The economist who correctly predicted the 2008 financial collapse is waving a red flag about another imminent disaster.
Nouriel Roubini, an economist at NYU Stern School of Business, writes in The Guardian that “the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation” and that “conditions are right” for a double whammy of the stagnation of the 1970s and the stock market implosion of 2008.
“The warning signs are there for global economy, and central banks will be left in impossible position … today’s extremely loose monetary and fiscal policies, when combined with a number of negative supply shocks, could result in 1970s-style stagflation (high inflation alongside a recession),” Roubini wrote.
Arguing that the debt ratios were much lower in the 1970s than they are now, Roubini says the upcoming crisis will be much worse.
“Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years,” Roubini wrote.
“For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck,” Roubini continued. “The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralised loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.
“(At the same time) the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive.
“More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the Covid-19 pandemic are pushing national governments toward deeper self-reliance,” he continued. “Add to this the impact on production of increasingly frequent cyber-attacks on critical infrastructure, and the social and political backlash against inequality, and the recipe for macroeconomic disruption is complete.
“Making matters worse, central banks have effectively lost their independence because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis,” Roubini wrote. “With both public and private debts having soared, they are in a debt trap. As inflation rises over the next few years, central banks will face a dilemma. If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.”
Roubini continued to warn that due to an impending debt crisis, “many governments will be semi-insolvent and thus unable to bail out banks, corporations and households,” stating: “As matters stand, this slow-motion train wreck looks unavoidable…The stagflation of the 1970s will soon meet the debt crises of the post-2008 period. The question is not if but when.”