NEW YORK ¨C Nouriel Roubini thinks the global economy is ¡°lurching toward an unprecedented confluence of economic, financial and debt crises, following the explosion of deficits, borrowing and leverage in recent decades.¡± Is he right?
At the risk of sounding Panglossian, I do not regard such a disaster scenario as inevitable ¡ª or even as the most likely outcome. Turkey and a few other countries afflicted with severe macroeconomic and regulatory mismanagement will almost certainly suffer the fate Roubini describes, but most economies can still avoid a financial disaster and a deep recession.
Yes, private and public debt as a share of gross domestic product is near a peacetime high. At 334% as of the third quarter of 2022, this ratio is down from its 2021 first-quarter peak (363%), but way up from its 1991 first-quarter level (227%). Moreover, the slight reduction since early 2021 is due primarily to (unanticipated) inflation, not real GDP growth. The inflationary surge following the COVID-19 pandemic eroded the real value of nominally denominated fixed-rate debt ¡ª a reminder that unanticipated inflation is always the debtors¡¯ best friend.
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