INSIDE ECONOMICS

Mark Zandi:           Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts and colleagues, Chris deRitis. Chris is the deputy chief economist. And Ryan Sweet. Sorry about that, Ryan. Ryan is the director of real time economics. Hey Chris, have you noticed that Ryan's been kind of trash talking me on Twitter? Have you-

Ryan Sweet:           I'm trash talking.

Mark Zandi:           Have you seen this?

Cris deRitis:           I'm not on Twitter, so...

Mark Zandi:           Oh, that's right. You're not on Twitter. [crosstalk 00:00:40].

Cris deRitis:           I'm in the dark there.

Ryan Sweet:           We're referencing my tweet last night, where I was getting ready for our stats game?

Mark Zandi:           Yeah, you said you're going to-

Ryan Sweet:           I said your hot streak is got to come to an end.

Mark Zandi:           I call that trash talking.

Ryan Sweet:           Oh, if you think that's trash... just wait.

Mark Zandi:           Oh, is that right?

Ryan Sweet:           Mm-hmm (affirmative).

Mark Zandi:           Well, I wasn't going to engage because I knew I'd just lose badly if-

Ryan Sweet:           Oh, no. We'll keep it-

Mark Zandi:           ...trash talking contest with you. Because I follow the Thumper principle. You know the Thumper principle? You ever heard of this?

Ryan Sweet:           The rabbit?

Mark Zandi:           Yeah. Thumper the rabbit.

Cris deRitis:           Bambi.

Mark Zandi:           From Bambi.

Ryan Sweet:           Right.

Mark Zandi:           You know Bambi? You don't know Bambi?

Ryan Sweet:           Yeah, I know Bambi. I know Bambi.

Mark Zandi:           Okay. Yeah. Thumper said... I believe he said... I think he said this to Bambi. I'm not sure. "If you can't say anything nice, don't say anything at all." That's what he said. Right?

Ryan Sweet:           You really don't follow that.

Mark Zandi:           I know you don't follow that.

Ryan Sweet:           No, you don't.

Mark Zandi:           That's my point.

Ryan Sweet:           Listen to any of our podcasts.

Mark Zandi:           I don't follow that?

Ryan Sweet:           No, absolutely not.

Mark Zandi:           What do you think, Chris?

Ryan Sweet:           You like to trash talk on the podcast.

Cris deRitis:           I think he's got a point.

Mark Zandi:           Yeah, he's got a point. Yeah. Well, we've got another guest. We've got Nouriel. Nouriel Roubini. Nouriel, it's good to have you.

Nouriel Roubini:     It's such a pleasure to be with you on this podcast.

Mark Zandi:           Did you know the Thumper prin... Did you watch Bambi when you were a kid? Did that movie ever-

Nouriel Roubini:     I did when I was a child, but I didn't remember the principle, so-

Mark Zandi:           Okay. That was one of my favorite movies, Bambi. I still fondly remember that. Nouriel is the professor emeritus from New York University. Well, everyone knows Nouriel. Let me just say that. I think Dr. Doom applies, and we'll get to all of the doom and gloom. And should I say Nouriel, or ask Nouriel, are you good with that Dr. Doom kind of a character?

Nouriel Roubini:     Well, usually I say I'm not Dr. Doom. I'm Dr. Realist. Because I'm neither pessimist nor optimist. I try to figure out the world is going to be, but since I see many downside risk, usually, I'm skewed on the downside. That's why. Plus, Dr. Doom sounds better than Dr. Realist. So that's-

Mark Zandi:           Oh yeah. Rolls off the tongue.

Ryan Sweet:           Much better marketing.

Nouriel Roubini:     Exactly.

Mark Zandi:           Rolls off the tongue. So you were a longtime professor at NYU, now you're emeritus. You've founded your own firm, which I believe you recently sold and now you have a new firm.

Nouriel Roubini:     Yeah.

Mark Zandi:           And of course, you've been doing many, many things over the years, obviously very engaged in the discussion around what's going on in the global macro economy. And you have a new book coming out or-

Nouriel Roubini:     Yes. Yes, it'll be published at the end of the year. I finished the draft for now. Between copy editing, type sighting and publication takes about six months. So the final draft is there, but it'll be published towards December, or early January.

Mark Zandi:           Can I ask, is it... I'm sure it's about the global macro economy and where it's headed, but is that right? I mean, what are you writing about?

Nouriel Roubini:     Well, the title of the book is actually Mega Threat. And there was a famous book, I think in the '80s, John Naisbitt, the futurist, titled Megatrends. That book was about how much technology and other things are going to change the world for the better. This book instead is about all the things can go wrong. And I've become a little bit maybe too ambitious because of course I'm an economist, so I talk about all the traditional economic and financial risk, that private and public inflation, financial crisis, you name it. But then I see that around the world, there are other types of risks that have also economic and financial consequences. So there's a chapter, of course, on global climate change, and whether we resolve it or not, using economic analysis. Another one on global climate change. One about AI, robotic and automation, and the threats to jobs and labor income.

                              Another one about the rising income and wealth inequality leading to populism and threats to liberal democracy. Another one about strategic rivalries between US and China, but not just US and China, but US and the west and China and its own allies being Russia, Iran, North Korea. Another chapter about the risk of de-globalization. So of course, there are books on each one of these topics, but the way I think of it is they are all interconnected to other. So it's like a 10 by 10 matrix. Every one of these threats affect the other one is affected back. So I was trying to in a holistic way to think about all the things that can actually doom us, not only on the economic side, but also technologically, pandemic, climate change, politics, geopolitics, and they all interconnected with each other.

Mark Zandi:           Well, it sounds like a great book, but also sounds like you need to have a stiff drink between chapters.

Nouriel Roubini:     Yeah. From Dr. Doom, maybe Dr. Apocalypse.

Mark Zandi:           Yeah. Wow.

Nouriel Roubini:     For that catastrophe.

Mark Zandi:           And that's coming out in... end of this year.

Nouriel Roubini:     At the end of the year. Yeah.

Mark Zandi:           Yeah.

Nouriel Roubini:     But the book is not deterministic. At the end, there are two chapter. They say there is a road that takes us to doom and gloom, and there is another road in which if we do the right things, of course, we can avoid the most of these risks.

Mark Zandi:           Oh, cool.

Nouriel Roubini:     So the outcome depends on the right policies, of course.

Mark Zandi:           Maybe we can talk about that too, because that would be really, really good to do. Well, perfect. We have something in common. That we're both Iranian-Americans.

Nouriel Roubini:     Oh, yeah.

Mark Zandi:           Americans with Iranian heritage.

Nouriel Roubini:     Yeah.

Mark Zandi:           Where were you raised? Were you raised in Iran, or were you raised-

Nouriel Roubini:     No, no, I was born in Istanbul because my father left Iran for business, and he was working in Istanbul. But then when I was a year old, we moved back to Tehran for about a year or so. And then we moved from there to Israel. We're Persian-Iranian-Jewish family. And then by the age of four, we moved to Milano. Then I told my parents, "Hello, we've been in four countries in four years. Can we stop somewhere?" So I grew up in Italy. That's why I still have an Italian accent, because-

Mark Zandi:           Yeah, you do. You do have an Italian accent. Yeah.

Nouriel Roubini:     Yeah, because I grew up there and I came to US for grad school after college. So in high school maybe I don't have the accent, but it came when I finished my undergraduate studies. So I'm an Iranian Jew born in Turkey, raised in Italy, ended up in US, through global nomad.

Mark Zandi:           Very cool. Very cool.

Nouriel Roubini:     But I cannot go back to Iran, because I used to work for US government for a couple of years, I'm Jewish. I used to have a Iranian passport, now a US passport. So if I will go there, maybe I get in, but I don't get out.

Mark Zandi:           Yeah.

Nouriel Roubini:     At least under different regime. So we have to go and visit. Great country, great civilization, but unfortunately with a bad regime in power.

Mark Zandi:           Exactly. Well, it's wonderful to have you. And before we kind of dive into the subject at hand, the economy, obviously it was great timing, right? Because we got a bunch of data this week. One of the data points was GDP that fell 1.4% in the quarter. And I thought I handed the conversation over to Ryan for a minute or two to give us his sense of that report and give us what it means. Ryan-

Ryan Sweet:           Yeah. Well, I think overall the takeaway is it's a little bit misleading, because the drop in GDP was attributed to pretty volatile components of GDP inventories and net exports. So declines in GDP during expansions are... I mean, they're kind of uncommon, but last time, last expansion, there was three times that GDP fell. And in each of those times, it was either attributed to inventories or net exports. So we kind of knew this inventory hangover was coming. We added a boatload of inventories in the fourth quarter last year. We weren't going to be able to duplicate that. So inventory subtracted a lot. And then the consumer, we're just buying a boatload of stuff. Goods. And a lot of those goods, retail sales are imported and that's why imports are exceeding exports by a noticeable margin. So overall, it was a little bit of a surprise, but we always knew there was a risk that GDP could fall in the first quarter.

Mark Zandi:           So, you're arguing that less of an inventory accumulation and the widening out of the trade deficit are kind of one-offs. They're not more fundamental and thus a negative print. Okay.

Ryan Sweet:           Yeah. I mean combined, inventories and net exports subtracted four percentage points from GDP.

Mark Zandi:           Oh. Is that right?

Ryan Sweet:           So the first number I really looked at was real final sales to domestic purchasers. That's the underlying economy, and that was up over 3% annualized in the first quarter, which is an acceleration from what we saw in the second half of last year. I think the economy is slowing, but I don't think it's as bad as the first quarter GDP numbers would otherwise suggest. In fact, I think jobless claims are more telling of the state of the economy than GDP is. And we have jobless claims south of 200,000. So it's really hard to be overly pessimistic about the economy right now.

Mark Zandi:           About the growth rate in the economy.

Ryan Sweet:           Yeah, yeah, exactly.

Mark Zandi:           Yeah. 

Ryan Sweet:           It bounces around.

Mark Zandi:           Well, you did mention government spending fell. I think defense spending in particular fell a lot. That field felt a little bit weird too, didn't it?

Ryan Sweet:           Yeah.

Mark Zandi:           In terms of the size of the-

Ryan Sweet:           Yeah, it was a little bit surprising. We don't have a lot of good source data on government spending. So of all the components of GDP to forecast, that's one of the hardest.

Mark Zandi:           Well the Bernard Yaris, our colleague who follows thorough government carefully pointed out that the deflator for defense spending rose sharply because tied to oil, because the department of defense consumes a lot of oil as you can imagine. And it's a big part of that deflator. So when you see oil prices spike, like we did in Q1 because of the Russian invasion of Ukraine that caused the deflator to jump in that significantly depressed, the real defense outline number that appeared in the GDP, which also feels like a bit of a measurement or one-off fact.

Ryan Sweet:           Yeah. I mean GDP's going to bounce back in a second.

Mark Zandi:           Okay. Well, let me ask you this. What do you think underlying growth is in the economy, GDP right now as of Q1?

Ryan Sweet:           Well, if you think, I mean, if you look at the last several quarter, it's bouncing all over. We had a couple quarters north of 6%, then we had one for oil. We're probably 3.5, 4.

Mark Zandi:           That's year over year growth actually, 3.5%. 

Ryan Sweet:           Oh, is it? Yeah, that's probably more accurate of what the economy's run.

Mark Zandi:           Yeah. Hey Nouriel, I don't know. Do you watch these data? You can see we're pretty nerdy about the data, the weekly data or the monthly data. Do you follow these GDP numbers carefully as well? Or do you have a view on what happened in the first quarter?

Nouriel Roubini:     Yeah, I follow them. Maybe not as close as you folks do, but I agree with your overall assessment of some of the components of domestic demand; real private consumption was quite fine, [inaudible 00:12:23] spending was fine, residential investment was fine. So the negative print was pointed out inventories and net exports. Net exports with a strong dollar may keep on worsening in some sense. So that one might be a further drive to growth maybe over time. But the first quarter even consensus was expected to be weak, about 1% in part because people I think were thinking that the delayed effect of Omicron would show up more in the first quarter data than in the fourth quarter. And that might have been part of it.

                              One caveat is that we first had the COVID and Omicron. Now we have the Russia invasion of Ukraine and the impact of it. It's only very, very partially into the Q1 number. So we'll have to see how much of that a negative impact on the second quarter of economic growth as well. And then they're also, the shutdowns are coming out of China because of their own zero COVID tolerance policy that might also negative effect on the supply side global supply chains. So there may be other types of speculation reflection even in the short run that may push inflation to remain high and weaken economic growth.

Mark Zandi:           Yeah. Yeah. Okay. Hey Chris, before we move on there, we had a cornucopia of data and I'm sure the fodder for our statistics game, which we'll get to a few minutes here. Of all of the other Statistics, GDP obviously was kind of the more key statistic. Of all the other statistics that came out during the week, is there one that you would call out as important and want to highlight?

Ryan Sweet:           So you want to go to the statistics game?

Mark Zandi:           No, well, I wasn't quite there yet, but we could. We could, but I was wondering if there's another one of those, the statistics this week that you think would, it's particularly important for people to focus on?

Ryan Sweet:           Okay. I selected for the game what I think is the most important statistics of the week, but there are certainly, if you want to talk housing, certainly continue to get very strong house price growth numbers so far. The residential investment component of your GDP was still quite strong. We could go there if you want, but I don't know how that's going to look.

Mark Zandi:           Okay. You're ain't going to play the game. Okay. Let's play the game. Let's play the game.

Cris deRitis:           There's only one correct answer to the most important number of the week. And it's not GDP. 

Mark Zandi:           It's not GDP. 

Cris deRitis:           It's not even close.

Ryan Sweet:           I'll give you [inaudible 00:14:55].

Mark Zandi:           Okay, Nouriel. Let me get... this isn't part of the game, but let me get into the mind of Ryan. The Employment Cost Index.

Ryan Sweet:           Yep.

Mark Zandi:           Ah, there you go. 

Ryan Sweet:           All right.

Mark Zandi:           Oh, yeah.

Ryan Sweet:           This is why a trash talk people. Try to throw you off your game.

Mark Zandi:           See Nouriel, you see how I got him pegged? I know exactly where he's going.

Nouriel Roubini:     Yeah. Yeah, you read his mind. That's impressive.

Mark Zandi:           Yeah, I read his mind. Exactly.

Nouriel Roubini:     You know each other really close.

Mark Zandi:           Okay. So Ryan, tell us about the ECI, the Employment Cost Index.

Ryan Sweet:           Well, are we going to play the game? Because I got my change of the number.

Mark Zandi:           No, no, no, no, no, no, because why is that so important? Go ahead.

Ryan Sweet:           For the Fed because they're laser focused on wages, because they're concerned about a wage price spiral setting in which would keep inflation elevated, raise the risk of a stagflation scenario, which is the worst case scenario for the Fed attention. It's a nightmare scenario for the Fed. So they're paying very, very close attention to wage group. I mean, Powell, himself even said, Fed chair, Powell recently that the labor market's very tight, but unhealthy. And we're seeing very, very strong wage growth. And that's going to be a concern that it's supply chain issues that's keeping inflation elevated now. Maybe we transition into a period where wages are keeping inflation of it.

Mark Zandi:           Right. Hey, Nouriel. How worried, and then this... I know I'm kind of getting ahead of myself here, but since we're on the ECI, the Employment Cost Index, how worried are you that we're getting into kind of a wage price spiral where wages reflect price inflation and then the price inflation reflect wages. Obviously, that's a pretty pernicious dark place. You don't want to be there. How big a deal is that?

Nouriel Roubini:     Well, I think it's a meaningful risk because depending on the measures of course, that you use to measure wage growth, it's in the 5 to 6% range. That is significantly higher than what it should be. If you want to achieve inflation rate of 2% with inflation at 2 and potential productivity got at 1.5, you have to have wage growth by 3.5 maximum in order to achieve 2% inflation. If you are in the 5-6 range, that's not consistent with that. And what concern is that there is a very tight labor market and one is unemployment rate, of course at 3.6%. But the other one is a measure based, actually being developed by folks at Goldman Sachs of the gap between labor demand and labor supply. Labor demand, the way they measure it is the sum of employment and job vacancies. And labor supply is the supply of labor force.

                              Now, that gap between the two is estimated be about 5.3 million jobs. The highest we have had in decades. And if it remains this high, wage growth is going to be north of 5% closer to 6. And therefore you're not going to be able to achieve an inflation rate of 2%, unless there is a massive of financial condition that would require a recession. That's the point. The dilemma that the Fed is facing right now is that with stagflationary shocks that increase inflation and reduce economic growth, they trade-off required to achieve a soft landing becomes harder. Because either you care about inflation and you tighten enough well above neutral to prevent inflation expectation from becoming the anchor. But then you risk a recession. Or if at some point then you worry about the impact on growth, given it will mandate you don't tighten enough, you may have the anchor of the inflation expectation and then you adapt at that equilibrium.

                              Now that gap in the labor market is huge. Those who believe in the soft landing story, tell you the story that some of the gap is going to be reduced because labor force participation rate is going to rise significantly. So labor supply is going to go up. And if you tighten monetary policy, you reduce labor demand. But the margin where you reduce it is job openings as opposed to employment. And if you can narrow that gap from 5.3 to about 2 million plus, then wage growth can go towards 4% or less. And then you have the soft landing.

                              It's very knife edge because it requires, in the best scenario that growth is below potential around one-ish for over a year for that equilibrium to be achieved. And even in that case, it's not so obvious you're going to achieve the soft landing. Because if inflation is sticky, you may have to push Fed funds rate more than 3.5 towards 4% to push inflation down enough, and that leads to a recession. So whether we get the soft landing or a landing is very knife edge. And of course, there is a spectrum of obviously between those who believe that the Fed is going to be able to make it, and those who believe that no, we're going to get the recession.

Mark Zandi:           Yeah. And I'm going to ask you point blank right now. Where are you in that spectrum?

Nouriel Roubini:     Well, I'm more on the [inaudible 00:20:13] side, I think. I see a bunch of, first of all of stagflationary pressure continuing. First was COVID, now Russia/Ukraine, now is China. And my piece speaks about medium-term forces that are stagflationary. That trade-off becomes harder where you have more inflation, you have lower growth than otherwise. And it's not just a problem for the Fed that we have the same problems of how inflation is growing throughout in Europe, in other advanced economies. The only exception being Japan, where inflation is still quite low. And of course there is inflation also many emerging markets.

                              So we're going to be also in a period, not just a Fed tightening, but it's going to be tightening by the Fed, by DCB, by the Bank of Canada, by the Bank of England, the Riggs Bank, pretty much any advanced economy and many emerging markets. So that global liquidity tightening is going to have a global impact and spill-over effects.

                              And I worry that the process of wage price determination is becoming sticky enough that the pattern the Fed was having for what core PC will be this year, next year into 2024 is too optimistic. For them, that top plot suggesting that we reach 1.8 at the end of this year and maybe 2.5 by the end of next year, is already out of the window with 50 basic points increases in May, June, maybe July. By year end, you're already at neutral. And that may not be enough. And if you have to go by next year towards 3.5, 4, then I think the risk of a hard landing becomes great. So I worry about it.

Mark Zandi:           People are couching their views on recession risk in terms of probability. For example, I would say if push comes to shove and someone said, what is the probability that the economy enters into recession over the next year? I'd say probably about a third. And if they said, well, what's the probability of economy entering recession over the next two years? I'd say, probably even odds. Do you think about it in those terms? Do you have some probabilities?

Nouriel Roubini:     Yeah. Yeah. I would agree probably over the next 12 months, the Fed tightens but is not enough to push into a recession. That's why the probability might be only a third, but if I were to be right and I might be wrong that the wage price process is too sticky to be reduced towards 2% with only a moderate Fed tightening, and then the Fed were to go towards 3.5 to 4% by the end of next year, then into 2024, the risk of a recession becomes at least even odds. Yeah.

Mark Zandi:           Yeah. Okay. Hey Chris, remind me, what are your odds for recession over the next year and over the next two years?

Cris deRitis:           Over the next year, not too far from you. I would say probably 40%. Over the next two years, I'd probably go with 60%.

Mark Zandi:           60, a little higher. So you're out doing Dr. Gloom. You're even gloomier than Dr. Gloom. I'm just pointing that out. And Ryan, what is your odds?

Ryan Sweet:           I'm being realistic. I said over the next two years, 70%.

Mark Zandi:           Oh, so we're going in.

Ryan Sweet:           Our landing is... the odd of soft landing is not going to be, they're not going to be able to pull off.

Mark Zandi:           Okay.

Nouriel Roubini:     I didn't want to be too doom-ish, but I see you guys are [crosstalk 00:23:36].

Mark Zandi:           Yeah, they are. Did you, Nouuriel? Yeah. Hey, before we play the statistics game, I want to go back to something you said about the labor market, because you pointed out that labor supply demand, gap analysis. And one thing that I can't get my mind around is if you look at that, you say, "Oh, the labor market is at full employment, tight as a drum, nowhere to go here," but are still creating well over half a million jobs per month, which we've been doing for more than a year. We did it in March. We'll see what happens for the month of April next Friday. How can the economy be creating so many jobs if the economy is at full employment? I can't square that circle.

Nouriel Roubini:     We may be close to full employment, but we may not get full employment. But I think that what, as I said, those who worry about the tightness of the labor market are concern is that the number of job openings is huge still, on top of employ method is growing. But even that increase in employment is only marginally putting a dent on those job openings. And labor supplies improving. Labor force participation rate right now as we know drop like a stone is recovering, but recovering only very slowly. And there's this debate about whether this great resignation is more of a temporary phenomenon or more a permanent phenomenon. And I'm in between. I don't think it's totally permanent. There is some increase, but maybe not enough to increase labor supply. I think that tightness in the labor market is going to remain with us and that's going to keep wage higher than necessary to achieve the 2% inflation rate

Mark Zandi:           So we may not quite be there at full employment, but we're pretty darn close. No matter how you cut it, that's for sure.

Nouriel Roubini:     Yeah.

Mark Zandi:           Yeah. For sure. Okay. Let's play the game. Just to remind the listener the game, the statistics game is we each put forward to statistic. The rest of the group tries to figure that out through questioning and clues and deductive reasoning. The best question is one that is not so easy that Ryan gets it. We don't want that to happen. And not too hard that well no one's-

Ryan Sweet:           That Mark can't get it.

Mark Zandi:           That I can't. I wasn't going to say that. And a bonus, if it's apropo to the topic at hand, and of course we're talking about the economy and the outlook, so that kind of wide open here and a lot of statistics this past week. So let me, and Nouriel, I'm not going to go to you first because, and you don't have to play the game, Nouriel. Only if you want to. Only if you want to.

Nouriel Roubini:     Perfect.

Mark Zandi:           Let's go to Chris first. Chris, what's your statistic of the week?

Cris deRitis:           Well, my statistic was 4.5%.

Mark Zandi:           4.5%.

Cris deRitis:           Is that the ECI year over year?

Mark Zandi:           That is the ECI. Already covered that.

Cris deRitis:           Yeah, it is ECI. But I'll give you a backup if you'd like.

Mark Zandi:           But that would've been too easy. Wouldn't it have, Ryan? That would've a little-

Ryan Sweet:           I gave it the year over year.

Mark Zandi:           Okay.

Ryan Sweet:           You probably were thinking about the quarter percent change.

Mark Zandi:           1.4 is the quarter-

Cris deRitis:           But it is the most important statistic of the week.

Mark Zandi:           There you go. Okay.

Ryan Sweet:           For all the reasons we gave, but I'll give you a backup and this is a trio. 0.6% minus 0.9% and minus 0.3%. 

Mark Zandi:           Does it come from GDP?

Cris deRitis:           Yeah. All right.

Mark Zandi:           Okay. DeRitis, say the three statistics again.

Cris deRitis:           0.6%, minus 0.9% and minus 0.3.

Mark Zandi:           I think I know.

Ryan Sweet:           Wage contributions.

Cris deRitis:           No.

Mark Zandi:           I think, I think-

Cris deRitis:           Okay. Go for it.

Mark Zandi:           Well, hold it. Was it from the GDP report or from the monthly consumption?

Cris deRitis:           Oh, it's the monthly consumption.

Mark Zandi:           Oh, okay. All right. So the 0.6 is the real increase in consumer services spending. The minus 0.9 is probably durable goods spending. 

Cris deRitis:           Correct. 

Mark Zandi:           And the minus 0.3 is non-durable goods.

Cris deRitis:           You got it. 

Mark Zandi:           Oh.

Cris deRitis:           You got it. 

Ryan Sweet:           Very nice.

Mark Zandi:           Nouriel. What do you think, Nouriel? You go to be-

Nouriel Roubini:     Not the wonk.

Mark Zandi:           A little weird, I'd say.

Nouriel Roubini:     Yeah.

Mark Zandi:           Hey, where's the cowbell, Mr. Ryan Sweet. Nouriel, I forgot to tell you if you show above average game acuity, you get a cowbell. So that was a pretty weak cowbell, I have to say.

Nouriel Roubini:     Okay. Can I provide this statistic myself?

Mark Zandi:           Oh, hold on one second though. Before you do that, because you're next. But I want to Chris to explain why. Why did you pick those statistic? What's going on?

Cris deRitis:           Well, we mentioned consumption actually is supportive of GDP. So consumers are still spending despite their confidence, but they're the nature of their spending is changing. We are shifting back towards more services, less durables. Well, certainly as a consequence of the pandemic, but that also may have some implications for inflation going forward, given that we've seen most of the or much of the inflation in the durable sector, as we've talked about previously. So less durables, more services. Unless we get the type of wages that Nouriel is talking about, that should help to calm some of the inflationary pressure.

Mark Zandi:           Hey, here's a factoid for you which I found quite interesting. If you look at overall consumer spending, real consumer spending since the pandemic hit. So go back to March of 2020 through March of 2022, the last data. Average annual growth is 2.4%. If you go in two years prior to the pandemic, real consumer spending growth was 2.3. So we're right on trend. Consumer spending is exactly where you would've expected it to be if there had been no pandemic. I find that, even though obviously is a big shift as you pointed out, and it's starting to ship back. But consumers have been doing what they've always been doing, at least. All right, Nouriel, you're up. You're ready to go. I can tell. You see that? He wanted to go before I even gave the green light. He wanted to go. All right. Now, I'm nervous.

Nouriel Roubini:     Okay. My statistics is 3.6%, but then there's the answer that is unemployment rate is not the one that I wanted you to get. There's a different 3.6%.

Cris deRitis:           Another 3.6.

Nouriel Roubini:     Something that goes beyond the US, to give you a hint.

Mark Zandi:           Oh, okay.

Ryan Sweet:           [crosstalk 00:30:36]

Mark Zandi:           What is it? What did you say, Ryan?

Ryan Sweet:           No, I like going international now.

Mark Zandi:           Oh yeah.

Cris deRitis:           It came out this week?

Nouriel Roubini:     About a week ago or so week ago also, I would say. Was slightly more than a week I would say, but is recent.

Ryan Sweet:           It's not Eurozone CPI core, [inaudible 00:30:59].

Mark Zandi:           No, it can't be. It's higher than that, the Eurozone now.

Nouriel Roubini:     It's something global. It's not something Euro related. I'm a global market economist. I know more about global variables than domestic.

Mark Zandi:           Sorry about I'm coughing. I apologize for that. It's a growth rate?

Nouriel Roubini:     It is.

Mark Zandi:           It is. Is it real economic growth?

Nouriel Roubini:     Yes.

Mark Zandi:           Is it real GDP growth?

Nouriel Roubini:     Yes.

Mark Zandi:           Is it-

Ryan Sweet:           Is it IMF, the forecast?

Mark Zandi:           Yeah. That's what I was going to ask.

Nouriel Roubini:     Yeah, it's the IMF.

Ryan Sweet:           Yeah.

Nouriel Roubini:     They advised-

Mark Zandi:           That is unfair to the max. Because I took them down the path and then you came in and cherry picked the answer.

Ryan Sweet:           Thanks.

Mark Zandi:           Don't you think [crosstalk 00:31:49].

Ryan Sweet:           It was a team effort. Let's say team effort here.

Nouriel Roubini:     It's free riding, [inaudible 00:31:54] getting to. Yeah, the IMF. That was their forecast for this year growth from 4.4 to 3.6 globally. And also, next year's growth is going to be only 3.6. So by global standards mediocre, let's put this way. And inflation rates has been a forecast revised upwards.

Mark Zandi:           So real global GDP growth and calendar year 2022 according to IMF is going to be 3.6 and that's sort of-

Nouriel Roubini:     And also in calendar year 2023 as well.

Mark Zandi:           Oh, it's-

Nouriel Roubini:     For both years.

Mark Zandi:           Both years. Oh, I didn't. Okay. 

Nouriel Roubini:     Yeah, both years. 

Mark Zandi:           Oh, interesting. And what potential GDP growth? Is it about that?

Nouriel Roubini:     I think that globally is higher than that. Is around 4.6 or so.

Mark Zandi:           Okay.

Nouriel Roubini:     Because American markets are going much faster potentially than advanced economies.

Mark Zandi:           I guess it depends on if there's market dollar based or PPP based. 

Nouriel Roubini:     Yeah.

Mark Zandi:           Yeah, okay. So that's below you. So the IMF is saying below potential growth probably.

Nouriel Roubini:     I have to check exactly what's their definition of potential, but let's say it's close to below. Certainly a significant, I would say slow down compared to their January forecast. January forecast was 4.4 for this year, but because of what happened in Russia, Ukraine among others, they're revising it downward. They're revising up or their forecast for of course, inflation, but so does everybody else. Yeah.

Mark Zandi:           Does that feel, how does that strike you? Is that kind of consistent with your view of growth this year or?

Nouriel Roubini:     I think it's a reasonable estimate for this year. The revisions, of course. I mean, for Russia and Ukraine, they expect a total free fall, significant drop in growth in Europe because proximity to Russia. Ukraine because of greater reliance on energy and natural gas, because of the trade and financial linkages and even the impact on consumer and business sentiment. Some spillovers also to Asia, slow down of growth in Asia in part because slowdown of Europe implies less export from Asia to Europe, in part because tightening of financial condition by the Fed effects Asia, EM in part because what's a happening in China, slowing down growth in China affects then growth throughout Asia.

                              And the rise in commodity prices is quite negative because most of emerging Asia tends to be a commodity importer as opposed to exporter. A commodity exporter tend to be say middle Eastern oil exporting country. So it's a weakening of the global economic outlook. In a stagflationary interaction, revision upward in inflation expectations and revision downwards in growth forecast expectations. So not the stagflation, but stagflation in terms of its interaction.

Mark Zandi:           Got it. Got it. And I do want to come. Nouriel, you're definitely coming back after the game and talk a lot more about recession/stagflation. But Ryan, what's your statistic of the week?

Ryan Sweet:           5.2%.

Mark Zandi:           5.2%. It's a statistic that came out this week.

Ryan Sweet:           It did. We've already talked a little bit about it. So I have a backup, if you wanted.

Mark Zandi:           Is it one of the statistics we've already talked about? So you-

Ryan Sweet:           One of the reports. Yep.

Mark Zandi:           One of the reports. It's not the east back to the ECI, is it?

Ryan Sweet:           It's the ECI.

Mark Zandi:           Core PC?

Ryan Sweet:           Nope. It's in the ECI. It doesn't get as much attention as it should, but what's the 5.2%?

Mark Zandi:           Is that year over year growth for private sector workers excluding-

Ryan Sweet:           Oh my God.

Mark Zandi:           ... Bonus pay.

Ryan Sweet:           Are you bugging my emails? How did you get that? I thought for sure you would not get that one.

Mark Zandi:           Oh my Gosh. I got it?

Ryan Sweet:           Yeah, that was it. 

Mark Zandi:           Okay. Where's that cowbell? Where's the cowbell?

Ryan Sweet:           Oh, I'm extremely impressed.

Mark Zandi:           Nouriel, I am staying-

Nouriel Roubini:     Super won. 

Mark Zandi:           I'm deep in his mind though. I got him nailed. I got him nailed. He thinks he's so smart. Oh my gosh.

Nouriel Roubini:     Either you're a mind reader or you know every statistic under the sun. That's insane.

Mark Zandi:           Is so funny. Oh, that's-

Ryan Sweet:           Because that's my go-to number.

Mark Zandi:           See how I did that, Ryan. You need to take a lesson there. You see no hesitation. Just methodical.

Ryan Sweet:           Yeah. You're laser focused. That was impressive.

Mark Zandi:           Okay. Why is that so important? Why do you pick that one?

Ryan Sweet:           I mean, that's incentive pay which is captured in the overall ECI can be very volatile. So when you strip it out, this is kind of like wages' version of the core CPI. You take out the volatile components and that's what we have with a nominal wage growth for private workers north of 5% year over year. It's very strong. We only have data going back to 2006, but it's the strongest that we've had on record, since.

Mark Zandi:           We talked about this in the past, but just to get it out there. The employment cost index is a quarterly series from bureau of labor statistics, and the thought to be the "best measure of wages and compensation," because it controls for mix, occupation industry mix. And other measures of wages more or less don't. The average hourly earnings, which comes out with the monthly employment report, that has no control for a mix. And right now that's all juice. I think that's almost 7% year over year or something like that. But the 5% ish, which we're getting from the ECI feels like that's kind of underlying wage growth.

Ryan Sweet:           Correct. Yeah.

Mark Zandi:           Would you say right?

Ryan Sweet:           Yeah. I don't even pay attention. Average hour.

Mark Zandi:           Yeah. Which is obviously below inflation. So real wages are declining. 

Ryan Sweet:           Correct. 

Mark Zandi:           All right. Very good. I took great pleasure on that one. I've got a lot of statistics. I got a lot of good ones. I'm a little nervous because I might give you too easy one. What if I give you one? If it's too easy, I'll give you a hard one. Is that okay?

Ryan Sweet:           That's fine.

Mark Zandi:           Okay. And the easy one is 6.2%. Is a statistic that came out this week.

Ryan Sweet:           Is it housing related?

Mark Zandi:           It is not housing related. No, indeed. It's not. Oh, I thought this was going to be easy. Okay. Goes back to the consumer related to [crosstalk 00:38:31]? What is it?

Ryan Sweet:           Inflation related?

Mark Zandi:           Not inflation related. No. It came out today.

Ryan Sweet:           Oh, is it the savings rate?

Mark Zandi:           Savings rate. Personal savings rate, 6.2.

Ryan Sweet:           That's a good one.

Mark Zandi:           By the way, I think if I look back correctly, that's the lowest saving rate since 2013. That's the lowest rates since 2013. That means consumers are now starting to spend down a bit of the excess savings that they accumulated during the pandemic. Still, quite prodigious amount of excess saving. By our calculation, 2.6 trillion still out there in excess saving. But it is now starting to roll over a little bit.

                              Hey, Nouriel, let me ask you about that. How do you think about that context of the doom and gloom? During the pandemic, consumers sheltered in place. Didn't spend saved. And of course there was a lot of government support. A lot of that got saved or fair share got saved. So you got all this cash out there sitting in people's bank accounts. Doesn't that provide a nice cushion here to consumer and spending and the economy more broadly allow it to kind of navigate through without going into recession. How do you have a view on that?

Nouriel Roubini:     Well, you could make that argument, but you could make the opposite argument by saying that the biggest problem we're facing right now is the rising inflation. And that rising inflation is a combination of, on one side, there's supply bottleneck. And there's a variety of them from COVID to Russia/Ukraine, to what's happening now in China. But then on the demand side, of course we had extremely loose monitoring and fiscal policy. And the fiscal part was a massive transfer to the household sector that led to build up of the excess savings and pent up demand. And now that we're reopening, that leads to a significant robustness in consumption and the consumption numbers have been quite strong. 

                              If you worry about inflation and overheating of the economy, keeping inflation high, having those excess savings that can be run down, if it's another 2.6 trillion. And actually, if the great resignation continues, people who are out of the labor market who have those savings will have to spend them to live, that puts a further pressure on demand. So you have supply bottleneck, you have strong demand because of loose market and fiscal policy. And there's then our hard land becomes greater. I see as a risk factor rather than a positive one.

Mark Zandi:           Got it. Chris, is that? How do you think about it? Do you have a different perspective? 

Cris deRitis:           Yeah, I actually think of it more as a buffer, as a potential positive. In the face of higher inflation, the consumers have certainly some savings to draw on to, pay these higher prices, at least for a while. Now demographically it differs, right. I think that's a very important point to make. Certainly, these savings are really concentrated at the higher end. It might provide that buffer, but only for a select number of households. You still have fragility at the bottom end where people are actually running out of savings at this point in the face of rents and inflation, or prices on gas or food.

Mark Zandi:           Yeah. Nouriel, we calculate this concept of excess saving across different demographic groups based on data from the Fed's financial accounts and distributional financial accounts, survey consumer finance. And it's a bit lags, but we don't have Q1. But looking at this data through Q4 across income group, what's really interesting, I found interesting is that the decline in the excess saving already has begun, but guess which groups are using that excess saving most quickly? I would've thought the low income groups. Right? You would've thought that.

Ryan Sweet:           Yeah. 

Mark Zandi:           You know who it is? It's the high middle, like the 60 to 90. And that's because they didn't get government support or a lot of government support, and they weren't able to shelter in place like the high income households were. They had much less coming in and they are now spending down more of that excess saving a lot more quickly. I found that pretty, pretty interesting.

Ryan Sweet:           Yeah, it is.

Mark Zandi:           Okay. I want to give you one more statistic. It's a hard statistic. Maybe you'll get it fast, but just to because I think it's a really important one. A really cool one that came out this week. 82 basis points. 82 basis points. And I'll give you a hint. Chris should get this statistic. And Nouriel, we have a running joke here. Chris only thinks housing statistics.

Cris deRitis:           Is it mortgage rate?

Mark Zandi:           What is it?

Cris deRitis:           The rise in mortgage rates since the beginning of the year.

Mark Zandi:           No, no. That's been locked. It was 3% at the beginning. That's 5 and-

Cris deRitis:           Oh yeah. So home ownership, vacancy related?

Mark Zandi:           Yes, indeed. Yes, it is. Yep. Home ownership. Vacancy rate.

Ryan Sweet:           Was the home ownership rated? No, that didn't go up that much.

Mark Zandi:           No, that is the home ownership vacancy rate.

Ryan Sweet:           Oh. Oh vacancy. Oh, correct. Yeah.

Mark Zandi:           Yeah. Right. If you look at the vacancy rate across homes, occupied housing stock. Not for rent, occupied housing stock. 82 basis points. That's a record low going back to world war II. Goes to the housing shortage, very severe housing shortage and the house price screens we've been getting up until now. But anyway, okay. So let's...

                              Nouriel, before we kind of dive in deeper here, can we define terms? I think we all know what a recession is, but how do you... because you in your Guardian piece, which by the way, I recommend everyone, it was a great piece this last week in the Guardian. You talk about stagflation and you mentioned that concept a number of times in the conversation so far. How do you define stagflation? How do you think about it?

Nouriel Roubini:     Well, there maybe two ways of thinking about it. True stagflation will be a situation where you have inflation rates that are significantly higher than the target of a central bank together with an economic recession. In the 1970s, given to large shock, we had double-digit inflation and we had two severe recessions in '74, '75 and the doubled recession '80/'82. So that would be a true stagflation.

                              The other way to think about stagflation will be stagflationary shocks that everything else equal increase inflation and reduce economic growth, but they don't lead necessarily to a recession. So short of a recession, you have a significant slowdown of economic growth. And I would say that the Russia/Ukraine is such a stagflationary shock. That's what the led the IMF to revise upward their forecast for inflation in advanced economies emerging market this year and significantly revise downward their growth forecast as well. So that's something goes in a stagflationary interaction as opposed to true stagflation.

Mark Zandi:           So in the United States right now, 3.6% unemployment, 8% CPI inflation, you wouldn't consider that a stagflation or would you?

Nouriel Roubini:     No, I would not consider that the stagflation. I don't know, the editorial board of the Wall Street Journal, [inaudible 00:45:59]. They said that Q1 data was stagflation because you had recession and inflation at 8%, but we know that it was in partly a technical reason why we have had the negative growth print and you need at least two quarters of negative economic growth to have a definition of a recession.

                              But I would say suppose that we are in a scenario in which inflation remains stubbornly above the Fed target, the Fed tightens in order to push it lower. And that causes a recession. And the data suggested in the United States any increase in the three month moving average of unemployment rate of at least 0.5% leads almost inevitably historically to a recession. Then you could be in a situation, you are speaking before about the probability recession in the next two years, whether it's 50 or 60 or 70. If you end up in that recession, most likely you end up in that recession together with inflation being above 2%. Whether it's going to be 3 or 4, I don't know.

                              But I would say, if you have a recession, you have of inflation above target, that's stagflation. It's not as bad '70s when inflation was double-digit and then you had the really severe unemployment, but technically speaking, that outcome will be the true stagflation. We're going to end up in a recession and you have not achieved your inflation target. So that's the risk. Once we're thinking about the recession, most likely we have to think about the stagflation or recession in the next couple of years, unless the Fed pushes the inflation down to 2%, then causes the recession. By doing that, you achieve inflation at 2 and you have a recession. But I think it's more likely that if inflation is persistent and you're trying to achieve 2, it stays above 2 and then you have a recession and that's a stagflation.

Mark Zandi:           Oh, okay. So just to paraphrase, if we have very slow growth and/or a recession, but inflation remains persistently high, above that 2% target in a meaningful way, like 3, 4% is or [crosstalk 00:48:13]. But persistent, not... it may come down. It may elevated, but come down as the recession plays out. But you're saying it remains persistent even with the slower growth and that's stagflation in your mind?

Nouriel Roubini:     Well, if pure recession and inflation say a fall, I would call it the stagflation. If growth goes to 1%, technically is not a recession, it's a growth recession. A growth below potential again, will be a stagflationary interaction. Technically speaking, this question of semantics of how you want to define the stagflation of course, but will be an outcome that is stagflationary, I would say. Yeah.

Mark Zandi:           Yeah. Okay. That makes sense. I mean, Kind of the way I've thought about it is that for there actually to be stagflation, that has to be a period of persistently high unemployment and persistently high inflation. High inflation, anything above close above 2, certainly closer to the 3 or 4. And unemployment that's 4 to 5 to 6, not below 4, something like that. It'd have to be something like-

Nouriel Roubini:     Well, it's to be a rising unemployment rate that is associated with at least two consecutive quarters of negative economic growth. And we know that even a 0.5% unemployment rate will lead to that recession. Once you start going up with unemployment rate, it goes much higher. So yes, even if it's a mild recession and unemployment rate goes from 3.6 towards 5-ish or 6-ish, and you have inflation around 3, 4, that's not a typical recession because during the financial crisis, we had severe recession and we had low flation. And for a while we had deflation, meaning inflation was below 2% and it for a few months was actually negative. This will be instead of stagflationary recession because inflation for the first time will be in a long time, well above target while you do have a recession.

Mark Zandi:           Yeah. Okay.

Nouriel Roubini:     And normally, if you have overrating of the economy and you have inflation growth high, recession might be associated with a tight monetary policy that pushes the common recession and pushes inflation below target. But that's when you have a negative aggregate demand shock through tight monetary policy. But if you have a negative supply shock that reduces growth and increases inflation, and then you have tight monetary policy, you end up with a recession and inflation still above target. That is a stagflationary recession. So to get stagflation, need that persistent negative aggregate supply shocks. That is the worry that I have.

Mark Zandi:           Yeah. And that's a great point and resonates with me. You're saying, look, we got nailed by the pandemic. That's a massive supply shock to the global economy. We got nailed by the Russian invasion of Ukraine. That's a massive supply shock to the economy. No surprise. Then we're in a situation where we're kind of grappling with the potential for a stagflationary environment because of the supply shocks. And then you go on to say that look, there's a lot of other things out there that feel like they could be significant supply shocks.

Nouriel Roubini:     Yeah. Yeah, those are more medium term forces. They're not in the short run. But I have a view that we are at the end of this period of 30 years of great moderation where inflation was low and growth was robust, I think we're going to move gradually in the direction of a period of what I would call great inflationary instability. And again, I'm not talking about hyperinflation or not even about double digit inflation, but if you had inflation going from two to 5% advanced economies that has massive consequences, not only for the economy, but also for financial market like bond yields, credit spreads, the stock market, you name it. And in my latest piece I've written, it's not just on the Guardian. It's the piece on project syndicated. It's syndicated around the world.

                              I speak about 11 potential sources of negative aggregate supply shocks over the medium term. I don't have time to go over all of them, but briefly, no deglobalization and protectionism, reassuring of manufacturing and disruptions in global supply chains, aging in populations in both in advanced economies and emerging markets, restrictions to migration from south to north, increase decoupling between US and China, global climate change, pandemics that may come back, cyber warfare, income and wealth inequality leads down now to fiscal policy to help the workers, the wager earners and those left behind. Geopolitical conflicts, today is Russia/Ukraine tomorrow could be US/Israel, Iran, could be North Korea could be eventually a conflict on Taiwan and the role of semiconductors there.

                              And finally, we're weaponizing the role of the US dollar for imposing trade and financial sanction against our strategic rivals. And then they're going to decouple from us. So we may be in a world that is where financial links, international reserve currencies, the role of the dollar that may weaken the dollar, the inflationary. So these are all medium-term forces that they might view might be stagflationary over time.

Mark Zandi:           Yeah. There may-

Nouriel Roubini:     Even a few of them would be important if more of them occur. Those are all things that increase cost of production, reduce potential growth, and they are stagflationary.

Mark Zandi:           Now, there's a lot there and we obviously can't go down each one of those. And that sounds like a book, doesn't it? Someone [inaudible 00:54:03].

Nouriel Roubini:     Well, there is a part of my book.

Mark Zandi:           Yeah. Exactly.

Nouriel Roubini:     And a couple of factors exactly on this topic.

Mark Zandi:           Right.

Nouriel Roubini:     There are these two chapters of the book on the risk of a return to inflation and stagflation. Yes.

Mark Zandi:           Yeah. And that list-

Nouriel Roubini:     There also demand factors that in my view can lead there, but there also supply factors as well.

Mark Zandi:           But the list you gave, and I found it impressive that there were 11. I would've stopped with 10 to saying Nouriel, just a nice round 10.

Nouriel Roubini:     It be nicer 10.

Mark Zandi:           Yeah.

Nouriel Roubini:     Like the 10 commanders.

Mark Zandi:           I just said. Yeah.

Nouriel Roubini:     Or the 10 plagues. Right? 10 plagues of the Egypt.

Mark Zandi:           There you go. That's right. Exactly. They weren't rank orderly. Were they in your mind in some way, in terms of chronology or terms of severity or-

Ryan Sweet:           Likelihood?

Mark Zandi:           Likelihood?

Nouriel Roubini:     No, because when we speak about the globalization, of course it could be extreme, could be slowbalization, could be globalization. People are using different terms in that direction. I think that what going in a world where there'll be more restriction to the trading goods in services, in the movement of capital, in the movement of labor, in the trading technology, dating information. How severe, is going to be depends on lots of factors, including politics and geopolitics. So that can be as in important or more important than say global climate change. And global climate change is also stagflationary for a number of reasons I can discuss if needed.

Mark Zandi:           Okay. So-

Nouriel Roubini:     It's not ranking them in order of importance. Each one of them could be more severe or less severe, depending on a bunch of things.

Mark Zandi:           Let me pick, let me try to identify one by asking.

Nouriel Roubini:     Yes.

Mark Zandi:           Which one of those do you think is not well appreciated as a risk? I mean, all of those are risks that that people have thought about, you've thought about, you've written about, you've talked about. Which one of those is least appreciated in your mind in terms of being a threat and could lead to kind of that stagflation scenario that we've been talking about?

Nouriel Roubini:     Well, maybe the one that is least appreciated is paradoxically global climate change, because everybody's worried about global climate change and the damage that global climate change can induce, and what can be done about in terms of mitigation, adaptation and you name it. But I think that if you think about the inflationary of impact of global climate change, there are many channels that are important.

                              Channel number one is that we rightly want to decarbonize and we've been bashing big oil and producer of fossil fuels and they have underinvested massively new capacity, right? The shareholders, the banks, everybody saying underinvest. But unfortunately, the increase in the production of renewable energy has not been sufficient to compensate for the fall in the capacity in fossil fuels, demand is growing because we're returning to global growth. And therefore there is a structure imbalance between demand and supply. And therefore that's going to lead regardless of what's happening in Russia/Ukraine to a super-cycle in energy. That's one of the consequences of global climate change.

                              Secondly, global climate change leads to whether it's rising sea levels, as opposed to hurricanes, as opposed to droughts, as opposed to fires to significant damage in economic activity. And specifically in agriculture. I mean, people worry about Russia, Ukraine and impact on food prices, but there is a massive drought in the west of the US, from the Colorado all the way to California. And it's not just the middle east, it's not just Sub-Saharan Africa. And as you know, two thirds of old fruit and vegetables in the US and [NAS 00:58:03] are produced in California. And you need for the cattles having water and power lake meat at 100 years, low levels and so on. So some farmers in California prefer to sell their water rights rather than producing food. That's another channel.

                              And the third channel thing is important is that as we move to renewable energy, we need actually to use energy to produce, say electric batteries and things of that sort that require lithium, palladium and lots of aluminum and lots of stuff that uses energy. So there's a risk of what people refer to as greenflation that actually the rise in oil and energy crisis increases the cost of production of those inputs that are necessary for going in direction of green and renewable energy as well.

                              These are all channels that are, I'll to say stagflationary that I don't think are well considered. People really worry about global climate change because it's bad for the environment, it's for the economy and this and that, but there is an inflationary impact that over time becomes severe on food, on production of goods and services, on energy, on lots of other things. Leaving aside that actually a huge part of the stock of even real estate could be damaged.

                              I mean, if you're in Florida, everything is moving there. But what happened in Miami with that building collapsing in my view is a can in a coal mine of how rising sea level and hurricanes can destroy a huge part of the capital stock, whether it's commercial or residential real estate over time. And now insurers and investors in real estate are start to think about how global climate change may impact the value of those assets and how much they could become stranded assets. That's why central banks are worried about climate change about the financial stability. Some of the impact might be on not just energy becoming stranded assets, but parts of real estate becoming a stranded asset. That's another thing that has to be considered for example.

Mark Zandi:           Yeah, very interesting. So the transition costs from getting here to there certainly raise the supply side event. And I guess the hope is that this transition occurs over a long enough period of that it doesn't become a macroeconomic event or at least not to a significant degree. Insurance rates rise, people move in response to that. We go from fossil fuel to green energy over time, but I think that's the hope,

Nouriel Roubini:     It's the hope, but going from fossil fuels to renewable requires one providing [inaudible 01:00:49] that is built by better planner. A trillion dollar and half of it was for incentivizing and subsidizing that transition, that money is not there. Both the US and new Europe as a goal of reducing net greenhouse gas emission by 50%, US 55% by the end of the [inaudible 01:01:01], I think is mission impossible.

                              Two, you need to have carbon taxes that are 20 or 30 times higher than the average globally that you have right now. And with energy prices rising and all fuel prices rising, the idea of increasing now carbon taxes is totally politically impossible. If anything, actually many countries are cutting fuel taxes as a way of reducing the impact on households of these spike in energy prices. There's a lot of talk about decarbonizing and renewable energy, but we're doing a little about it. And therefore, that's one of my concerns that there's too much talk about it, but it's mostly rhetorical and we're not going to achieve those targets. And the plan is going to become, 1.5 to 2% is mission impossible. We'll be lucky if we get to 3. And there's a risk of 3, and 3 is a disaster for the global economy over the medium-term.

Mark Zandi:           Okay. I think we need more than one drink between chapters, I'm just saying. Yeah. I mean it's funny-

Nouriel Roubini:     There's a full chapter of this issue in my book.

Mark Zandi:           Yeah. I know it's-

Nouriel Roubini:     The solutions are too costly to be politically acceptable. This next zero emission is a mission impossible. Adaptation will be too costly, say. In Manhattan, they have a plan to build levees near Verrazzano bridge to avoid the rising sea level from the destroying Manhattan. The project alone would be 125 billion, will take 20 years. And even if you protect Manhattan, if they sea level rises, then the water has to go somewhere. It's going to flood New Jersey shore or Long Island. Right? So there are thousand [crosstalk 01:02:58].

Mark Zandi:           New Jersey. Oh, well, okay.

Nouriel Roubini:     Half world population is there in the coast.

Ryan Sweet:           Hey, hey, hey.

Nouriel Roubini:     So mitigation doesn't look like, the adaptation is usually expensive and geoengineering is a freak sign so far. It's easy to talk about net-zero, achieving it is much harder.

Mark Zandi:           The frustrating thing I think for economists is I think we know what the answer is, and that is just raise the price of carbon. Please, do it fast. It'll work.

Nouriel Roubini:     Yeah. You need gasoline at 10 or 15-

Mark Zandi:           Yeah. Well, maybe not immediately, but possible. Anyway. Hey, I do want... I know we're running short of time. I have two other questions for you though. One is going back to recession, stagflation. What indicators do you look at to get where the economy is headed and what the probabilities are of the economy going to recession or stagflation? Now there's been a lot of debate discussion around the shape of the yield curve. I'll just throw that out there, but what do you feel about the yield curve or what other indicators are you looking at to try to gauge where we're headed?

Nouriel Roubini:     Yeah. The yield curve has been a reason because predictor but not a perfect one, and depends also which part of the yield curve you're looking and how inverted it is and for how long, and you name it with brief inversion, but it's not very inverted right now. I think that the important thing is going to be first of all, to look whether that there's a persistency of these negative supply shocks. If China keeps on locking down more and more, that's going to have global impacts on global supply chains. If this conflict in Russia/Ukraine gets to the point in which say you have a full shutdown of exports of natural gas from Russia to Europe, I think the folks at JP Morgan said, you could have almost a doubling in oil and natural gas prices. That extreme scenario, if it happens all at once, those will be severely stagflationary.

                              Those are factors that are on the supply side. And then we have to monitor very much what happen is to wage inflation. If there is a of inflation expectation, if this wage growth is in a 5, 6% range and is not falling, if these measures of the labor market gap between supply and demand, the tightness that doesn't go away, I think the risk that then wage inflation remains high price inflation remains high, and then inflation being higher. Then wage inflation on real incomes that have actually also slows down demand. Those are all variables that are worth considering.

Mark Zandi:           Got it. Got it. Okay. We're going to end the conversation in a bit different way. You've made a really strong case for the threats out there to the economy and the economic expansion and the possibility of recessions and stagflation. Take the other side, if you're wrong, why are you wrong? What could make this turn out better, much better than you think it will turn out?

Nouriel Roubini:     Well, there are some cyclical factors and there are some that are more secular. On the cyclical side, maybe the Fed is either good enough or lack enough to pull a soft landing. And that depends very much on the price wage mechanism, how much there is a anchoring, not only of inflation expectation, but also how much there is a wage price spiral. The one argument one way or another, but one could argue that things are going to end up with a soft landing.

                              The second factor I spoke about many stagfationary, how to say trends in the global economy. But of course, those are optimists are thinking about technology. And technology and innovation, one increases the economic pie. Two reduces the cost of production, a variety of all the new and services. The optimist on growth, on productivity growth and on inflation remaining low would argue that technological innovation is both deflationary, but positively deflation. It's like a positive aggregate supply shock that reduces cost and increases the production output and productivity.

                              Over the long term, I think that might be true. But first of all, we don't see yet the impact of these robotic automation, AI, and so on in the macro data. They're not yet in the productivity data. It's hard to see that. Two, it leads to significant disruptions. And I have a whole chapter in my new book about what's the future of jobs and of labor income. And it's not just the manual jobs. It's not just the cognitive jobs that are extreme scenarios in which even the more creative jobs. Even your job and mine maybe eventually done better by AI or machine learning. 

Mark Zandi:           Oh, wow.  Yeah, I have already-

Nouriel Roubini:     Maybe you and I are better than AI today to predict what the Fed will do, but maybe tomorrow an AI takes all the speeches, all the data and understands the reaction function of the Fed better than you and I do. Even economic analysts might become, how to say obsolete. You cannot rule it out, right? There are already-

Mark Zandi:           Well-

Nouriel Roubini:     The financial reporting of the-

Mark Zandi:           Well, let me say in my lifetime, I don't think that's going to happen Nouriel. I don't think so. Maybe in Ryan's lifetime. That's possible.

Nouriel Roubini:     Yeah. Yeah, exactly. We're not going obsolete, maybe Ryan will.

Mark Zandi:           Yeah. Maybe Ryan. Yeah. Yeah. Hopefully you're saving. Hopefully you have a higher the than a 6.2% savings rate.

Nouriel Roubini:     Yeah. I worry that actually innovation AI robotic on one side increases economic pie. But as we know, it's also increasing in quality because it's a capital intensive skill buys and labor saving. If you own the machines and the robots, you do well. If you're in the top 10, 20% of the distribution of skills, maybe you still become more productive, but everybody else, white collar, blue collar, their jobs and income gradually is replaced by the machine. And that's going to lead to a backlash. Same way in which the rising inequality driven by some of the aspects of trade and globalization led to a backlash against globalization. You could have a war against the machines. You cannot rule it out as well.

Mark Zandi:           Well, I found it very informative. I asked you to play the other side of the coin, and you did it admirably for a little bit of time, but you just couldn't help yourself, right? Back to the dark. I tell you-

Nouriel Roubini:     Dr. Doom is there. Dark place.

Mark Zandi:           Yeah, yeah, yeah. I can't get beyond that. But I'm telling you. I hear you, and all the things that you brought up are really good points and obviously challenges. We always have challenges. But at the end of the day, you got to admire the ingenuity of the capitalist system and the ability to adjust and respond to challenges. And particularly the American capitalist system. I mean, if you can figure out how to let people make money, they figure out how to solve problems. Again, going back to climate change, just put a price on the carbon, and good things will happen. People will figure it out. That's the optimism in me, that when push comes to shove, we... what's that old adage from Winston Churchill about Americans? He said something like they try everything and then ultimately do the right thing. Something to that effect.

                              I just keep going back to that. I feel like we'll do the right thing. But anyway, it was wonderful to have you. I really appreciate you taking the time and providing your perspective. And I wish you the best of luck with the book. I'm definitely going to buy it. And I will definitely-

Nouriel Roubini:     Buy with like a bottle of whiskey or vodka.

Mark Zandi:           That's what I was going to say. I'm going to have a drink, at least one drink per chapter. One drink per chapter. Thank you, Nouriel. Take care.

Nouriel Roubini:     Yeah. Great pleasure being with all.

Cris deRitis:           All right, thanks a lot.

Mark Zandi:           Thanks a lot.

Ryan Sweet:           Thank you.

Mark Zandi:           And to the listener, thank you for attending this week's podcast, and we'll be back with you next week. Take care now.