Roubini Warns on Stagflation and Spiralling Debt
Commentary by Kathleen Tyson - July 1, 2021
I started reading Nouriel Roubini's blog on Roubini.com back in 2005. He was one of the few economists to appreciate how the boom in bad mortgage underwriting and worse mortgage securitisations with derivatives would eventually lead to a banking and financial crisis. I actually warned a roomful of central bankers to prepare for a liquidity crisis and bank resolutions in 2006, but they laughed at me.
Being right early in markets is indistinguishable from being wrong. As Citibank's CEO Chuck Prince said in 2008, "while the music is playing you have to keep dancing." That's why no one believes another crash is imminent so long as central banks are buying everything everywhere and monetising government deficits.
USD 11 trillion in central bank balance sheet expansion in less than a year has the music blasting louder in 2021, and all around the world. Markets trained by 30+ years of central bank puts can only go higher. At least until the music stops.
Over at Project Syndicate Roubini is predicting a 'Minsky Moment' will pop today's bubble markets, causing bad stagflation and recession for dominant currency economies (US, UK, EU and Japan) but disastrous depression for EMDEs that finance government debt in dominant currency bonds. With global debt now more than 3 times larger relative to global GDP, the Third World Debt Crisis of the 1980s will look mild in comparison.
I warned a central bank that the 1980s could repeat a few months ago. They didn't look happy. Central banks have been saying they would welcome an uptick in inflation as a sign of recovery, most having forgotten just how destructive inflation is for the poor, the elderly, and those who lack collective power to negotiate higher wages. With social cohesion already strained in some major economies, political instability might follow.
The whole thing is worth a read, but here's the gist of it:
When former Fed Chair Paul Volcker hiked rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession.
Under these conditions, central banks will be damned if they do and damned if they don’t, and many governments will be semi-insolvent and thus unable to bail out banks, corporations, and households. The doom loop of sovereigns and banks in the eurozone after the global financial crisis will be repeated worldwide, sucking in households, corporations, and shadow banks as well.
As matters stand, this slow-motion train wreck looks unavoidable.
Dr Doom is back!
Where I am a bit sceptical is his assertion that 'semi-insolvent' governments won't be able to bail out banks, corporations and households. With central bank monetisation of growing deficits in 2020 and for the foreseeable future, it isn't clear that governments can be 'semi-insolvent' anymore. At least not governments that issue sovereign bonds in their own currency . . .
I remember meeting a Caribbean finance minister back in the 1980s as the Debt Crisis raged. He told me that he had resisted borrowing in USD for many years, but when he went to IMF-World Bank meetings in Washington he was told he was stupid not to take the money to finance development. He took the money. His island nation, once peaceful and stable with strict fiscal discipline, was later crisis torn with rising political instability and civic violence. The USD debt could not be refinanced against rising inflation and higher USD interest rates. There's a lesson there somewhere.