If the Fed tightens too soon the system will crash: Nouriel Roubini

Nouriel Roubini, Roubini Macro Associates CEO and NYU Stern School of Business Professor, joins Yahoo Finance’s Julia La Roche to discuss the state of the global economy, the crypto market, and relations between U.S. and China.

Video transcript

KRISTIN MYERS: But I want to turn now to Yahoo Finance's Julia La Roche for a conversation with the CEO of Roubini Macro Associates, Nouriel Roubini. Julia.

JULIA LA ROCHE: Thank you so much, Kristin. And Nouriel Roubini, always great to have you back on the program. I want to start with what's been happening in the cryptocurrency markets, particularly Bitcoin. Falling below $30,000 for the first time since January on Tuesday here, and certainly well below its peak of more than 63,000 just back in April. A lot's been going on in this space, you've been pretty vocal in the area. What do you make of what's transpired lately?

NOURIEL ROUBINI: Well, that volatility is based on the fact that these currencies are not really currencies, they don't have any fundamental value, they're driven by speculation, by FOMO. And yes, Bitcoin almost reach 64,000 in April, and now it's down more than 50%. And there are days in which it falls overnight 10%, 20%, even 30% based on no fundamentals. And then you have other things like Dogecoin. It was great as a joke, as a parody of cryptocurrencies and shit coins, and it went through the roof, and now is collapsing. So this is a place where calling them currency is a misnomer. They're not a unit of account, they're not a scalable means of payment, they're not a stable store of value, they're not a single numerator.

Calling them cryptocurrency its really a joke because they're not used as a means of payment so-- and they're not even assets. They don't have income, they don't have use, they don't have utility, they're not the stable store of value. So they're not currency, they're not assets, they're just a speculative bubble that is now bursting as the regulators are cracking down, and they're going to crack down more.

JULIA LA ROCHE: So it's safe to say you don't see a future when it comes to cryptocurrency. There's nothing that might change your thesis?

NOURIEL ROUBINI: Nothing. If anything, the future is that most central banks over time are going to introduce central bank digital currencies, electronic euro, dollar, RMB, you name it. But that's not a victory for crypto because these are central bank digital currencies are not going to be based on crypto, not on blockchain. They're going to be centralized, they are going to be in a system that is private, that is monitored, that is permission, and so on. So they have nothing to be crypto, but they can have the advantage that compared to any cryptocurrency, but also relative to other private payment system, they're going to be instantaneous, settling, clearing, they're going to be costless, they're going to be safe.

And therefore, if and when they're going to be introduced, they're going to dominate not only cryptocurrency that have no means of payment, but eventually could be also a threat to other traditional things like bank accounts or even some of the digital payment system like Alipay, WeChat Pay, Venmo, PayPal, and so on. So the future of money is central bank digital currencies, certainly not cryptocurrencies.

JULIA LA ROCHE: Let's talk about some of the things happening here in the US and the conversations, particularly around inflation, kind of this debate of is this going to be transitory or more rampant. We also had Fed Chair Jay Powell make some comments on the issue. It seems here that he thinks inflation will subside, but he doesn't know exactly when that will happen. Where do you stand on this issue, and what kind of risk does it pose?

NOURIEL ROUBINI: Well, I'm on the side of those who believe that the rise in inflation is not going to be temporary, is going to be more persistent. We have a massive monetary and fiscal stimulus, much bigger and more protracted than we had after the global financial crisis. We have a bunch of supply bottlenecks, we have pent up demand because there is at least $2 trillion are for savings. We have constrains to the labor supply. There's been a sharp increase in commodity prices, in home prices, in food prices. Earnings calls suggests that many firms are seeing rising cost of their inputs. Many leading firms and corporations are increasing wages 10% or more because they cannot find workers, Amazon, Chipotle, McDonald's. There's a bottleneck in the supply of semiconductors. It's leading to factories of new cars being shut down. And that's why I also used car prices spiking.

Inflation expectation are rising, the dollar is weakening, and that implies imported inflation and higher dollar price of commodities. And the Fed wants to overshoot 2% with the risk of the [? ongoing ?] inflation expectation. And our policy are becoming maybe rightly so pro-labor, pro-workers, pro-unions because there's been such a massive increase in income and wealth inequality that the $1.9 trillion of the Biden stimulus is all going rightly so to workers, unions, to unemployed workers, to partially-employed workers, to people who have been left behind. So we're going to end up with high inflation and a wage price spiral over time. And the Fed cannot tighten because there is so much debt in the system, if they're going to try to tighten too soon, the system is going to crash. So that debt trap. They're in a fiscal dominance.

JULIA LA ROCHE: I want to bring up something with you. Our colleague, Rick Newman, he has a great column that just came out moments ago. And I know we're waiting for the official GDP numbers, but it seems, you know, the recovery's happened here in the US, yet as you were kind of talking earlier about labor, we haven't seen employment come close. We still have fewer than 7.6 million fewer workers than we did before, yet we have this recovery here in the US. So how do you kind of think about that if our economy is kind of recovered, but we still don't have folks coming back into the workforce or companies needing to fill these vacancies? What do you make of the consequences there? Can we just kind of operate with fewer folks in the workplace?

NOURIEL ROUBINI: Well, by the end of the year the output gap is going to disappear. Output is going to be back to potential, while the unemployment rate is still above what people refer to as NAIRU. But I think there are going to be a significant number of supply bottlenecks on the labor supply. They're going to put the upward pressure on wages. We still have ongoing unemployment benefits that will continue for a while. We have a lack of childcare. And, you know, even if school were to reopen, this is a fundamental problem unless it is resolved, it's going to limit the ability of women and care providers to rejoin the labor force.

Many people prefer to work from home. They don't to go back to lousy jobs that imply long commutes. And the disruption that occurred implied that the new jobs of the future are not where they used to be, but people cannot [INAUDIBLE] as much move as in the past. So I think there'll be a whole bunch of friction in the labor market that imply that while output is a potential, unemployment is going to remain high. But probably the structural unemployment rate is going to be higher. And rightly so, our fiscal policy are going to protect workers. We're going to give them more transfer payments, more insurance of one sort or another. And therefore, people are going to say, I'm not going to have a lousy hamburger flipping job that doesn't pay anything, it doesn't give me any benefit, it's a gig economy. I'm going to have to transfer payments and other benefits coming from the government, and I'm not going to rejoin the labor force until things change. And that's going to put upward pressure on wages.

You know, the federal minimum wage is already $15. That implies that then all federal contractors have to pay $15. But now, growing number of corporations are saying to get workers and keep them and retain them, we have to pay them $15 per hour at the minimum, probably much more than that. So I think that there'll upward pressure on wages are going to imply these wage price spiral over time is going to lead to higher inflation over time.

JULIA LA ROCHE: Do you think we'll see a 1970s-style inflation event here, or is that just too out there?

NOURIEL ROUBINI: Well, you know, in the 1970s, what happened was not only that we had inflation high double digits, but we had stagflation. Inflation and recession because there were two negative supply shocks, the oil shock of '73 Yom Kippur War, and '79 the Iranian Revolution. That implied that output fell, potential, and the cost went up with the price of oil spiking. This time around, I think there'll be other negative supply shock that are going to hit the economy, reduce potential growth, increase the cost of production. And like in the '70s, with loose monetary and fiscal policy going to lead to stagflation, high inflation and also recession.

If you think about these new supply shocks, what they could be, deglobalization, protectionism, and inward oriented policy restrict trade in goods and services, aging of population in advanced economies and emerging markets. You know, 30 years ago China joined in the global labor supply kept a lid on wages. Now, there is aging in China, in Russia, and Korea, and East Asia. And, of course, in US, Europe, Japan, advanced economies. There'll be decoupling withing US and China on trade, on technology. This [INAUDIBLE] is going to also disrupt global supply chains.

The restriction to migration that kept a lid on wages, migration from South to North from emerging market US and Europe is going to be restricted for political reason. Global climate change is going to also be a negative supply shock. It's going to imply drought. Look what's happening in the West of the US in California. There is not water. One third of our vegetables, 2/3 of our fruits and nuts come from there. And that's going to be a shock to food prices, not just in the Middle East, not just in sub-Saharan Africa. Even in the West of the United States.

We're going to see balkanization of global supply chains and re-shoring up manufacturing from low-cost China to US and Europe. We're going to see global pandemics implying that you want to have policies of national self-reliance for cheap goods and services, pharma product, agriculture, PPE, rare earths, and so on. There'll be this backlash against income and wealth inequality is going to make to fiscal policy, labor, stronger.

And finally, we have cyber attacks. They're disrupting production. One day, the Colonial Pipeline, another day is a beef processor. Every day there is another one that disrupts production. Or if firms have to then try to prevent those things, they have to spend hundreds of billions of dollar to upgrade their IT system. That's another huge cost. So you have nine factors that are all reducing potential output, increasing the cost of production, and the price of goods and services. And with ease in monetary fiscal policy, we're going to end up with stagflation like the '70s over time.

JULIA LA ROCHE: Well, certainly some profound social and political implications as you were highlighting. Nouriel Roubini, professor of economics at NYU's Stern School of Business, and chairman of Roubini Macro Associates. I thank you so much for joining me today.