Opinion: Great stagflation is coming as the global economy is under pressure from all sides

New York (Project Syndicate) – The global economy is undergoing a radical regime shift. Decades of Great Moderation are over.

The Great Moderation, which followed the stagflation (high inflation and deep recession) of the 1970s and early 1980s, was characterized by low inflation in the developed world. Relatively stable and robust economic growth and a short, shallow recession. Lower and lower bond yields (hence the positive return on bonds) due to a long-term decline in inflation. US, SPX,


and Global Equity GDOW,

This prolonged period of low inflation is usually explained by the central bank’s move to credible inflation targeting after the accommodative monetary policy of the 1970s, and the government’s adherence to relatively conservative fiscal policy. (Meaningful stimulus only comes during recessions). More important than demand-side policies, however, were the many positive supply shocks that raised potential growth, lowered production costs, and kept inflation in check.

Reduce production costs

During the post-Cold War era of hyper-globalization, China, Russia, and other emerging market economies became more integrated into the global economy, supplying the global economy with low-cost goods, services, energy, and commodities. Mass migration from the Southern Hemisphere to the Northern Hemisphere has kept wages low in developed countries, technological innovation has reduced the cost of producing many goods and services, and relative geopolitical stability has pushed production to the lowest cost. Locations can now be efficiently assigned. Worried about the safety of your investment?

However, cracks began to appear in the Great Moderation during the 2008 global financial crisis and the 2020 COVID-19 recession. In both cases, inflation initially remained low given the demand shock, and lax monetary, fiscal and credit policies prevented deflation from occurring. supply factor.

On the supply side, the backlash against hyperglobalization is gaining momentum, creating opportunities for populist, nativist and protectionist politicians. Public anger over income and wealth inequalities is also growing, leading to more policies to help workers and those “left behind”. However well-intentioned, these policies are now contributing to a dangerous spiral of wage price inflation.

political resistance

To make matters worse, new protectionism (from both left and right) is restricting trade and capital movement. Political tensions (both within and between countries) are driving the process of reshoring (and “friendshoring”). Political resistance to immigration is curbing global movement of people and putting further upward pressure on wages. National security and strategic considerations further restrict the flow of technology, data and information. And new labor and environmental standards, though important, hinder both trade and new construction.

This Balkanization of the global economy is a serious stagflation, and aging is progressing not only in developed countries but also in large emerging economies such as China. This trend is also stagflation because young people tend to produce and save while older people tend to use up their savings.

The same is true of today’s geopolitical turmoil.

Russia’s war in Ukraine, and the Western response to it, has disrupted trade in energy, food, fertilizers, industrial metals, and other commodities. Western decoupling from China is accelerating in all aspects of trade: goods, services, capital, labor, technology, data, and information.

Other strategic rivals in the West could soon wreak havoc. Should Iran exceed its nuclear arsenal limit, it could trigger a military attack by Israel or the United States, causing a massive oil spill. And North Korea still rattles its nuclear weapons on a regular basis.

climate change

Now that the US dollar has become BUXX,
Fully weaponized for strategic and national security purposes, it could start to lose its status as the leading global reserve currency, and a weaker dollar would of course increase inflationary pressures. needs a frictionless financial system. But sweeping primary and secondary sanctions have thrown sand into this well-oiled machine, significantly increasing the transaction costs of the deal.

On top of that, climate change is also stagflation. Droughts, heat waves, hurricanes, and other disasters are increasingly disrupting economic activity and threatening crops (thus pushing up food prices). At the same time, the demand for decarbonization has led to underinvestment in fossil fuel capacity before reaching a point where investments in renewable energy can make up the difference. Today’s Big Energy Price Spike CL00,

It was therefore inevitable.

A pandemic is also a persistent threat, further fueling protectionist policies as countries rush to stock up on critical supplies of food, medicine and other essentials. Two and a half years after his COVID-19, he now has monkeypox. And human encroachment on fragile ecosystems and the thawing of Siberian permafrost may soon allow us to deal with dangerous viruses and bacteria that have been trapped for thousands of years.

Finally, cyberwarfare remains an underestimated threat to economic activity and public safety. Businesses and governments will have to face production disruption from stagflation or spend big on cybersecurity. Either way, the costs will rise.

On the demand side, lax and unconventional monetary, fiscal and credit policies have become the hallmark of the new regime, not a bug. Between today’s soaring private and public debt (as a share of GDP) and the huge underfunded debt of pay-as-you-go social security and health systems, both the private and public sectors face increasing financial risks. facing. Central banks are therefore trapped in a “debt trap”. Attempts to normalize monetary policy will lead to a sharp increase in debt service burdens, leading to massive bankruptcies, a cascade of financial crises, and real economic repercussions.

Governments that can borrow in their own currency will increasingly resort to an “inflation tax” because they cannot reduce their large debts and deficits by spending less or raising revenues. It relies on unexpected price increases to wipe out long-term nominal debt at fixed interest rates. .

Thus, as in the 1970s, persistent and repeated negative supply shocks, combined with lax monetary, fiscal and credit policies, would trigger stagflation. Moreover, high debt ratios create the conditions for a stagflationary debt crisis. Long-term bonds TMUBMUSD10Y, which are both components of traditional asset portfolios during the Great Stagflation,
US and global stocks could be hit and suffer huge losses.

Nouriel Roubini, emeritus professor of economics at New York University’s Stern School of Business, is chief economist for the Atlas Capital Team and author of the following papers:MegaThreats: 10 dangerous trends threatening our future and how to navigate them(Little, Brown and Company, October 2022).

This commentary was published with permission of Project Syndicate — From Great Moderation to Great Stagflation

Read more columns by Nouriel Roubini:

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Putin’s war promises to crush the global economy with inflation and much slower growth

Rising stagflation storm shakes markets, economies and societies

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