With economic growth slowing and inflation raging, many experts are concerned about stagflation. That’s a combination of slow or negative growth combined with high inflation.
The economy shrank 1.6% in the first quarter and 0.6% in the second. Consumer prices soared 8.2% in the 12 months through September.
Nouriel Roubini, emeritus professor of economics at New York University, is one of those who is concerned. He gained acclaim for predicting the housing crash of 2007-08 in 2006. That earned him the nickname Dr. Gloom.
As for the present, he’s concerned that Federal Reserve may abandon its interest rate increases too soon. “Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation,” he wrote in a commentary on Project Syndicate.
Skepticism of Fed Diligence
“There is good reason to doubt their willingness to do whatever it takes to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash,” he said. The Fed’s inflation target is 2%.
So, “any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations,” Roubini said.
He is skeptical that the Fed will be able to engineer a soft landing, where it quells inflation without sending the economy into a recession.
Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% and unemployment below 5%, Roubini noted. Unemployment registered 3.5% in September, matching a five-decade low.
We aren’t in a recession yet, he said. But the data “points to a sharp slowdown that will grow even worse with monetary-policy tightening,” he said. “A hard landing by year’s end should be regarded as the baseline scenario.”
Economic and Financial Crash
While some economists foresee a mild, short recession, Roubini doesn’t. Rather, he expects a “protracted stagflationary debt crisis.”
And, “the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash,” Roubini said
As for stocks, they “have not yet fully priced in even a mild and short hard landing,” he said.
“Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy.”
Already, “signs of strain in debt markets are mounting,” Roubini said. “Highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here.”
