By Naveen Athrappully
Following the explosion of leverage, borrowing, and deficits in recent decades, the world economy is now moving towards an “unprecedented confluence” of financial, debt, and economic crises, Roubini warned in a Dec. 2 article for Project Syndicate. Households, corporations, financial entities, governments, pension plans, and so on are now burdened with massive amounts of debt that will only “continue to grow as societies age.”
Total private and public sector debt as a share of GDP rose to 350 percent in 2021 from 200 percent in 1999. In the United States, this stands at 420 percent, while in China it is at 330 percent.
The unsustainable debt ratios turned many borrowers like banks, corporations, households, nations, shadow banks, and governments into “insolvent zombies.” The low interest rates in the past years helped keep this trend alive.
But with elevated inflation, the “financial Dawn of the Dead” has ended, Roubini observes. As the Fed raises interest rates to combat inflation, the “zombies” are facing a sharp rise in debt servicing costs. Roubini was senior adviser to Obama-era Treasury Secretary Timothy Geithner.
Since January, the Federal Reserve has pushed up its benchmark interest rate from 0.25 percent to a range of between 3.75 percent and 4 percent.
“For many, this represents a triple whammy, because inflation is also eroding real household income and reducing the value of household assets, such as homes and stocks,” the economist wrote.
“The same goes for fragile and over-leveraged corporations, financial institutions, and governments: they face sharply rising borrowing costs, falling incomes and revenues, and declining asset values all at the same time.”
These developments are happening amidst the return of stagflation, a situation of weak economic growth and high inflation. Unlike the 2008 financial crisis and the COVID-19 crisis, bailing out private and public entities will only end up pouring “more gasoline on the inflationary fire.”
This means that there will be a “deep, protracted recession” on top of an intense financial crisis. “The mother of all economic crises looms, and there will be little that policymakers can do about it,” Roubini warns.
A similar negative prediction for the American economy was also made by Harvard professor Larry Summers in a recent interview with Bloomberg.
Summers, who also served under Obama, pointed out that it will become much harder to bring inflation down without a recession because at a certain point, consumers will run out of their savings, which will reduce consumption. This means that the economic downturn will be “fairly forceful.”
“When the unemployment rate goes up by 0.5 percent, it goes up by more than 2 percent. And that’s because once you get into a negative situation, there’s an avalanche aspect. And I think we have a real risk that that’s going to happen at some point,” Summers said.