Renowned economist Nouriel Roubini says central banks will be forced to “bend” to avoid causing economic and financial collapses.
Roubini, known in the financial community as Dr. Doom for his forecasts of the subprime crisis that led to the 2008 financial crash, says the world faces a more than $300 trillion “debt trap” between the public and private sectors.
According to the famed economist, a new era of “great stagflation” has arrived, and central banks cannot raise interest rates enough to return inflation to target levels.
“Central banks are in a debt trap and cannot continue to raise interest rates,” he says. “There is so much debt in the system that if rates rise enough to fight inflation, there will be a real hard landing that will lead to serious debt defaults,” Roubini adds.
“If we try to raise interest rates to fight inflation, we will cause massive debt defaults: households, companies, financial institutions, governments. There would be economic and financial collapses. So central banks will have to cower back,” Roubini said.
As a result, he says, inflation will remain at high levels for longer.
“I’m realistic,” he adds.
Professor Roubini said the forces that caused the benign era of “great moderation” of low inflation before the pandemic are now being reversed.
Those positive supply shocks that helped keep inflation low over the past few decades included international trade, globalization, migration, the integration of China and emerging countries into the global economy, technological innovation, and weak workers’ bargaining power.
“These positive supply shocks are reversing and more of them are turning negative, so we end up with higher inflation.”
The new era will be characterized by stagflation, debt and instability, Roubini concludes.