The world’s foremost economist when it comes to projecting negative economic phenomenon, Nouriel Roubini, recently posted an article on Project Syndicate with a dire warning:
It is tempting to think that the war in Ukraine will have only a minor economic and financial impact globally, given that Russia represents merely 3% of the world economy. But policymakers and financial analysts need to avoid such wishful thinking.
All the negative inflationary trends already baked into the cake for 2022, and long dismissed by the U.S. Federal Reserve, will now be further accelerated and become more broad-based. The sanctions being imposed on Russia will not only damage Putin’s economy but also further augment inflationary pressures in the global economy. Furthermore, Roubini warns, Russia will inflict its own asymmetrical retaliatory measures, adding to the overall pain in major economies.
The cumulative effect of the measures enacted in the wake of Russia’s invasion of Ukraine will be massive stagflationary trends-high inflation combined with low or negative economic growth. But with central banks already having loosened their monetary policies for far too long, their ability to engage in damage control is limited, Roubini warned. Based on recent policy mistakes, Roubini believes the Federal Reserve will likely “fudge” rate hikes to avoid creating a fiscal drag that heightens recessionary forces. But energy prices will continue to spike. Inadequate measures by central banks will only augment inflationary expectations. Attempts to increase alternative supplies of oil with a nuclear deal with Iran are likely to fail, resulting in energy hoarding.
It is not only central banks that are in a bind, according to Nouriel Roubini. The vast deficit spending unleashed by sovereigns to counter the negative shock from Covid have led to soaring public debt levels, leaving little fiscal ammunition to confront the economic consequences of Putin’s war on Ukraine. Furthermore, Professor Roubini points out that the economic crisis generated by Putin’s attack on Ukraine has led to a negative supply shock, fundamentally different from the demand shock generated by the credit crisis that occurred in 2007-09. He warns that fiscal stimulus is the wrong response to the current crisis, and will only accelerate already high inflationary expectations.
Nouriel Roubini offers the following sobering conclusion:
The global impact of Putin’s war will be channeled through oil and natural gas, but it will not stop there. The knock-on effects will strike a massive blow to global confidence at a time when the fragile recovery from the pandemic was already entering a period of deeper uncertainty and rising inflationary pressures. The knock-on effects of the Ukraine crisis – and from the broader geopolitical depression it augurs – will be anything but transitory.
My own assessment; we are now in a deep global economic crisis that will be enduring, likely for the remainder of the decade. It will be the Great Depression 2.0.
Sheldon Filger-blogger for GlobalEconomicCrisis.com
