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Investing.com — Nouriel Roubini, a well-known economist and currently professor emeritus of Economics at New York University’s Stern School of Business, is famous for his nothing short of pessimistic predictions about the state of the global economy and financial markets. But this opinion piece in Project Syndicate went further, titled “The Unavoidable Crash,” that is, the inevitable collapse that the globalized world will face in a few months from now and that not even central banks will be able to counter.
“After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt,” the economist writes, warning that “the mother of all economic crises looms, and there will be little that policymakers can do about it.”
To argue his point, Roubini highlights data on debt, described as “staggering.” He writes, “Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II.”
This over-borrowing has been going on for a long time and, the article explains, low rates have kept “insolvent zombies” such as “households, corporations, banks, shadow banks, governments, and even entire countries” up during the 2008 crisis and the COVID biennium.
But now inflation, fueled by the same ultra-loose fiscal, monetary, and credit policies, has ended “this financial Dawn of the Dead,” Roubini writes bluntly, and with central banks forced to raise interest rates, “zombies are experiencing sharp increases in their debt-servicing costs.”
This radical change represents “a triple whammy,” as inflation is also eroding households’ real income and reducing the value of their assets, such as real estate and financial assets. “The same goes for fragile and over-leveraged corporations, financial institutions, and governments: they face sharply rising borrowing costs, falling incomes and revenues, and declining asset values all at the same time.”
Unlike the crises mentioned above, ultra-loose policies can no longer be implemented as they would throw further fuel on the fire of inflation, and this, the economist points out, means a deep and prolonged recession, as well as a severe financial crisis.
“As asset bubbles burst, debt-servicing ratios spike, and inflation-adjusted incomes fall across households, corporations, and governments, the economic crisis, and the financial crash will feed on each other,” the article points out.
“To be sure,” Roubini writes, “advanced economies that borrow in their own currency can use a bout of unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, central-bank deficit monetization will once again be seen as the path of least resistance. But you cannot fool all of the people all of the time.”
“The mother of all stagflationary debt crises can be postponed, not avoided,” Roubini concludes on Project Syndicate.
