Economist Nouriel Roubini: The Fed Is Going to Wimp Out in the Inflation Fight

Economist Nouriel Roubini says Federal Reserve is going to “wimp out” on the inflation fight and that will lead to a dollar crash.

Roubini is the Professor Emeritus at the Stern School of Business, New York University. He recently appeared on Bloomberg Markets and Finance to talk about threats to the global economy.

Roubini predicted the housing bubble would pop in an IMF position paper in 2006. When asked if we were there again, he emphatically said, “Yes.”

Yes, we are here again. But in addition to the economic, monetary and financial risks — and there are new ones now, we’re going toward stagflation like we’ve never seen since the 70s — in the book, I point out that there are also geopolitical risks.”

These include possible confrontations with China and Russia, environmental risks, health risks, and technological risks. Roubini called it a confluence of “mega risks.”

You might not expect Roubini to talk like this. He served in the Clinton administration as a senior economist in the White House Council of Economic Advisers and then moved to the Treasury department as a senior adviser to Timothy Geithner who was undersecretary for international affairs at the time. Despite his work in a Democratic Party administration, he sounds a lot like Peter Schiff when it comes to his views on the trajectory of the economy.

Roubini pointed out the amount of debt in the global financial system. Debt to GDP has gone from 200% to 350% globally. In the US the debt to GDP ratio is higher than after the Great Depression and WWII. After the 2008 financial crisis and during the pandemic, Zombie households, corporations, banks and governments were bailed out by negative interest rates and quantitative easing.

This time around is different because we have so much debt and central banks like the Fed have to increase interest rates to fight inflation so that zombie institutions are going to go bankrupt. That’s why not only are we going to have inflation and stagflation, but we’ll have a stagflationary debt crisis.”

We had supply shocks in the 70s similar to those we’ve experienced in the post-pandemic era. But at that time in most of the developed world, debt ratios were low. There were no debt crises in developed nations. But we did see debt crises in Latin America because those countries like Brazil, Mexico and Argentina had borrowed too much. When Volker jacked up interest rates to 20%, they went bankrupt.

Today, we have the worst of the 70s. We have a massive amount of stagflationary negative supply shock … and at the same time, we have a debt ratio like we’ve never seen before. So, we get a stagflationary debt crisis.”

The IMF identifies around 40 emerging market countries on the verge of a sovereign debt crisis. And Roubini said we are starting to see these problems spilling to developed nations. He specifically mentioned the United Kingdom being forced to monetize reckless fiscal stimulus.

Roubini agrees with Peter Schiff that central banks can’t do what’s necessary to win the inflation fight.

Right now, all central banks are playing tough, and talking tough, and acting tough – hawkish – because they have a problem of credibility. But in my view, there are two problems. One problem is if they try to get to 2% inflation, they cause a recession. And this recession is not going to be short and shallow. It is not going to be garden variety. It’s not going to be plain vanilla. It’s not going to be two quarters of negative growth and then inflation collapses and they can ease again. … It’s going to be a severe recession because of the debt ratio — because we’re going into fiscal and monetary tightening. And at the same time, not only do we have an economic crash, you’re going to have also a fiscal crash.”

Roubini called it a debt trap. There is so much private and public debt that any attempt to seriously fight inflation will ultimately cause a crash in financial markets.

And not just the stock market. That’s the least important. Credit markets and bond markets — And that crash and the financial crash feeds on the economic crash and vice versa. And therefore, they’re going to wimp out and they’re going to blink.”

The Bank of England already blinked. Roubini said the Federal Reserve is going to do the same.

Roubini also warns of an impending dollar crash. He said the greenback is at risk due to the twin deficits – budget and trade. He also mentions the weaponization of the dollar. But the real catalyst will be the Fed “wimping out.”

Once the Fed is going to essentially prevent an economic and financial crash – or try to prevent it by … stopping raising rates, even though inflation is too high, then the dollar is going to start to sharply weaken. That is going to be the trigger for it. Because what is raising the dollar is tight monetary policy.”

So, what can you do to protect yourself? Roubini recommends buying gold.

Gold has not done very well because you have tight monetary policy and a strong dollar. But if central banks are going to blink and wimp out, gold is going to rise in value.”