To argue his point of view, Roubini highlights the debt figures, which he describes as “Amazing, to say the least.” On a global scale, he writes, “the total debt of the public and private sectors in relation to GDP has gone from 200% in 1999 to 350% in 2021. The share is now 420% in advanced economies and 330% in China. In the United States it amounts to 420%, a percentage higher than that registered during the Great Depression and after World War II.
This over-indebtedness has been going on for a long time and, as the article explains, thanks to low interest rates, it has kept “insolvent zombies such as households, companies, banks, shadow banks, governments and even entire countries afloat” during the crisis of 2008 and the two years of the Covid period.
But now inflation, fueled by the same ultra-loose fiscal, monetary and credit policies, has put an end to this “dawn of the financial dead”writes Roubini bluntly, and with central banks being forced to raise interest rates, “the zombies are experiencing a sharp rise in debt-servicing costs.”
the triple whammy
A radical change that supposes “a triple blow”, since inflation is also eroding the real income of households and reducing the value of their assets, such as real estate and financial assets. “The same is true for fragile and overleveraged businesses, financial institutions and governments: they are simultaneously facing sharply rising financing costs, falling revenues and rents, and declining asset values.”
Unlike the aforementioned crises, ultra-relaxed policies can no longer be applied because they would add fuel to the inflation fire, and this, the economist points out, means a deep and prolonged recession, as well as a serious financial crisis.
“As asset bubbles burst, debt service ratios soar, and inflation-adjusted incomes of households, businesses, and governments fall, the economic crisis and financial meltdown will feed off each other.”“says the article.
“Certainly,” Roubini writes, “advanced economies borrowing in their own currencies can take advantage of unexpected inflation to reduce the real value of some long-term fixed-rate nominal debt. Banks’ monetization of the deficit plants will once again be seen as the lesser evil. But you can’t fool all citizens all the time.”
“The mother of all stagflationary debt crises can be postponed, but not avoided,” concludes Roubini in Project Syndacate.
Source: Ambito
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