The man dubbed "Dr Doom", US-based economist Nouriel Roubini, is warning that the world is facing a "perfect storm" of high inflation, rising interest rates and recession that will be "the worst of all worlds for workers".
Employees in Australia may already feel some appreciation for Dr Roubini's argument.
This week's National Accounts from the Bureau of Statistics showed real household disposable income per capita fell for the fifth straight quarter as inflation-adjusted hourly pay plunged 5.4 per cent, with real wages virtually unchanged from 2012 levels.
For many Australians, it may feel like stagflation — a situation where the economy is shrinking even as prices keep rising — is already here.
But Dr Roubini expects things to get much worse across the so-called advanced economies as the year unfolds.
"I do believe that this stagflation rate crisis is going to emerge this year," he told The Business.
"The latest numbers on inflation coming from the US and Europe, and other advanced economies, showed that inflation now is quite sticky.
"Central banks are in a dilemma, because they have to raise rates more to fight inflation. But, if they do so, the economy is going to start to contract quite soon, and if they don't then we could have a de-anchoring of inflation and inflation expectations.
"So I expect that we're going to have a recession in the US and Europe, in other advanced economies, at a time where inflation is not back to 2 per cent."
The 'great stagflationary debt crisis'
Worse than the garden variety stagflation the world endured through much of the 1970s and early 1980s, Dr Roubini expects this to evolve into a "great stagflationary debt crisis" — combining some of the worst elements of the 70s with the global financial crisis.
"Now we're facing the perfect storm — inflation, recession, stagflation and a potential debt crisis," he warned.
"The debt ratio in advanced economies was only 100 per cent of GDP [in the 1970s], today it is 420 per cent of GDP, in private and public debt.
"So, in this case, if we have those shocks to say oil prices, not only do you get inflation, not only do you get recession and stagflation, but you get what I call a great stagflationary debt crisis, because with interest rates so high, then that [debt] ratio has become unsustainable."
While the economic consensus is that inflation has peaked and will continue to ease this year and next, Dr Roubini is among a minority group of analysts who warn that the inflation shock is far from over and risks becoming entrenched.
"Goldman Sachs predicts that commodity prices, not just energy, the entire gamut of them, may increase 43 per cent this year," he observed.
"This is even without a war in the Middle East between Israel and Iran. If that spike in commodity prices occurs, then headline inflation is going to be higher rather than lower."
'Worst of all worlds for workers'
He believes that will force the Federal Reserve and other central banks to keep raising interest rates until their economies fall into recession and eventually they "wimp out" of trying to get inflation back to their target levels.
"I think that the Fed funds rate will have to be certainly above 6 per cent to achieve a 2 per cent inflation target," Dr Roubini argued.
"But if you raise interest rates to 6 per cent then you're going to have a real hard landing.
"Then you'll have also a crash in financial markets, you'll have a severe correction of equity markets, you'll have bonds going higher, you'll have credit spreads for borrowing by the private sector rising, so you'll have severe financial distress.
"That financial distress is going to make the recession more severe, and a more severe recession by having a contraction of income and output is going to increase the number of defaults by households, businesses, corporates, and even some financial institutions and some governments in poor countries that have serious debt problems."
Dr Roubini also warned that working people would likely be hit hardest by the looming crisis, including those who kept their jobs.
"Stagflation is the worst, because loss of jobs, unemployment, weakness of the labour market and wages are growing less than inflation, because you have stagflation," he said.
"So it's across the board to even those who have a job, to their real wages, because prices are rising more than wages, and some people lose their jobs and their income.
"So stagflation is the worst of all worlds for workers."
