'This rise in inflation may not be a short-term phenomenon: the Great Moderation of the past three decades may be over, and we may be entering a new era of Great Stagflationary Instability,' writes Nouriel Roubini
phenomenon: the Great Moderation of the past three decades may be over, and we may be entering a new era of Great Stagflationary Instability.until very recently. You may have barely heard about inflation. For a long time, until 2021, inflation—the increase in prices year to year—was below the advanced economies’ central banks’ target of 2%. Usually inflation is associated with high economic growth.
During the post–Cold War era of hyper-globalization, China, Russia, India, and other emerging-market economies became more integrated in the world economy, supplying it with low-cost goods, services, energy, and commodities.
This debate has raged for the past year, but now it is largely settled: “Team Persistent” won, and “Team Transitory”—which included most central banks and fiscal authorities—has now admitted to having been mistaken. The Fourth question: Are we in a recession already? In both the U.S. and Europe, forward-looking indicators of economic activity and business and consumer confidence are heading sharply south. The U.S. has already had two consecutive quarters of negative economic growth in the first half of this year, but job creation was robust, so we weren’t yet in a formal recession. But now the labor market is softening, and thus a recession is likely by year’s end in the U.S. and other advanced economies.
Moreover, because today’s higher inflation is a global phenomenon, most central banks are tightening at the same time, thereby increasing the probability of a synchronized global recession. This tightening is already having an effect: bubbles are deflating everywhere—including in public and private equity, real estate, housing, meme stocks, crypto, SPACs, bonds, and credit instruments. Real and financial wealth is falling, and debt and debt-servicing ratios are rising.
With governments unable to reduce high debts and deficits by spending less or raising revenues, those that can borrow in their own currency will increasingly resort to the “inflation tax”: relying on unexpected price growth to wipe out long-term nominal liabilities at fixed rates. This balkanization of the global economy is deeply stagflationary, and it is coinciding with demographic aging, not just in developed countries but also in large emerging economies such as China. Because young people tend to produce and save, whereas older people spend down their savings, this trend also is stagflationary.
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