Economist Nouriel Roubini Warns of Growing Risk of Stagflationary Crisis 'The rosy scenario that is currently priced into financial markets may turn out to be a pipe dream,' Roubini says.

By The Epoch Times

This story originally appeared on The Epoch Times

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Economist Nouriel Roubini, known for his gloomy-yet-accurate prediction of the 2008 financial crash, warned in a recent op-ed that the global supply chain crisis combined with high debt ratios and ultra-loose monetary and fiscal policies threaten to turn the "mild stagflation" of recent months into a stagflationary crisis.

Roubini argued in the Sept. 21 op-ed "Goldilocks Is Dying" that the optimistic outlook of stronger economic growth alongside moderating inflation may turn out to be wishful thinking.

"Given today's high debt ratios, supply-side risks, and ultra-loose monetary and fiscal policies, the rosy scenario that is currently priced into financial markets may turn out to be a pipe dream," Roubini wrote.

The supply-side shocks Roubini speaks of could stem from a range of sources, including new pandemic waves, demographic aging in developing and emerging economies, the balkanization of global supply chains, and cyberattacks. He argues that persistent negative supply shocks could stifle growth and drive up production costs over time.

"Over the medium term, as a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating: a full stagflation with much lower growth and higher inflation," Roubini wrote.

Roubini said that the consensus view among Wall Street analysts and policymakers is that that the current mild case of stagflation will be temporary and that the so-called "reflation trade" outlook will resume. This is the "goldilocks" scenario of stronger growth running in parallel with easing inflation, driven by the idea that supply-side bottlenecks will abate once the pandemic subsides.

"In this rosy scenario, inflation would subside, keeping inflation expectations anchored around 2 percent, bond yields would gradually rise alongside real interest rates, and central banks would be in a position to taper quantitative easing without rocking stock or bond markets," he wrote.

Dismissing the optimistic scenario as less likely, Roubini noted another possibility, namely "overheating." This he defined as growth accelerating as supply-side dislocations are ironed out, but inflation remaining stubbornly high, as a high savings rate combines with loose monetary and fiscal policies to further boost demand.

"The resulting growth would be associated with persistent above-target inflation, disproving central banks' belief that price increases are merely temporary," he wrote.

A sluggish response to such as scenario by central bank policymakers could raise inflation expectations, eventually boosting bond yields and leading to a correction in equities, while an overly hawkish response could, similarly, send bond yield higher and force a correction in stocks.

In the event of a scenario of ongoing stagflation, slowing growth could be met by ongoing loose monetary and fiscal policies, with the risk that inflation expectations become de-anchored, also driving up real yields and setting up equities for a sharp correction.

"Central banks, caught in a debt trap by high public and private debt ratios, would struggle to normalize rates without triggering a financial-market crash," he argued.

Roubini said he believes the "overheating" scenario is the most likely outcome, predicting that central banks will drag their feet on fighting surging prices and let inflation run hot.

"Faced with a debt trap and persistently above-target inflation, they will almost certainly wimp out and lag behind the curve, even as fiscal policies remain too loose," he wrote.

Roubini's remarks come as the Federal Reserve holds its two-day policy meeting, set to conclude Wednesday, where officials are discussing when to start paring back the $120 billion in monthly asset purchases as the first step toward normalizing monetary policy.

Most Fed officials have expressed support for a reduction in bond buys at some point this year, so long as the labor market continues to show signs of improvement.

While U.S. economic output has fully bounced back to pre-pandemic levels, the labor market remains around 5 million jobs down compared to before the outbreak hit, wiping out around 22 million positions.

By Tom Ozimek

Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'

The Epoch Times, founded in 2000, is headquartered in Manhattan, New York, with a mission to provide independent and accurate information free of political bias or corporate influence. The organization was established in response to censorship within China and a lack of global awareness regarding the Chinese regime's repression of the spiritual practice Falun Gong.

The Epoch Times is a widely read newspaper that is distributed in 33 countries and is available in 21 languages. The publication has been critical in providing balanced and detailed reporting on major global events such as the 2003 SARS pandemic and the 2008 financial crisis. Notably, the organization has played a key role in exposing corruption inside China.

Aside from its human rights coverage, The Epoch Times has made significant contributions in a variety of fields. It has received praise for its in-depth analysis and expert perspectives on business, the economy and U.S. politics. The newspaper has also received praise for its broad coverage of these topics.

A series of editorials titled "Nine Commentaries on the Communist Party" appeared in The Epoch Times in 2004. It asserts that freedom and prosperity in China can only be achieved by eliminating the Communist Party, which violated China's cultural and spiritual values. In addition, the organization led the Tuidang movement, which resulted in over 400 million Chinese citizens quitting the Communist Party. In spite of this, 90% of websites referring to the "Nine Commentaries" were blocked by the Chinese regime.

The Epoch Times has been at the forefront of investigating high-level corruption cases within the Chinese regime, with its reporters taking significant risks to uncover these stories. The organization has received several awards for its investigative journalism.

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