REVISITING THE WHITE SWANS OF 2020 / PROJECT SYNDICATE

Revisiting the White Swans of 2020

At the start of the year, when COVID-19 was barely on anyone's radar outside of China, the global economy was entering a fraught phase, facing a range of potentially devastating tail risks. And though the pandemic has since turned the world on its head, all of these threats remain – and some have become more salient.

Nouriel Roubini




NEW YORK – In February, I warned that any number of foreseeable crises – “white swans” – could trigger a massive global disturbance this year. I noted that:

“… 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.”

Since February, the COVID-19 outbreak in China did indeed explode into a pandemic, vindicating those of us who warned early on that the coronavirus would have severe consequences for the global economy. Owing to massive stimulus policies, the Greater Recession of 2020 has not become a Greater Depression.

But the global economy remains fragile, and even if a V-shaped recovery from highly depressed output and demand were to occur, it might last for only a quarter or two, given the low level of economic activity.

Alternatively, with so much uncertainty, risk aversion and deleveraging on the part of corporations, households, and even entire countries could result in a more anemic U-shaped recovery over time.

But if the recent surge of COVID-19 cases in the United States and other countries is not controlled, and if a second wave occurs this fall and winter before a safe and effective vaccine is discovered, the economy would likely experience a W-shaped double-dip recession.

And with such deep fragilities in the global economy, one cannot rule out an L-shaped Greater Depression by the middle of the decade.

Moreover, as I predicted in February, the rivalry between the US and four revisionist powers – China, Russia, Iran, and North Korea – has accelerated in the run-up to November’s US presidential election.

There is growing concern that these countries are using cyber warfare to interfere with the election and deepen America’s partisan divisions. A close outcome will almost certainly lead to accusations (by either side) of “election-rigging,” and potentially to civil disorder.

The COVID-19 crisis has also severely exacerbated the Sino-American cold war regarding trade, technology, data, investment, and currency matters. Geopolitical tensions are escalating dangerously in Hong Kong, Taiwan, and the East and South China Seas.

Even if neither China nor the US wants a military confrontation, increased brinkmanship could lead to a military accident that spins out of control. My warning in February that the Sino-American cold war could turn hot has become more salient since then.

In the Middle East, I expected that Iran would escalate tensions with the US and its allies – especially Israel and Saudi Arabia. But, given Trump’s increasingly evident weakness in the polls, the Iranians have evidently opted for a policy of relative restraint, in the hope that a victory for Joe Biden will lead the US to rejoin the 2015 nuclear deal and loosen US sanctions.

But, sensing that its strategic window is closing, Israel has reportedly been launching covert attacks on a range of Iranian military and nuclear targets (presumably with the Trump administration’s tacit support). As a result, talk of Middle East-related “October surprise” is increasing.

I also raised concerns that the Trump administration might use sanctions to seize and freeze China’s, Russia’s, and other rivals’ US Treasury holdings, prompting a sell-off of Treasuries as these countries shift to a geopolitically safer asset like gold.

This fear, together with the risk that large monetized fiscal deficits will stoke inflation, has since caused a spike in gold prices, which have risen by 23% this year, and by more than 50% since late 2018.

The US is indeed weaponizing the greenback, which has recently weakened as US rivals and allies alike seek to diversify away from dollar-denominated assets.

Environmental concerns are also mounting. In East Africa, desertification has created ideal conditions for biblical-scale locust swarms that are destroying crops and livelihoods. Recent research suggests that crop failures due to rising temperatures and desertification will drive hundreds of millions of people from hot tropical zones toward the US, Europe, and other temperate regions in the coming decades.

And other recent studies warn that climate “tipping points” such as the collapse of major ice sheets in Antarctica or Greenland could lead to a sudden catastrophic sea-level rise.

The links between climate change and pandemics are also becoming clearer. As humans increasingly encroach on wildlife habitats, they are coming into more frequent contact with bats and other zoonotic disease vectors.

And there is growing concern that as the Siberian permafrost melts, long-frozen deadly viruses will resurface and quickly spread around the world like COVID-19 did.

Why are financial markets blissfully ignoring these risks? After falling by 30-40% at the beginning of the pandemic, many equity markets have recovered most of their losses, owing to the massive fiscal-policy response and hopes for an imminent COVID-19 vaccine.

The V-shaped recovery in markets indicates that investors are anticipating a V-shaped recovery in the economy.

The problem is that what was true in February remains true today: the economy could still quickly be derailed by another economic, financial, geopolitical, or public-health tail risk, many of which have persisted and, in some cases, grown more acute during the current crisis.

Markets are not very good at pricing political and geopolitical – let alone environmental – tail risks, because their probability is difficult to assess.

But, given the developments of the last few months, we should not be surprised if one or more white swans emerge to shake the global economy again before the year is out.


Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.