The economist Nouriel Roubini presents the mother of all stagflationary debt crises: a destiny that may perhaps be postponed, but which is now inevitable for a global financial world crowded with insolvent zombies.
Professor of Economics at New York University, he Dr. Doom who managed to foresee the explosion of the financial crisis of the years 2007-2009, has long been warning about the devastating effects of the growth of debts all over the world, anticipating the moment of reckoning for those insolvent zombies who managed to do it franca, only thanks to the liquidity drug manufactured by central banks.
That drug that the central banks themselves are now forced to drain to save the world from inflation.
“The world economy is teetering towards an unprecedented confluence of economic, financial and debt crises, following the explosion of deficits, debt and leverage in recent decades. Roubini wrote in Project Syndicate.
Article title: “The Unavoidable Crash”or, “The Inevitable Crash”.
“Both the public and private sectors have run up huge debts – recalled the economist – Just look at the explicit debts, the numbers are staggering”.
Roubini: public and private debts up to 420% of GDP
“Globally, private and public sector debts in relation to GDP they rose from 200% in 1999 to 350% in 2021. The ratio is now 420% among advanced economies and 330% in China. In the United States, it is 420%, more than during the Great Depression and after World War II.”
“Obviously – Roubini explains – debts can support economic activity if debtors invest in new capital (machinery, housing, public infrastructure) which gives returns higher than the financing costs”.
However, in the current situation“a large part of the debt incurred simply goes to finance consumer spending, which persistently exceeds income. And this is the recipe for bankruptcy. In addition, equity investments can also be risky, whether the debtor is a family buying a home at an artificially inflated price, or a business seeking to expand too quickly regardless of returns, or from a government that spends money on white elephants (that is, explains Roubini himself) on extravagant and useless infrastructure projects”.
“Now, this recourse to debt has been going on for decades, for different reasons. The democratization of finance – which in the past Roubini defined as a hoax– it has allowed low-income families to finance consumption with debt”.
For their part, “centre-right governments they have persistently cut taxes without cutting spending at the same time, while centre-left governments they bet generously on social programs that were not financed however by sufficiently higher taxes. And fiscal policies more favorable to debt than to equity, supported by the ultra-expansionary monetary and credit policies of central banks, have unleashed a boom in borrowing both in the private sector and in the public sector”.
Debts: an army of insolvent zombies
Nouriel Roubini continues, presenting what could be called the original sin committed by central banks.
“Years of Quantitative Easing (QE) and credit easing have kept borrowing costs close to zero, and in some cases even negative (as was the case in Europe and Japan). By 2020, government debt with negative rates had come in dollar terms a value of $17 trillion and, in some northern countries, even mortgages had negative nominal interest rates”.
“The explosion of unsustainable debt ratios has made several debtors – families, businesses, banks, shadow banks, governments, and even entire countries – to become insolvent zombies who were buoyed by low interest rates (which allowed debt service costs to be manageable)“.
Roubini explains that “both in the 2008 financial crisis and in the Covid-19 crisis, many insolvent entities that they should have declared bankruptcy they have been bailed out by zero or negative interest rate policies, QE, and direct fiscal bail-outs.”
Now, however, the economist points out, with inflation, everything changed.
“But now, inflation – also fueled by the same ultra-accommodative fiscal, monetary and credit policies – it put an end to it Financial dawn of the living dead “.
The way in which the massacre of the insolvent zombies is happening is there for all to see:
“With central banks forced to raise interest rates in order to restore price stability, the zombies are facing sharp increases in debt service costs. For many, this situation represents a triple blow, as inflation is also eroding the real incomes of households and reducing the value of their assetssuch as that of real estate and shares”.
“The same is happening to fragile and over-indebted companies, financial institutions and governments as they grapple with soaring funding costs, declining incomes and revenues, and depreciating assets, all in the process. same moment. Worst of all, these developments are coinciding with the return of stagflation (high inflation accompanied by low growth).
Roubini: worse than in the 70s and the financial crisis
The New York University professor recalls that “the last time advanced economies experienced such conditions was in the 1970s. However, at least in those years, debt ratios were very low. Today, we are facing the worst aspects of the 1970s (stagflationary shocks), along with the worst aspects of the global financial crisis“.
The other drama is that“this time, we can’t just cut interest rates, in order to stimulate demand. DAfter all, the global economy is being hit by negative and persistent short- and medium-term supply shocks, which are reducing growth and raising prices and production costs”.
Roubini specifies that these shocks “they include pandemic-induced disruptions to the supply of labor and goods; the impact of war in Ukraine launched by Russia on commodity prices; China’s increasingly disastrous zero-Covid policy, and a dozen other medium-term shocks (from climate change to geopolitical developments), which will create additional stagflationary pressures.
Moreover, “unlike the 2008 financial crisis and the early months of Covid-19, simply resorting to the bail-out of public and private entities by adopting accommodative macro policies would add even more fuel to the inflation fire”.
All of this, for Nouriel Roubini, means “that there will be a hard landing – a deep and protracted recession – as well as a severe financial crisis”.
When the inflation genie comes out of the bottle…
The result?
The economist foresees a context characterized by‘ “asset bubble burst, by booming debt service costs, declining household incomes, corporate revenues, and government revenues (adjusting for inflation)” con “the economic crisis and the financial crash that will feed on each other”.
“It’s true – Roubini recalls – that advanced economies that borrow in their own currency will be able to use the unexpected inflation to try to reduce the real value of some long-term nominal fixed-rate debt“.
A positive aspect in this bleak scenario therefore seems to exist. But it also seems to be the only one. So that, “with governments unwilling to raise taxes or cut spending to reduce their deficits, the monetization of the deficit by central banks it will again be seen as the easy way out”.
“But you can’t always make fun of everyone – Roubini warns – Once the inflation genie comes out of the bottle – which is what will happen when central banks abandon the battle, in the face of the impending economic and financial crash – nominal and real borrowing costs will jump”.
And all this means that, as Roubini concludes, “the mother of all stagflationary debt crises it may also be postponed, but not avoided”.
From the 10 deadly D to the outlook STOP tax cartridges
It is worth mentioning that, already in the summer of 2020, Nouriel Roubini had presented the 10 deadly Ds from the Great Depression, confirming its bearish ‘setting’ long before the outbreak of war in Ukraine.
A few months later, the economist addressed the question of central banks again, explaining why the world was already MMT, (Modern Monetary Theory ).
Dr. Doom’s own outlook has undoubtedly deteriorated earlier this year, due to theVladimir Putin’s invasion of Ukraine by Russia (February 24, 2022).
As well as towards a Cold War 2.0, Roubini said, among other things, that he foresees a world oriented towards a collapse similar to the post-Lehman Brothers one.
In September of this year, the economist then remarked on the outlook of a long and violent recession, also talking about stop ‘fiscal cartridges‘ in countries with too much debt.
The anti-crypto par excellence finally stood out again just a few days ago,quoting Velasco’s J’accuse about the“the unbearable uselessness of cryptocurrencies”.