Dr. Doom’s gloomy New Year’s forecast – stagflation awaits

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“Structural trends suggest that the problems will be long-lasting, rather than temporary,” writes Nouriel Roubini about the rapidly rising prices that characterized 2022. Different types of war are a driving force behind this, the economist reasons in a column for the analysis forum Project Syndicate. “Many countries are now involved in various types of wars, some real others metaphorical, which will lead to even bigger budget deficits”, he writes, adding that these will be largely financed via the money presses, which in turn go hand in hand with additional inflationary pressures. Nouriel Roubini is a famous pessimist, who is celebrated for predicting the financial crisis. He has also wrongly and repeatedly warned of stock market crashes during the recovery year of 2009, as well as after the pandemic outbreak in 2020. Looking ahead to 2023, he points to major geopolitical tensions, with growing defense spending in many parts of the world.“The global war against Climate change will also be expensive, both for the public and private sectors.” In his column, Nouriel Roubini, however, is doubtful that investments in green technology will create much growth, since it largely involves replacing previously existing equipment. To various forms of war, he adds pandemic control and adds that the spread of disease may become more common, among other things as a result of climate change. A long list of concerns also includes income gaps and political populism. The problems are costly by nature, reasons Nouriel Roubini who at the same time sees it as difficult for states to finance increased public spending. “Taxes in relation to GDP are already high in many developed countries, especially in Europe. Tax planning and tax evasion complicate the prospects for raising them for high earners and capital.” Instead, waiting for growing structural budget deficits and increased risks of unsustainable indebtedness in many countries. This in turn is followed by higher borrowing costs and debt crises, with a negative impact on growth. “For countries that borrow in their own currency, it is close at hand to allow higher inflation to reduce the real value of long-term nominal debt.” Inflation simply becomes an easier way for politicians to manage debt, compared to, for example, raising taxes or push through uncomfortable austerity, argues Nouriel Roubini, who traces stagflation – an unwelcome mix of stagnant economic growth and inflation. Nouriel Roubini, who himself says he prefers the nickname Dr. Realist before Dr. Doom has predicted stagflation many times before. In an interview with the FT earlier in December, he advocated investing in short-term US government securities, inflation-adjusted bonds or gold. He further says that even investments in real estate can work well in an environment with rising prices. “Owning land is a good inflation protection,” he says there with the addition that such should be resilient from an environmental perspective. “Half of all land area in the US will be destroyed by climate change.”

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