For economist Nouriel Roubini, one of the few to have predicted the 2008 financial crisis, the volume of fiscal stimulus enacted by governments in recent years and the shocks in global supply chains increasingly point to a stagflation scenario (high inflation and stagnant economic growth) towards US and European economies in the coming months.
In an interview with Bloomberg’s Odd Lots podcast, Roubini said the impending financial crisis is likely to be worse than that seen in the United States in the 1970s, due to rising inflation and interest rates and a slowdown in economic growth.
According to the pundit, who earned the nickname “Doctor Doom” after predicting the bursting of the real estate bubble in 2008, overall inflationary pressures at a global level are due to a lack of supply rather than overheated demand, in contrast to much of the market .
The war in Ukraine and the Covidzero policy in China, together with movements such as the “big resignation”, with a wave of resignations as activities resume, will simultaneously prevent a steady and rapid decline in inflation at the same time that the rate hike by the Federal Reserve (Fed, US central bank) will lead to an abrupt slowdown in economic activity in the region.
More structural factors, such as increased protectionism, deglobalization and restructuring in global chains, are also contributing to an inflation scenario persistently above the Fed’s target of 2% a year, Roubini said.
“We will see the economy slow down, but inflation won’t ease off anytime soon because of the supply shock,” he said.
He recalled that the global oil shocks of the 1970s led not only to inflation in the United States but also to economic stagnation in the country.
For the economist, the difference to the same stagflation scenario that is now being outlined lies in the significant increase in public and private sector debt since then, especially after years of extremely stimulating fiscal and monetary policy.
With interest rate hikes needed to curb inflation, that debt could become a problem for many companies and even countries, with the risk of a credit crunch, the economist said.
Given this combination of negative factors for the global economy, the belief that the coming crisis will be quick and smooth is an “illusion,” according to Roubini, who cited inflationlinked and shortdated bonds as alternatives for investors.
Known for having opposing views on bitcoin, he said the most popular cryptocurrency on the market is just another “shitcoin”.
The economist also said the global scenario projected for the coming months could represent a “perfect storm” for emerging markets in a more economically fragile situation, as rising interest rates and weaker currencies against the dollar would pose economic challenges for countries in the region.