N. Roubini: The “inevitable collapse” is coming, the mother of crises

N. Roubini: The "inevitable collapse" is coming, the mother of crises

Nouriel Roubini, renowned economist and currently professor emeritus of economics at New York University’s Stern School of Business, is famous for his pessimistic predictions about the state of the world economy and financial markets. But this time he has gone even further, publishing an opinion piece in Project Syndacate entitledThe inevitable crash, that is, the inevitable collapse that the globalized world will face in a few months and that not even central banks will be able to counteract.

“After years of ultra-loose fiscal, monetary, and credit policies and significant negative supply shocks, the tensions of stagflation are putting pressure on a huge mountain of public and private debt,” the economist writes, warning that “the mother of all economic crises is in the making, and monetary policymakers can do little to prevent it.”

To argue his point, Roubini highlights the debt figures, which he describes as “staggering, to say the least.” Globally, he writes, “total public and private sector debt to GDP has risen from 200% in 1999 to 350% in 2021. The proportion is now 420% in advanced economies and 330% in China. In the United States it rises to 420%, a percentage higher than that registered during the Great Depression and after World War II.

This excess of indebtedness has been going on for a long time and, according to the article, thanks to low rates it has kept afloat “insolvent zombies such as households, companies, banks, shadow banks, governments and even entire countries” during the 2008 crisis and the two years of the Covid period.

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But now inflation, fueled by the same ultra-loose fiscal, monetary, and credit policies, has put an end to this “dawn of the financial dead,” Roubini writes bluntly, and with central banks forced to raise interest rates, “zombies are experiencing a sharp rise in debt-servicing costs.”

A radical change that is “a triple whammy”, since inflation is also eroding the real income of households and reducing the value of their assets, such as real estate and financial. “The same goes for fragile and overleveraged companies, financial institutions and governments: they face simultaneously a sharp rise in financing costs, a fall in revenues and rents, and a decline in the value of their assets.”

Unlike the aforementioned crises, ultra-loose policies can no longer be applied because they would add fuel to the fire of inflation, and this, the economist points out, means a deep and prolonged recession, as well as a serious financial crisis.

“As asset bubbles burst, debt-service ratios soar, and inflation-adjusted incomes of households, firms, and governments fall, the economic crisis and financial collapse will feed off each other,” the article notes.

“Certainly,” Roubini writes, “advanced economies borrowing in their own currencies can take advantage of unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. The monetization of the deficit by central banks will once again be seen as the lesser evil. But you can’t fool every citizen all the time.”

“The mother of all stagflationary debt crises can be postponed, but not avoided,” Roubini concludes in Project Syndacate.

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