Nouriel Roubini, “Dr. Doom” himself, has an op-ed at Project Syndicate in which he lists the likely “negative supply shocks” that could bring on a recession:
he first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
predicts a stagflationary recession, and makes some recommendations for dealing with it:
Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.
In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the United Kingdom with a permanent negative supply shock, and thus permanently lower potential growth.
I think he mischaracterizes the second supply shock. The Chinese authorities want to dominate emerging technology markets and all future technology markets as they do the present, low-margin commodity technology markets through a combination of theft, other illegal practices, homegrown R&D, and low production costs. We don’t want them to because that would leave us stuck in the unprofitable middle ground not to mention leaving us strategically vulnerable.
Note that other than mouthing a few platitudes about trade and globalization Dr. Roubini has little to say about the roots of the conflict between the United States and China. The Chinese authorities have pursued a concerted, illegal, and mercantilist bundle of policies that are the opposite of free trade. Under a system of free trade the parties benefit in direct relation to how free their trade is. Under the present system the more you trade with China the worse off you are.
The particular victims of the Chinese authorities’ policy are people in smaller developing countries like Mexico whose trade with China should result in the Chinese buying more manufactured goods from them, making both China and Mexico better off. Instead the Chinese primarily buy raw materials from their trading partners, dumping subsidized manufactured good on them.