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Roubini Sees Overheated Growth, Then Rampant Stagflation

'The rosy scenario that is currently priced into financial markets may turn out to be a pipe dream,' says the famously bearish economist Nouriel Roubini.
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Nouriel Roubini, famous for his gloomy economic and financial-market forecasts, is at it again.

“Given today’s high debt ratios, supply-side risks, and ultra-loose monetary and fiscal policies, the rosy scenario that is currently priced into financial markets may turn out to be a pipedream,” the chief economist at Atlas Capital wrote on Project Syndicate.

“Over the medium term, a variety of persistent negative supply shocks could turn today’s mild stagflation into a severe case.”

The U.S. economy grew 6.6% in the second quarter, and consumer prices rose 5.3% in the 12 months through August. Meanwhile, the S&P 500 index has climbed 18% year to date.

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Roubini warns of excessive economic growth in the short run. “Given today’s loose monetary, fiscal, and credit policies, the fading of the [Covid] delta variant and its associated supply bottlenecks will overheat growth,” he said.

That “will leave central banks stuck between a rock and a hard place. Faced with a debt trap and persistently above-target inflation, they will almost certainly wimp out and lag behind the curve, even as fiscal policies remain too loose.”

And over a longer horizon, “as a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating,” Roubini said.

The risk is “full stagflation with much lower growth and higher inflation,” he wrote.

“The temptation to reduce the real value of large nominal fixed-rate debt ratios would lead central banks to accommodate inflation, rather than fight it and risk an economic and market crash.”