Economist Roubini: “Severe” recession, financial crisis to come

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The economic outlook is bleak now.

It is difficult to know when inflation will peak, when it will fall seriously and therefore how far the Federal Reserve will ultimately raise interest rates.

It’s also unclear whether the Fed, in its quest to slay the inflation dragon, will raise rates high enough to cause a recession. The Fed has raised rates by 150 basis points since March.

The central bank indicated that an additional 75 basis points would arrive on July 27. And some experts predict the total from March will be 350 basis points by the end of the year.

Creeping inflation is pushing the Fed to move, with consumer prices soaring 9.1%, a 40-year high, in the 12 months to June.

Summers sees likely recession

Former Treasury Secretary Larry Summers is one of the experts who sees a high likelihood of a recession. The Harvard economist notes that at no time in the past 65 years has inflation been above 4%, unemployment below 5%, and the economy has not gone into recession during of the next two years.

Unemployment stood at 3.6% in June.

Summers and most other economists who expect a recession believe it will be moderate, but Nouriel Roubini, managing director of Roubini Macro Associates, is not one of them.

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“There are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” said Roubini, one of the experts who predicted the 2008-09 financial crisis. told Bloomberg on July 25. “The idea that this is going to be short and superficial is totally delusional.”

In a recent article on Project Syndicate, he compared the current predicament to the 1970s and 2008. “The next crisis will not be like its predecessors,” Roubini wrote:.

Combination of past crises

“In the 1970s, we had stagflation, but not massive debt crises, because debt levels were low. After 2008, we had a debt crisis, followed by low inflation or deflation, because the credit crisis had generated a negative demand shock.

So what do we have in store next?

“Today we are facing supply shocks against a backdrop of much higher debt levels, implying that we are headed for a combination of 1970s-style stagflation and debt crises. 2008 – that is, a stagflationary debt crisis,” Roubini said.

For fiscal year 2021, ending September 30, the budget deficit totaled 12% of GDP, the second-worst ratio (after 2020) since 1945.

As for US stocks “they will most likely dive lower,” Roubini said. “In typical vanilla recessions, US and global stocks tend to fall around 35%,” he noted.

“But, because the next recession will be both stagflationary and accompanied by a financial crisis, the stock market crash could be closer to 50%.”

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