Nouriel Roubini, Professor of Economics at NYU Stern, joins Yahoo Finance's On The Move panel to discuss how the coronavirus outbreak is impacting the markets and what investors should expect in the coming weeks.

Video Transcript

ADAM SHAPIRO: As we continue our discussion with Nouriel Roubini, the professor of economics from the NYU Stern School. And Brian Cheung has a question for you, Nouriel.

BRIAN CHEUNG: Hi, Nouriel. Brian Cheung here. So I was listening to your earlier point about the worries about debt increase. Obviously this stimulus package whenever it's passed is going to be a pretty large package. But I'm just wondering how big should Congress be going in terms of, you know, creating something big here? I mean, if it's going to add substantially to the national debt, how do you worry about the inflationary pressures?

Even though, despite the Donald Trump administration continuing to increase the debt, inflation really hasn't been a huge issue over the post crisis period.

NOURIEL ROUBINI: Well, you know, the entire budget deficit, about $2 trillion, is going to be fully monetized by the Fed. The Fed yesterday announced unlimited QE. So every single piece of Treasury bills, notes, and bonds issued by the Treasury is going to be bought by the Fed. Now in the short term, that's the right thing to do. It's what people call a helicopter drop of money, or modern monetary theory. And now it's become mainstream. Used to be a leftist radical idea.

But now people like Stan Fischer, or Ben Bernanke, or Ray Dalio are saying that's what's needed. And it's need that because if you have a $2 trillion budget deficit and the Fed doesn't buy all of it, long term interest rates are going to sharply increase. And that's going to crowd out the recovery. So we have to monetize the fiscal deficit. That's necessary. The problem, however, is that this is not a demand shock like the global financial crisis. There is a supply shock. Global supply chains are going to be affected.

Soon enough, we're not going to have even workers in California to pick up the fruits and vegetables. And that's going to be a negative supply shock. It's going to increase food prices. We're going to have more globalization, more balkanization, more decoupling between US and China, more fragmentation of the global economy, more inward oriented policy protecting your country, your firms, your workers. More protection is more tariffs. All these things are negative supply shock. They'll increase cost over time and they're going to to reduce potential growth.

Now you throw massive fiscal stimulus and you monetize it into an economy that's negative supply shock, in the short run you have a recession and deflation. But over time, like the '70s when we had this negative supply shock, oil '73, '79, what did we do? Budget deficits and monetize them. What we ended up, with stagflation, recession, and high inflation. So in the short run, we have to worry about deflation. But these policies cannot be run all the time. Otherwise we end up like Zimbabwe. We end up like Venezuela.

You end up like Argentina. You can end up with high inflation, if not hyperinflation. So you cannot fool all of the people all of the time. For the time being, we can do massive stimulus this year, 10% of GDP, fully monetize it by the Fed, and we're not going to get inflation. Once we have supply bottlenecks, and we're going to get worse because we are in a world in which we will have a whole series of negative supply shocks, you cannot fight negative supply shocks with deficits, and debt, and money.

If you do that, you end up into stagflation, recession, inflation like the 1970s. And the next couple of years we could be there. That's why, at some point, you have to absorb the shock. You cannot kick the can down the road.

- Nouriel, I want to get back to a point you made earlier about this-- the need for a complete shutdown, whether that is one month or two months. And of course, you've-- sounds like you're strongly opposed to this idea the president has floated that, you know, maybe in a week or two we start testing and then some workers return. Can you help us understand, from-- from an economic standpoint, how that kind of approach the president is floating would complicate the overall recovery? Sort of a stop and go, stop and go approach.

NOURIEL ROUBINI: Well, you know, the experience with China has been you shut down everything for two, three months. The number of cases goes to zero. And then you start and restore economic activity gradually. And that's the right thing to do. The other example of the extreme is Italy that did not take the problem seriously and that now is exploding. You have 8% mortality. You have 40,000 cases and increasing by 20% every day. And too little, too late they reach what China did.

But when the genie was out of the bottle, now they have an economic nightmare, 8% mortality rate, still 20% increase. And we're having a situation is out of control. And as you pointed out, Cuomo governor of New York, just said the numbers are increasing 30% per day. That is doubling in three days. It's not just in New York State. All over the US, the numbers are 30% increase. As I said in a month from now, we're going to have a half a million cases. In China, you had only 80,000.

Think about what's going to happen this economy if you don't shut down everything for a month or two, whatever it takes to stop this contagion. You restart economic activity, you get short term benefit, and then you have to shut it down for six months rather than for two months. So this idea we're going to be stopped everything soon enough in a week or so is totally nuts. Look at what happened in Italy and compare to what happened in China. The worst thing you can do. It's going to be a nightmare. It's going to imply that we're going to end up into a depression.

JULIE HYMAN: Nouriel, it's Julie again. I-- I just want to get your reaction to some recent investor comments that have even been made on our air. Some folks see the market right now what's happening as a buying opportunity for a bargain of a lifetime. We've seen that characterization. I'd like to get your reaction there. Do you see further downside? And then separately, someone wants to know your thoughts on Bitcoin. So can you answer those two quickly? Thank you.

NOURIEL ROUBINI: Well, I have a kind of a proprietary tool that is a boom bust kind of signal of the stock market that was showing already in beginning of February that the market was totally overbought, and a massive correction would occur. And that signal, then, has led to a correction of 35% down. That signal today tells you that the market may be close to a bottom. But conditional on the macro. Conditional on the macro and the health response. And I think that what's going to happen is that today the market can go down.

You can go-- can go up another 5, 7, 8%, pricing in the monetary and the fiscal stimulus. But then all the policy good news are gone. And think about what's going to happen in the next few weeks. You'll have terrible news that every three days the number of cases is increasing in the US. The number of dead are doubling every three days. And the economy is going to keep on surprising on the downside. Because even the consensus forecast, right now, is not pricing in output falling in the second quarter at the annual rate of at least 40%.

That's the number we're facing right now. 40.7 point fall in GDP. So the economic news are going to be worse than otherwise. The health news are going to be worse than otherwise. The market need to know. And they have to be able to pricing when the contagion is stopped. And unless you do massive testing, massive tracing, massive quarantines, massive lockdown, not voluntary, they have to be compulsory. You get out of your home, you end up in jail like they did in China and now in Italy.

If you don't do that, then the market cannot rise. Something that is not risk but is what's called uncertainty. You have no idea when this is going to end. And therefore, those bad news are going to push the market lower and lower. So all the good news as of today are going to be already priced in. Monetary and fiscal bazooka. OK, done. Trillions of dollars of stimulus on the monetary and fiscal. What's going to be the economic news? Worse. What's going to be the health news? Worse. What's going to be the contagion news? Worse.

So the market from now after today can go only south until we take seriously the issue of locking down the country for as long as it takes. The market is not going to bottom until we do that. We might do it too late like in Italy. That's going to be a nightmare.

ADAM SHAPIRO: Nouriel Roubini is a professor of economics at the NYU Stern School of Business. We appreciate your being here with us on Yahoo Finance.