The keys to the inevitable debt crisis
All economic forecasting rates indicate that we are heading for a global financial crisis. For at least a year now, renowned economists such as Nouriel Roubini, Robert Kiyosaki and Mervyn King have been warning that government debt is growing too high. This runaway debt now comes on top of rampant inflation and a galloping energy crisis. In 11Onze we summarise the keys to understanding the inevitable global debt crisis.
Uncertainty, uncertainty, uncertainty. Possibly the most repeated word since the beginning of 2022. The leading economic newspapers, prestigious economists and investors, and economic analysts all agree: an unprecedented financial crisis is approaching —”a historic crisis,” in the words of Kiyosaki— and there are several indicators that, combined, are a real time bomb: debt, inflation and rising fossil fuel prices.
As Nouriel Roubini, professor of economics at New York University and one of the few economists who previewed the 2007 crisis, has explained, the current scenario adds up to worse ingredients than those that gave rise to the inflationary crisis of the 1970s and the debt crisis of 2007. The result, he warned, could be a crisis that mutates into an economic depression that could last for years.
Public debt sets off alarm bells
To begin with, says Roubini, there are record levels of private and, above all, public debt. Moreover, he explains that the context of stagflation, i.e. a scenario of high inflation, a slow rate of economic growth, and high unemployment, together with unprecedented fiscal and monetary policies is further increasing this debt of states. And he argues why this debt crisis, coupled with inflation and rising prices, has never happened before.
He argues that, during the inflation crisis of the 1970s, advanced economies and most emerging markets had much lower public debt than they do now. In any case, that inflation did not have a negative impact on debt, because “unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed rates, thus reducing many advanced economies’ public-debt burdens.” Now, however, in order to reduce debt, states need such high levels of inflation that they may become unaffordable for citizens, who may lose purchasing power and thus become impoverished.
If we take the financial crisis of 2007 as a reference, Roubini recalls that the levels of public and private debt led to a major global debt crisis, which was aggravated by the bursting of the real estate bubble. However, the recession that followed that debt crisis led to low inflation, almost deflation. Today, by contrast, the runaway debt crisis coincides with stagflation that is beginning to look alarming.
Roubini’s hypothesis coincides with the view of former Bank of England governor Mervyn King, who early last year warned of a possible eurozone financial crisis. Already then, in an interview in ‘El País’, he stated forcefully: “A new debt crisis is coming, and it will be soon.”
In that conversation, King argued that global debt is indeed above 2007 levels, a debt that has not stopped growing with the pandemic. “When the crutches of the state are withdrawn, there will be corporate bankruptcies, and most likely sovereign debt crises in emerging countries,” he said. And he warned that having all this happen at the same time could cause a “serious problem.” “It is impossible to know when and where it will happen, because of the radical uncertainty, but the system is creaking on the debt side,” he said.
The collapse of emerging markets
Just a few days ago, economic analyst Bill Dudley made the same forecast as King ‘Bloomberg’. The expert warns of the possible bankruptcy of emerging countries, due to the impossibility of assuming their public debt. Even so, he points out some ways out. Dudley considers it very likely that 2022 will be a “very difficult” year for low-income countries and emerging markets, because they have been the big borrowers in the sovereign debt market.
“A series of crises concentrated in these countries seems almost inevitable,” he says. And he predicts that as the US Federal Reserve begins to tighten monetary policy, funding costs will rise and less credit will be available, because interest rates reduce the incentive for investors to seek the kind of returns offered by these countries.
Added to this situation is the fact that the debt moratorium agreed during the pandemic by the International Monetary Fund (IMF) and the World Bank with the G-20 countries will soon come to an end. And this will mean that these emerging countries will need to get into debt again. Dudley therefore proposes that the IMF increase aid, but also admits that the measure only “postpones the day of reckoning” and subordinates these emerging markets to “private lenders” and large state lenders, such as China.
As such, Dudley believes that the best thing to do is a far-reaching reform of the sovereign debt regime, to make it more robust and resilient to the adverse economic backdrop. And he calls for much more transparency. “In many cases, it is impossible to judge how large the obligations are, when they will come due, their interest cost and other terms and conditions, including what collateral that may have been pledged to secure the borrowing,” he says.
The year of the big crisis, how to prepare for it
The president of 11Onze, James Sène, agreed with this analysis. In a conversation that you can revisit on the 11Onze Podcast, he detailed how to face the onslaught of a debt crisis on an international scale. Public debt and inflation, he explained, make it essential to seek refuge for people’s savings, so that citizens do not once again have to pay the price of an economic crisis.
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