Debt is rising around the world as governments, businesses and individuals go on a spending and borrowing spree during the COVID pandemic and as it eases.
Nouriel Roubini, chief economist on the Atlas Capital team, observes that debt is causing major trouble.
He adopted the moniker “Dr.” Gloom” and predicted the financial crisis of 2007-09.
“After the explosion of deficits, borrowings and leverage in recent decades, the world economy is heading towards an unprecedented confluence of economic, financial and debt crises,” Roubini wrote on Project Syndicate,
He said that huge debt has accumulated in both the public and private sectors. “Looking only at explicit loans, the figures are staggering,” Roubini said.
“Globally, total private and public sector debt as a share of GDP is set to increase from 200% in 1999 to 350% in 2021. … In the US, it is 420%, which is higher than during and after the Great Depression. second World War.”
years of over-lending
Roubini said the excessive lending has been going on for decades.
He added, “The explosion of the nonperforming loan ratio shows that many borrowers … were bankrupt zombies who were being propped up by low interest rates.”
“During both the global financial crisis of 2008 and the Covid crisis, many insolvent agents were rescued [stimulative monetary policy] and one-time fiscal bailout.
But now we’re paying Piper, Roubini said.
“Inflation – fed by the same overly loose fiscal, monetary and debt policies – has ended this financial Dawn of the Dead,” he said.
“With central banks forced to hike interest rates in an effort to restore price stability, zombies are experiencing a sharp increase in their debt-servicing costs.”
At the same time, stagflation (high inflation and weak growth) has arisen, Roubini said. And “we cannot cut interest rates just to stimulate demand,” as central banks did during the 2007–09 financial crisis, he said.
This is partly because the global economy is also facing supply shocks that are pulling down growth and pushing up prices, he said.
“These include the pandemic’s disruption to the supply of labor and goods, the impact of Russia’s war in Ukraine on commodity prices, and China’s increasingly destructive zero-covid policy,” Roubini said.
hard economic landing
“Unlike the 2008 financial crisis and the initial months of Covid, merely unleashing private and public agents to loosen macro policies will add more fuel to the inflationary fire.”
So what’s going to happen? “A hard landing on top of a severe financial crisis will be a deep, long recession,” Roubini said. “The economic crisis and the financial crash will feed off each other.”
He said that central banks would reverse their tight monetary policies. “With governments reluctant 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 then the “genie of inflation” [will] Get out of the bottle,” Roubini said. and “nominal and real borrowing costs will increase.”
The result: “The mother of all stagnant debt crises is avoidable, not avoidable,” Roubini said.