The “inevitable Crash”, the mother of crises is coming. The article by N.Roubini From Investing.com

By Alessandro Albano

Investing.com – Nouriel Roubini, a well-known economist and currently an emeritus professor of economics at New York University’s Stern School of Business, is famous for his pessimistic forecasts about the state of the global economy and financial markets. But this one went further, publishing on Project Syndicate an opinion piece entitled “The Unavoidable Crash”, that is the inevitable collapse that the globalized world will have to face in a few months and that not even central banks will be able to counter.

“After years of ultra-loose fiscal, monetary and credit policies and the unfolding of major negative supply shocks, stagflationary pressures are now putting pressure on a huge mountain of public and private debt,” writes the economist, warning that “the mother of all economic crises looms and policymakers can do little to avert it”.

To support his thesis, Roubini highlights the data on debt, which he defines as “stunning to say the least”. Globally, he writes, “total public and private sector debt to GDP ratio rose from 200% in 1999 to 350% in 2021. The ratio is now 420% in advanced economies and 330% in China. United States is 420%, which is higher than during the Great Depression and after World War II.”

This over-borrowing has been going on for a long time and, the article explains, thanks to low rates it kept alive “insolvent zombies such as households, companies, banks, shadow banks, governments and even entire countries” during the 2008 crisis and in the two-year period of Covid.

But now inflation, fueled by the same ultra-loose fiscal, monetary and credit policies, has put an end to “this financial Dawn of the Dead,” Roubini writes openly, and, with central banks forced to raise interest rates, ” the zombies are experiencing sharp increases in debt service costs.”

A radical change that represents “a triple blow”, as inflation is also eroding the real income of households and reducing the value of their assets, such as real estate and financial assets. “The same is true for over-leveraged and fragile businesses, financial institutions and governments: they are simultaneously facing sharply rising funding costs, falling incomes and revenues, and falling asset values. “.

Unlike the crises mentioned above, ultra-loose policies can no longer be implemented as they would add further fuel to the inflation fire, and this, the economist points out, means a deep and prolonged recession, as well as a severe financial crisis.” .

“As asset bubbles burst, debt service ratios soared, and inflation-adjusted incomes of households, businesses, and governments fell, the economic crisis and the financial crash will feed into each other,” he says. the article.

“Of course – writes Roubini – advanced economies that borrow in their own currency can take advantage of unexpected inflation to reduce the real value of some long-term fixed-rate nominal debts. The monetization of the deficit by central banks will once again be seen as the lesser evil. But you can’t fool all citizens all the time”.

“The mother of all stagflationary debt crises can be postponed, not avoided,” Roubini says in Project Syndicate.