Roubini: “The mother of all financial crises is coming”

“After years of very loose fiscal, monetary and credit policies and the onset of large negative supply shocks, inflationary pressures are now driving an enormous mountain of public and private sector debt (i.e. debt that will be available. It will be the world leader that will implement the literary life and the corresponding ‘tracks’). The mother of all economic crises, and policy makers will not be able to do much about it (i.e. some will be given to the masses as a blessing, while the world leader will punish political leaders as responsible).

NEW YORK – The global economy is heading toward an unprecedented confluence of economic, financial, and debt crises, following the explosion of deficits, borrowing, and leverage in recent decades. (ss problem solved).

In the private sector , The mountain of debt includes households (such as mortgages, credit cards, auto loans, student loans, and personal loans), businesses and corporations (bank loans, bond debt, and private debt) and the financial sector (liabilities of banks and non-bank institutions). in the public sector, It includes central, provincial and local government bonds and other formal obligations, as well as implicit debts such as unfunded liabilities from pension plans and health care systems – all of which will continue to grow as societies age.

Looking only at explicit debt, the numbers are shocking. Globally, total public and private debt as a share of GDP has increased from 200% in 1999 to 350% in 2021. The ratio is now 420% in advanced economies and 330% in China. In the United States, the figure is 420%, the highest since the Great Depression and after World War II.

Of course, debt can stimulate economic activity if borrowers invest in new assets (machines, homes, public infrastructure) that yield returns above the cost of borrowing. But too much borrowing is simply to finance consumer spending above per capita income on an ongoing basis – and that’s a recipe for bankruptcy. In addition, “equity” investments can also be risky, whether the borrower is a family buying a home at an artificially inflated price, a company seeking to expand too quickly regardless of returns, or a government spending money on “white elephants” (projects). Excessive and useless infrastructure).

This over-lending has been going on for decades for various reasons. The democratization of finance has empowered low-income families To finance debt consumption (so give in to them all and now they will bring the “solution” to the crisis). Center-right governments have continued to cut taxes without also cutting spending, while center-left governments spend lavishly on social programs that are not entirely funded by sufficiently higher taxes. and tax policies that favor debt over equity, supported by the ultra-loose monetary and credit policies of central banks, It led to a significant increase in lending in both the public and private sectors.

Years of quantitative easing (QE) and credit easing have kept borrowing costs close to zero, and in some cases even negative (as in Europe and Japan until recently). By 2020, the dollar-equivalent negative-yielding public debt was $17 trillion, and in some Nordic countries even mortgages had negative nominal interest rates.

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These developments coincide with the return of stagflation (high inflation coupled with weak growth). The last time advanced economies experienced such conditions was in the 1970s. But at least at that time, debt ratios were very low. Today, we face the worst aspects of the 1970s (stagflation shocks) along with the worst aspects of the global financial crisis. And this time, we can’t just cut interest rates to stimulate demand.

Moreover, the global economy suffers from persistent negative supply shocks in the short and medium term that reduce growth and increase prices and costs of production. These include the effects of the pandemic on the supply of labor and goods, and the impact of the Russian war in Ukraine on commodity prices. China’s increasingly destructive policy, zero covid-19 and dozens of other medium-term shocks – from (allegedly) Climate change to geopolitical developments – which will create additional stagflationary pressures.

In contrast to the 2008 financial crisis and the early months of COVID-19, bailing out private and public actors through loose macroeconomic policies would only add more fuel to the inflationary fire. This means that there will be a hard landing – a deep, protracted recession – that will exceed the scale of the Great Financial Crisis. As asset bubbles burst, debt service rates rise and inflation-adjusted incomes of households, businesses, and governments fall, The economic crisis and financial collapse will feed off each other.

Certainly, advanced economies that borrow in their own currency could use a period of unexpected inflation to reduce the real value of some long-term fixed-rate nominal debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, monetization of central bank deficits will once again be seen as the path of least resistance. But you can’t fool all the people all the time. Once the inflation genie is out of the bottle – which will happen when central banks give up the fight in the face of impending economic and financial collapse – the nominal and real cost of borrowing will rise. Debt crisis with stagflation can be postponed, not avoided.”