By Alessandro Albano
Investing.com – Nouriel Roubini, renowned economist and professor emeritus at New York University, gained notoriety for his rather pessimistic predictions about the state of the global economy and financial markets. But your opinion piece on Project Syndicateentitled “The Inevitable Crash”, went further, saying that the globalized world will suffer an inevitable collapse in a few months, which not even central banks will be able to avoid.
“After years of ultra-loose fiscal, monetary and credit policies and the onset of large negative supply shocks, stagflationary pressures are now putting pressure on the huge mountain of public and private sector debt,” wrote the economist, warning that “ the mother of all crises is coming, and there is little the authorities can do”.
In his arguments, Roubini points to data on indebtedness, described as “amazing”. In his words: “Around the world, the total debt of the public and private sectors as a percentage of GDP has grown 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 post-World War II”.
This excess of debt has been going on for a long time and, according to the article, low interest rates kept “insolvent zombies” standing, such as “households, corporations, banks, parallel financial institutions, governments and even entire countries” during the crisis. 2008 and the Covid biennium.
But now inflation, fueled by the same ultra-lax fiscal, monetary and credit policies, ended “this Rebirth of the Financial Dead”, in Roubini’s evaluation. With central banks forced to raise interest rates, “the zombies are facing a sharp increase in the cost of servicing their debt”.
This radical change represents a “triple blow”, as inflation is already deteriorating the real income of families and reducing the value of their assets, such as real estate and financial assets. “The same applies to fragile and overleveraged corporations, financial institutions and governments: they are facing a sharp rise in credit costs, a drop in income and income, as well as the devaluation of their assets, all at the same time” .
Unlike the crises mentioned above, ultra-lax policies cannot be implemented anymore, as they would throw more fuel on the inflation fire, and this, points out the economist, will lead to a deep and prolonged recession, as well as a serious financial crisis.
“As asset bubbles burst, debt service rates soar, and households, corporations, and governments’ inflation-adjusted incomes fall, the economic crisis and financial crash will feed back,” predicts the article.
“Undoubtedly,” writes Roubini, “advanced economies that have borrowed in their own currencies can use an episode of unexpected inflation to drive down the real value of some long-term fixed-rate debt. In the face of governments’ unwillingness to raise taxes or cut spending to reduce their deficits, central bank deficit monetization will again be seen as the path of least resistance. But it is 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 the Project Syndicate🇧🇷