Nouriel Roubini is Professor of Economics at New York University. This expert was one of the few economists who anticipated the 2007 crisis with some precision and accuracy. Roubini assured that the current scenario has the worst ingredients that gave rise to the debt crisis after the 2007 crisis. The result may be a new crisis that ends up mutating into economic depression (years of pain).
(companies above all) are at their highest levels in recent decades, while inflation is beginning to rear its head, fueled by unprecedented fiscal (the public debt continues to increase) and monetary policies. “The stage is being set for the mother of stagflationary debt crises in the coming years,” says Nouriel Roubini in an article published in Project Syndicate.
“After all, debt ratios in advanced economies and most emerging markets were much lower in the 1970s, which is why, historically, stagflation has not been associated with debt crises. In In any case, unexpected inflation in the 1970s wiped out the real value of fixed-rate nominal debts, thus reducing the public debt burdens of many advanced economies,” Roubini explains. But the current debt levels (they continue to rise in 2021) would require unaffordable inflation levels for the population.
On the other hand, during the 2007 financial crisis, high debt levels (public and private) caused a severe debt crisis (intensified by the bursting of the real estate bubbles) but the subsequent recession led to low inflation, which was about to turn into deflation. The credit crunch and the bursting of the housing bubble were a setback for aggregate demand, which allowed inflation to remain very low. However, today the risks are on the supply side, while .
The worst of the 70s and 2007
“We are left, like this, like the period 2007-10. Debt ratios are much higher than in the 1970s and a combination of lax economic policies and negative supply shocks threatens to fuel inflation more than deflation, mounting the scenario for the mother of stagflationary debt crises in the coming years,” warns the New York University economics professor.
Roubini believes that in the short term all this economic ‘doping’ promoted by central banks and governments will continue to inflate the bubbles in housing, stocks, cryptocurrencies, etc. Low interest rates will create the illusion that high debt levels are sustainable, while assets are worth more and more.
However, there will come a time when inflation begins to scare and the pressure on central banking accumulates. “At some point this boom (a sudden loss of confidence) and tight monetary policies will lead to a bust and bust.”
It remains to be seen whether or not the central banks dare to fulfill their mandate, since they have lost all independence in recent years, according to Roubini. Now the central bank is dedicated to keeping huge amounts of debt afloat.
“When the former Fed chairman stopped inflation in 1980-82, the result was a serious double-dip recession for the US and a debt crisis and a lost decade for Latin America. But now that global debt ratios are nearly three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession,” says this economist.
Central banks will be between a rock and a hard place, any move can cut: “In these circumstances, central banks will be hurt if they do and hurt if they don’t, and many governments will be near insolvent and therefore unable to bail out banks, corporations and households. The cycle of doom for sovereign debt and banks in the eurozone after the global financial crisis will be repeated globally, sucking in households, corporations and shadow banks as well.” warns Roubini.
“As it stands, this slow-motion derailment seems inevitable. The Fed’s recent swing from ultra-dark stance to basically dovish stance doesn’t change anything… The Fed is stuck. So is the European Central Bank , the Bank of Japan and the Bank of England will soon run into the debt crises of the period after 2008. The question is not if this will happen, but when”, Nouriel Roubini concludes his presentation.
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