- Economics professor Nouriel Roubini warned the global economy faces a stagflationary debt crisis.
- Reckless borrowing has amplified the risks of stubborn inflation and economic stagnation, he said.
The debt-ridden global economy could face a punishing period of stubborn inflation, declining output, and higher unemployment, Nouriel Roubini has warned.
"The decade ahead may well be a stagflationary debt crisis the likes of which we've never seen before," he said in a Time essay published on Thursday.
Roubini, an economics professor at NYU Stern, is nicknamed "Dr. Doom" for his dire predictions. He noted that over the past 60 years, whenever the Federal Reserve has tried to crush US inflation north of 5% when unemployment was below 5%, the result has always been a "hard landing" or recession.
US inflation was 8.2% and unemployment was 3.5% in September, the economy has shrunk for two straight quarters, and the labor market appears to be cooling. As a result, Roubini expects a full-blown domestic recession by the end of this year.
The veteran economist sees similar challenges around the world. He emphasized that private and public debt, as a share of global GDP, has soared from 200% in 1999 to 350% today. Meanwhile, several of the world's central banks are quickly hiking interest rates to counter surging inflation, making those debts more onerous.
"Rapid normalization of monetary policy and rising interest rates will drive highly leveraged households, companies, financial institutions, and governments into bankruptcy and default," Roubini said, flagging the risk of "massive insolvencies and cascading financial crises."
This "debt trap" means that if financial markets seize up and the global economy slumps into a recession, central banks and governments will have limited scope to help without fueling inflation or squeezing debtors, he added.
Roubini noted that tighter monetary policy is already taking its toll. "Bubbles are deflating everywhere — including in public and private equity, real estate, housing, meme stocks, crypto, SPACs, bonds, and credit instruments," he said. "Real and financial wealth is falling, and debt and debt-servicing ratios are rising."
If central banks balk at the impact of their policies and "wimp out and blink," the result could be persistent inflation and economic decline, Roubini said. He highlighted several other stagflation drivers, including greater protectionism, reshoring, and xenophobia. Ageing populations who spend instead of save, the supply disruptions caused by Russia's invasion of Ukraine, and climate change also made his list.
Finally, Roubini offered some advice to investors navigating a tough market. He warned that stocks and long-term bonds could nosedive, and recommended short-term and inflation-indexed bonds, gold and other precious metals, and disaster-proof real estate as better bets.