By Alessandro Albano
Investing.com Nouriel Roubini, renowned economist and professor emeritus at New York University, rose to fame for his rather pessimistic predictions about the state of the world economy and financial markets. But his commentary on Project Syndicate, titled “The Inevitable Crash,” went further, saying that in a matter of months the globalized world will suffer an inevitable collapse that not even central banks can prevent.
“After years of ultraloose fiscal, monetary and credit policies and the onset of large adverse supply shocks, stagflationary pressures are now putting pressure on the huge public and private sector debt mountain,” the economist wrote, warning that “the mother of all crises comes, and the authorities can do little”.
In his arguments, Roubini refers to data on debt that he describes as “amazing”. In his words: “Around the world, total public and private sector debt as a percentage of GDP has increased from 200% in 1999 to 350% in 2021. The ratio has now reached 420% in advanced economies and 330% in China. In the United States it is 420%, a number higher than during the Great Depression and after World War II.”
This debt excess has persisted for a long time and, according to the article, low interest rates kept “insolvent zombies” such as “households, corporations, banks, parallel financial institutions, governments and even entire countries” alive during the 2008 crisis and the Covid biennium.
But now inflation, fueled by the same ultraloose fiscal, monetary and credit policies, “ended this rebirth of the financial dead,” in Roubini’s assessment. As central banks are forced to raise interest rates, “the zombies face a sharp increase in the cost of servicing debt.”
This radical shift represents a “triple whammy” as inflation is already degrading families’ real incomes and depreciating the value of their assets such as real estate and financial investments. “The same is true for fragile and overindebted businesses, financial institutions and governments: they are facing sharp increases in the cost of borrowing, falling revenues and revenues, and devaluation of their assets, all at the same time.”
Contrary to the crises mentioned above, ultraloose policy can no longer be implemented as it would fuel the inflationary fire further, which the economist says will lead to a deep and prolonged recession as well as a severe financial crisis.
“As wealth bubbles burst, debt service rates soar and inflationadjusted incomes of households, businesses and governments fall, the economic crisis and financial crash will have an impact,” the article predicts.
“Undoubtedly,” writes Roubini, “advanced economies that have borrowed in their own currency can use an episode of unexpected inflation to drive down the real value of some longterm fixedrate debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, central bank deficit monetization is once again viewed as the path of least resistance. But it’s impossible to fool all the people all the time.”
“The mother of all stagflationary debt crises can be delayed but not avoided,” concludes Roubini in Project Syndicate.