Economist Nouriel Roubini has again warned about an impending economic crisis in the global economy that policymakers will likely not be able to handle. He says the explosion of leverage, borrowing, and deficits in recent decades, the world economy is now moving toward an unprecedented confluence of financial, debt, and economic crises. Households, corporations, financial entities, governments, pension plans, and so on are now burdened with massive amounts of debt that will only continue to grow as societies age.
He mentions the world debt as the prime reason behind his assumptions. Total private and public sector debt as a share of GDP rose to 350 percent in 2021 from 200 percent in 1999. In the United States, this stands at 420 percent, while in China it is at 330 percent. The unsustainable debt ratios turned many borrowers like banks, corporations, households, nations, shadow banks, and governments into “insolvent zombies.” The low interest rates in the past years helped keep this trend alive.
These developments are happening amidst the return of stagflation, a situation of weak economic growth and high inflation. Unlike the 2008 financial crisis and the COVID-19 crisis, bailing out private and public entities will only end up pouring more gasoline on the inflationary fire.
This means that there will be a deep, protracted recession on top of an intense financial crisis.
Harvard professor Larry Summers also pointed out that it will become much harder to bring inflation down without a recession because at a certain point, consumers will run out of their savings, which will reduce consumption. This means that the economic downturn will be fairly forceful.