Nouriel Roubini.
REUTERS/Rick Wilking
Nouriel Roubini warned the US economy faces a huge market crash and stagflationary debt crisis.
The economist said inflation could spiral if the Fed doesn’t raise interest rates high enough.
However, rate hikes may slow growth, raise unemployment, and cause headaches for borrowers, he said.
Nouriel Roubini warned investors to prepare for a historic market crash, and suggested the US economy could tumble into a quagmire of shrinking output, surging inflation, and soaring unemployment.
The economics professor at NYU Stern, whose nickname is “Dr. Doom,” shared his grim outlook during a recent eToro webinar. He argued the Federal Reserve might have to double interest rates to 5% in order to curb inflation, but hiking to that level could choke economic growth and cause a spike in joblessness.
Moreover, raising rates could spark a debt crisis, Roubini said. American consumers, companies, and other entities have borrowed aggressively over the past decade, and could struggle to repay their loans if interest costs jump, he explained.
The upshot is the rate hikes needed to rein in inflation could tank the economy, and cause crashes across stocks, bonds, housing, credit, private equity, and other assets in bubble territory, Roubini said. If that fallout spurs the central bank to give up on fighting inflation, price increases could spiral out of control as well, he continued.
Stubborn inflation — fueled by Russia’s invasion of Ukraine disrupting global food and fuel supplies, and the COVID-19 pandemic continuing to prompt lockdowns and restrict international trade — might force the Fed to drive the US economy into an even deeper recession than the one it avoided, he added.
“I worry about a stagflationary debt crisis, because you have the worst of the ’70s in terms of supply shocks, and you have the worst of the global financial crisis because of too much debt, and that combination is dangerous,” Roubini said.
“If you’re behind the curve, eventually the recession is going to be more severe, the loss of jobs and income and wages is going to be more severe,” he noted, referring to the Fed’s rate hikes relative to inflation. “You need to be ahead of the curve.”
The economist, who was one of the few experts to foresee the collapse of the US housing bubble in the late 2000s, also dismissed the recent rebound in stocks as most likely a bear-market rally. He cautioned that if the US economy suffers a “hard landing” due to the Fed’s rate hikes, stocks could tumble by another 35%, based on how they’ve traded in past recessions.
Finally, Roubini warned that both stocks and long-term bonds would likely slump in value if inflation remains a problem. He suggested investors hedge their portfolios with alternative assets such as short-term and inflation-indexed bonds, gold and other commodities, real estate, infrastructure, and even bitcoin.