The great stagflationary debt crisis will hit markets this year, the famed economist warns
The world is facing the “perfect storm” of high inflation, rising interest rates and a recession in 2023, with people who are currently employed likely to be hit hardest by the crisis, famed economist and New York University professor Nouriel Roubini told Australia’s ABC on Thursday.
One of the first economists to predict the financial crisis of 2008-09, Roubini has been warning now for months of a stagflationary debt crisis, which would combine the worst elements of 1970s stagflation and the 2008 debt crisis.
“I do believe that a stagflationary crisis is going to emerge this year,” he said, pointing out that the debt ratio in advanced economies was only 100% of GDP in the 1970s while currently it is 420% of GDP, in private and public debt.
“So, in this case, if we have those shocks to, say, oil prices, not only do you get inflation, not only do you get recession and stagflation, but you get what I call a great stagflationary debt crisis, because with interest rates so high, then that [debt] ratio has become unsustainable,” he explained.
Dubbed ‘Doctor Doom’ by Wall Street for his dire economic predictions, Roubini suggested that all of this would force the US Federal Reserve and other central banks to keep hiking interest rates until their economies fell into recession.
“I think that the Fed funds rate will have to be certainly above 6% to achieve a 2% inflation target,” he said. “But if you raise interest rates to 6% then you’re going to have a real hard landing.”
According to the economist, this will precipitate a harsh correction in equity markets, bond yields going higher, credit spreads for private sector debt widening, and will eventually lead to severe financial distress.
“That financial distress is going to make the recession more severe, and a more severe recession by having a contraction of income and output is going to increase the number of defaults by households, businesses, corporates, and even some financial institutions and some governments in poor countries that have serious debt problems,” Roubini warned.
He also said that people who are currently employed would likely be hit hardest by the looming crisis, including those who kept their jobs. “Stagflation is the worst of all worlds for workers,” he stressed.