In his last article, Nouriel Roubini hypothesized a global depression greater than the Great Recession of 2008, but also than the Great Depression of 1929.
He called this scenario “Greater Depression”, precisely to highlight that it could be an even more severe unfolding than the one known as the “Great Depression” of the last century.
According to Roubini, the Covid-19 pandemic is getting out of control and at this point, the resulting recession will be deeper than the one after the 2008 financial crisis.
If anything, due to a “flailing policy response”, the chances of a much worse recession are increasing day by day.
China, after two months of emergency, is preparing to return to normality, with, for example, the Shanghai stock exchange index going from the low point it reached on March 19th, to its February 3rd levels, without ever falling below the December 2018 lows.
Roubini points out that the shock to the global economy from the pandemic was faster and more severe than the global financial crisis of 2008, and even than the Great Depression of 1929.
In these two episodes the stock markets collapsed by 50% or more, but in about three years, and this time it only took three weeks.
Actually, the S&P 500 index today stands at around 2,360 points, compared to a high of around 3,380 more than a month ago on February 19th, 2020, resulting in a loss of 30%.
Hence, this index didn’t lose 50% in three weeks.
The dynamics for the Dow Jones Industrial were similar, so, at least as far as the American stock exchange is concerned, the scenario described by Roubini does not seem to be correct.
However, he points out that in early March the US stock market lost 20% in 15 days, the fastest decline ever, and credit spreads rose to levels of 2008.
In addition, major financial companies such as Goldman Sachs, JP Morgan and Morgan Stanley predict that US GDP will fall by 6% in the first quarter of 2020 and from 24% to 30% in the second, with the unemployment rate also likely to skyrocket, i.e. above 20%.
At this point he writes:
“Every component of aggregate demand – consumption, capital spending, exports – is in unprecedented free fall. While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway, looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.”.
A similar scenario, which however does not seem to be shared by other authoritative analysts, would in fact be worse even than the Great Depression and World War II, but in reality, this seems to be only one of several possible hypotheses and not the most plausible one.
As far as monetary policies are concerned, the economist explains that what was done during the great financial crisis of 2008 over 3 years, took place in less than a month now and that governments are expected to distribute massive fiscal stimuli, also by means of the so-called helicopter money, which will have to be fully monetized.
If financed through public debt, interest rates would rise dramatically and the recovery would be suffocated in the cradle.
Furthermore, Roubini argues that the public health response to the pandemic in advanced economies has fallen far short of what would be needed to contain it, while the fiscal policy package currently under discussion would be neither comprehensive enough nor fast enough to create the conditions for a timely recovery.
For these reasons, he believes that there is a risk of a Greater Depression, worse than the original Great Depression of 1929.