and health nightmare,” he said. 

Read more: A notorious market bear says stocks are still historically expensive after tumbling on coronavirus — and warns a plunge ‘of about 50% from here’ is still coming

Of course, shutting down the economy for so long is painful, Roubini said, but it is the right thing to do to stop the spread of the virus so it doesn’t become necessary to halt the economy again in the future for a longer period of time. 

Roubini also said that it’s likely that the virus will come back in a different mutation next year in the winter. The spike will be smaller in the countries that have done suppression instead of mitigation to combat the virus, he said, adding that the US has done “mitigation light.” 

That could mean that the economy is hit hard again next year just as it’s starting to recover, Roubini said, prolonging the damage. 

2. The worry of future inflation 

“For a year, you can run a budget deficit of $2 trillion to $3 trillion dollars,” Roubini said, adding that would be about 15% of GDP, and nothing would happen, everything would be okay. 

But, “you cannot fool all of the investors all the time,” he added. “If you run a budget deficit of 10% to 15% of GDP while printing money financing, we end up like Zimbabwe, like Argentina, like Venezuela, with high inflation and eventually hyperinflation,” he said. 

If there’s a negative supply shock, as has been seen as the coronavirus pandemic disrupts global supply chains and sends workers home, it’s likely that will lead to less growth and more inflation, according to Roubini. 

“When there’s a negative supply shock, it reduces output and increases prices,” he said. When you print money and run a budget deficit, you could end up with stagflation, said Roubini. 

“Stagflation is a combination of economic stagnation, recession, and high inflation,” he said. 

3. Geopolitical shocks adding extra tension 

“We may have a wide range of geopolitical shocks between the US and China, global cyber warfare,” and more, said Roubini. 

Additional geopolitical tensions on top of an economic depression may lead to a geopolitical depression, according to Roubini. 

“Those shocks may end up being more severe than the coronavirus crisis,” Roubini said.

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