Renowned Economist Nouriel Roubini: Trifecta of Inflation, Recession And Banking System Collapse Driving America into A Doom Loop
The comments below are an edited and abridged synopsis of an article by Belle Carter
Nouriel Roubini says that inflation, the impending recession and an imminent insolvency crisis in the banking sector is leading the US into a doom loop. To solve the decade-high inflation and provide liquidity support, “the only solution is a severe recession—and thus a broader debt crisis.”
A recession will temper price and wage inflation, but it will make the debt crisis more severe, and that will lead to an even deeper economic downturn. Given that throwing more money at the economy will not prevent this systemic doom loop, Roubini urges everyone to prepare for the upcoming stagflationary debt crisis.
Roubini blames the current regulatory regime for allowing banks to treat securities and loans at their face value rather than at market value for the impending collapse of the banking system. He says that most US banks are technically near insolvency, and that hundreds more are already fully insolvent.
Higher inflation leads to higher bond yields, which will hurt stocks as the discount factor for dividends rises. At the same time, higher yields on ‘safe’ bonds would imply a fall in their price owing to the inverse relationship between yields and bond prices.
Roubini concludes that central banks cannot continue to believe that rate hikes could curb inflation while using liquidity support to maintain financial stability at the same time.
The collapse of Silicon Valley Bank (SVB) and others caused depositors to become jittery. An initial surge of $129.3 billion in deposit outflows from all US domestically chartered banks was recorded in the first week following SVB’s failure. This has since slowed down to $84 billion.
US regulators believe that while the surge in withdrawals represents a stabilization in deposit outflows, there remains considerable uncertainty as to where things will go in the future.