November 15, 2022
DHAKA – Professor emeritus at New York University’s Stern School of Business, Dr Nouriel Roubini – better known as “Doctor Doom” – who came to prominence for predicting the 2008 financial crisis, has again come out with some terrifying predictions. He said due to various global factors, financial markets around the world should brace for a period of decline that would be more severe than the crashes of the 1970s and 2008. “It’s going to get ugly, the recession,” and there will be “a financial crisis,” Roubini said. Despite countries around the world already facing substantial economic and financial problems, Roubini warned that “this is just the beginning… Wait until it’s real pain.”
In April this year, the International Monetary Fund (IMF) warned that we were living in dangerous times. Debt, globally, was already very high before the first pandemic lockdown. During the pandemic, deficits increased and debt built up much faster than they had in the early years of previous recessions, including the Great Depression and the Global Financial Crisis.
Low debt service costs relieved some concerns about the record high public debt of advanced economies – until recently. The reason was that nominal interest rates were very low in many countries. In fact, they were close to zero or even negative all along the yield curve in countries like Germany, Japan, and Switzerland, while neutral real interest rates were on a significant downward trend in countries such as the US, the EU region, Japan, and a number of emerging markets. Now global financial conditions are tightening as major central banks have raised interest rates to contain inflation.
The problem, however, is that after the 2008 financial crisis, many advanced economies resorted to printing massive amounts of money to bail out zombie institutions, which caused inflation and resulted in a transfer of wealth from the bottom 99.9 percent to the richest 0.1 percent. At the same time, they brought interest rates down to zero so that these zombie institutions could service their debts – while maintaining the illusion that they are not completely unsustainable.
As a share of global GDP, private and public debt levels are much higher now than before, having risen from 200 percent in 1999 to 350 percent today. Under these conditions, rapid normalisation of monetary policy and rising interest rates will drive highly leveraged households, companies, financial institutions, and even governments into bankruptcy.
The ongoing inflation may not be a short-term phenomenon, according to Roubini. And because many economies are expected to go into (or already are in) recession, the world may be entering a new era of “Great Stagflationary Instability.”
Because higher inflation is a global phenomenon today, most central banks are tightening at the same time, which is increasing the chance of a synchronised global recession. And this is already having an effect: real and financial wealth are falling, while debt and debt-servicing ratios are rising. Thus, the next crisis will be different from its predecessors. In the 1970s, the world experienced stagflation but no massive debt crisis because debt levels were low. After 2008, there was a debt crisis followed by deflation because the credit crunch had generated a negative demand shock. Today, we are facing supply shocks in the context of much higher debt levels, meaning we are heading for a combination of the 1970s-style stagflation and 2008-style debt crisis.
To add to that, the world is currently going through a geopolitical turmoil. The Russia-Ukraine war and the West’s response to it has disrupted the trade of energy, food, fertilisers, industrial metals, and other commodities, which is further fuelled by tensions between the West and China. American troops, even according to the Western media, are currently on the ground in Ukraine, “monitoring arms deliveries” to the country. Meanwhile, the US has banned the export of certain semiconductors – which are extremely valuable – to China and is pressuring European nations into cutting trade ties with it on national security grounds. Therefore, a new world war is practically underway, “certainly in Ukraine and cyberspace,” according to Roubini.
While the prospects of a world war and global financial turmoil will certainly negatively impact Bangladesh, another major concern for our country is that our economy already has a number of structural problems, which our policymakers have shown no interest in acknowledging, let alone resolving. Uncontrolled irregularities in our financial sector have probably created the same problem of zombie institutions getting propped up over the years. This has also diverted resources away from productive industries towards the unproductive ones.
Acting against most economists’ advice, the government has remained adamant not to adjust our interest rates in line with the current reality. Could it be because they are afraid of what that entails for our zombie institutions, which will find it difficult to maintain the façade that they are not insolvent, should interest rates go up?
During negotiations with the IMF, Bangladesh was questioned about the culture of project delays and cost escalation that has been normalised over the years. Bangladesh’s response was that these delays occurred as a result of “teething problems” – short-term problems that occur in the early stages of a new project – and now implementation of the projects are in full swing. Given the reality, however, it is extremely difficult to believe that to be true. Nevertheless, the fact remains that such wastage must end if we are to have any chance of coming out of the impending crisis relatively unscathed, to whatever extent possible.
Because of the myriad other structural problems that exist, the government has to formulate and implement a package of comprehensive reforms and policies by involving independent experts into the mix. Allowing bureaucrats and vested interests the luxury to dictate policies (or lack thereof), as has become the norm, will only dig us into a deeper hole at a time when the world seems to be descending into total chaos. It is imperative for our government to now recognise that it has made many mistakes in the past. And seeing the warning signs that are fast approaching on the horizon, it must realise that now is the time for national unity, good policies, and their timely implementation.
Eresh Omar Jamal is assistant editor at The Daily Star. His Twitter handle is @EreshOmarJamal