The economist Nouriel Roubini, famous for his ominous predictions in 2006 about the looming financial crisis, now warns that the current episode of stagflation will be deeper than expected and that the high level of public and private debt may end up causing “the mother of all crises”.
Stagflation (stagnation plus inflation) and an eventual debt crisis are two of the great economic dangers that Roubini identifies in his latest book, “Megamenazas” (Deusto), although in an interview with EFE he says that high inflation is the clearest short term threat. He adds to it on the immediate horizon the geopolitical risks derived from the invasion of Ukraine and the effect of China’s “covid zero” policy on supplies globally.
Great threats to the economy
In total, it lists a dozen “mega threats” which overlap and are potentially devastating, including the “cold war” between China and the United States, the expansion of the populist wave, the climate emergency, the normalization of global pandemics, the collapse demographics, economic deglobalization, the automation of employment and the increase in inequalities.
Roubini, who this week presented his book at the Rafael del Pino Foundation, explains that the increase in inflation in the last two years is a consequence of “bad policies maintained for too long” to combat the effects of covid-19, with excessive relaxation of fiscal and monetary policy that has given financial facilities.
“In Europe, bad luck has had more to do with dependence on Russian energy, although expansionary policies have also been part of the problem,” says the author, convinced that the consensus around inflation as something temporary “is wrong”. “The problem in fighting inflation is not just the risk of a hard landing for the economy, but the huge amount of debt in the system. Tightening financial conditions can worsen the recession and lead to defaults,” he says. .
“That is why I say that the central banks are in a debt trap, raising interest rates to combat inflation can not only contract the economy but also create a financial crisis,” he warns, while predicting that “the mother of all debt crises debt may occur sometime in this decade or the next.
“Spain’s policy to contain inflation is not optimal”
The measures are applied in Spain
Roubini considers that the measures that are being applied in Spain to contain inflation “are not optimal”, because artificially making certain goods cheaper “transfers money indiscriminately to the private sector and makes the task of the European Central Bank of cooling the economy more difficult”. In his opinion, it would be better to concentrate aid on the most needy and vulnerable families and companies.
“Spain is facing elections this year, all the governments before the elections give fiscal stimuli to increase the chances of being re-elected. It is not desirable or optimal because eventually a deficit and debt appointment can be created, which for now is not serious, but it poses a significant risk,” says Roubini.
He points out that if this risk materialized, Spain would return “to the fatal loop of the previous crisis”, which involved the rescue of the banks after the bursting of the real estate bubble. “It’s the domino effect of non-financial debt becoming financial. We’ve seen that horror movie before,” he says.
“Facing long-term threats requires sacrifices”
Solutions to long-term threats such as “the time bomb” represented by the aging of the population, the automation of work or climate change “require structural reforms that are unpopular and difficult to assume in democratic countries.”
“Politics is the art of the possible, not of the desirable,” says the economist, who points out that in the United States half the population denies climate change and the other half does not want to make sacrifices, which becomes a “mission impossible” “Fight against global warming.
“We should all be vegan, I tried for three months and failed,” acknowledges the author, who claims that the only way to convince developing countries to join “net zero” in greenhouse gas emissions is to “bribe” them.
