‘Dr Perdition’ has done it again. Nouriel Roubini, one of the economic gurus of recent decades, has announced the era of the ‘Great Stagflation’, an economic period where all fronts will suffer tension and which comes to replace decades of what he has called the ‘Great Moderation’ .
In an article published this week by Project Syndicate, Roubini highlights this “radical regime change in the global economy” as economic, political, demographic, climate, health and geopolitical threats are growing.
The emeritus professor of economics at New York University points out that the change was born with the 2008 financial crisis and deepened as a result of the coronavirus pandemic. Roubini considers that a series of factors have come together that, in the present and in the future, will keep the global economy in a situation of stagflation (stagnation of economic growth but with an increase in inflation) that will continue over time.
“As in the 1970s, persistent and repeated negative supply shocks will combine with lax monetary, fiscal and credit policies to produce stagflation,” he summarizes, anticipating that in this scenario “the economic components of any traditional portfolio – long-term bonds and US and global stocks – will suffer, which could lead to massive losses.”
On the one hand, he blames the expansionist and accommodative policies that politicians carried out during the pandemic to avoid leaving “no one behind”, “well-intentioned” measures that, however, “are now contributing to the dangerous inflationary spiral of wages – prices”.
To this is added the “renewed protectionism (both from the left and the right) that has restricted trade and the movement of capital”, such as the tightening of immigration policies that limit the available labor force and push up wages or restrictions on trade in technology alleging reasons of national security.
Strictly economically, Roubini points to the growing public and private debt, increasing financial risks. “Central banks are locked in a ‘debt trap’: any attempt to normalize monetary policy will cause increased debt burdens, leading to massive insolvencies, cascading financial crises and negative consequences for the real economy.
In addition, the chief economist at Atlas Capital Team predicts that the dollar will lose much of its power as a global reserve currency, having been used “as a weapon for strategic and national security purposes”, which will increase the costs of trade.
other causes
Regarding the demographic issue, Roubini recalls that aging in developed countries and in other large economies such as China is also a stagflationary factor, since “young people tend to produce and save, while older people spend their savings.”
Added to this is the pressure exerted by climate change in all its forms. On the one hand, its effects in the form of adverse natural phenomena create uncertainty in economic activity. On the other hand, governments have begun to carry out an energy transition that has led to “divesting from fossil fuel capacity before investment in renewables reaches the point where they can cover the difference”, increasing energy costs.
On the defense and geopolitical side, it affects current conflicts such as Russia and Ukraine, involving a large part of the West, which conditions a large part of the economic sectors, while the West itself is “disengaging from China”. at a commercial level. Remember other actors that may be potential threats, such as Iran and North Korea, while the constant danger of cyber warfare will cause governments to “have to spend a fortune on cybersecurity.”
He also sees great risks in the health issue. As the coronavirus has already shown, a microorganism can put the world economy in check and will invite further protectionism. Furthermore, with the permafrost thawing in some ecosystems, “we may soon be facing dangerous viruses and bacteria that have been locked away for millennia.”
The end of the Great Moderation
This ‘Great Stagflation’, according to Roubini, is partly the consequence of decades of a ‘Great Moderation’ characterized by “low inflation in advanced economies; robust and relatively stable economic growth, with short and shallow recessions; low bond yields and (and thus positive bond returns) due to the secular drop in inflation; and the sharp rise in risky assets such as US and global stocks.”
It is thus an era that, once the high inflation that characterized the 70s and 80s in the US had been combated, focused on central banks having “credible policies” on the inflation target, on “adherence to from governments to relatively conservative fiscal policies” and “positive supply shocks, which increased potential growth and reduced production costs”.
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