An economist who predicted the housing market crash of 2007 and has been dubbed “Dr. Doom” for his grim economic predictions warned in an opinion article Monday that rising inflation and current fiscal policies could spur a “severe debt crisis.”
Nouriel Roubini wrote in Project Syndicate that inflation is rising in the U.S. and economic growth is slowing sharply despite the federal government’s multi-trillion-dollar stimulus programs enacted in response to the COVID-19 pandemic.
“Compounding the problem, medium-term negative supply shocks will reduce potential growth and increase production costs,” he warned. “Combined, these demand and supply dynamics could lead to 1970s-style stagflation (rising inflation amid a recession) and eventually even to a severe debt crisis.”
Forget about the medium to long term – mild stagflation is already here, observes @Nouriel. https://t.co/wXaoeQGSM2
— Project Syndicate (@ProSyn) August 31, 2021
The personal consumption expenditures (PCE) index, which measures prices, surged 4.2% in the 12-month period between Aug. 2020 and July 2021, a Commerce Department report published last Friday concluded. Prices across all sectors increased 0.4% in July alone and prices excluding volatile food and energy categories increased 0.3% last month, according to the data.
The last time consumer prices increased this much in one year was more than three decades ago in January 1991, CNBC reported.
President Joe Biden and Treasury Secretary Janet Yellen have repeatedly stated that rising inflation was a temporary result of the ongoing economic recovery. Federal Reserve chairman Jerome Powell said in late July that inflation has been “higher and more persistent” but argued inflationary pressures would eventually decrease.
But some economists and Republicans in Congress blame the Biden administration’s economic policies for rising inflation. The administration, along with Democrats in Congress, are proposing roughly $6 trillion in federal spending that would bring the U.S. to its highest levels of spending since World War II.
The White House has downplayed inflation concerns and continues to promote the president’s economic agenda. Biden promised to “keep a careful eye on inflation each month” during remarks earlier in August but called his agenda “fiscally responsible.”
Roubini suggested this “optimistic view” toward inflation might be incorrect in his Monday opinion article. He noted the delta variant of COVID-19 is “throwing a monkey wrench” into the global economy and the Federal Reserve’s proposed changes to quantitative easing measures “could cause bond, credit, and stock markets to crash.”
Roubini warned the economy is likely to face a considerable number of “negative supply shocks” over the medium and long term. These shocks, combined with “loose monetary and fiscal policies,” could lead to persistent stagflation and a debt crisis, he wrote.
“While these persistent negative supply shocks threaten to reduce potential growth, the continuation of loose monetary and fiscal policies could trigger a de-anchoring of inflation expectations,” Roubini concluded. “The resulting wage-price spiral would then usher in a medium-term stagflationary environment worse than the 1970s – when the debt-to-GDP ratios were lower than they are now.”