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 Nineteen Seventies 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 have been a lot decrease within the Nineteen Seventies than they’re now, Roubini says the upcoming disaster will likely be a lot 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 indicators are already obvious in at this time’s excessive price-to-earnings ratios, low fairness threat premia, inflated housing and tech property, and the irrational exuberance surrounding particular function acquisition firms, the crypto sector, high-yield company debt, collateralised mortgage obligations, non-public fairness, meme shares, and runaway retail day buying and selling. At some level, this increase will culminate in a Minsky second (a sudden loss of confidence), and tighter financial insurance policies will set off a bust and crash.
“(At the identical time) the identical unfastened insurance policies which can be feeding asset bubbles will proceed to drive shopper value inflation, creating the circumstances for stagflation at any time when the following unfavourable provide 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 impression on manufacturing of more and more frequent cyber-attacks on vital infrastructure, and the social and political backlash towards inequality, and the recipe for macroeconomic disruption is full.
“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 resulting from an impending debt disaster, “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.”