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Nouriel Roubini Warns of “Mother of All Debt Crises” and Severe Recession Ahead

Renowned economist Nouriel Roubini, also known as “Dr. Doom” for his accurate prediction of the 2007-2008 global financial crisis, is warning of a “severe recession” looming in the next year. Roubini believes a dangerous “Bermuda Triangle” of threats to the economy is at play, including a massive buildup of debt worldwide.

In a recent interview with the McKinsey Global Institute’s Forward Thinking podcast, Roubini stated that low-interest rates allowed bankrupt “agents” or “zombies” to survive, whether they were households, corporations, financial institutions, governments, or countries. 

Even during the Global Financial Crisis (GFC), they were bailed out. During the COVID-19 crisis, massive backstops of every type of institution were put in place.

However, with central banks forced to combat high inflation by raising interest rates, Roubini predicts a severe recession is on the horizon. On Wednesday, the Fed increased its key interest rate by a quarter-point to continue the fight against inflation, despite fears that doing so could increase the recent banking sector turmoil. 

Roubini claims the Fed and other central banks are in a lose-lose situation. Raising interest rates could shake the banking system and cause greater instability, while lowering them could spur higher inflation. 

“It’s too late to find a solution that prevents a hard landing and prevents severe financial stresses,” he said earlier this week on Bloomberg TV.

Roubini warns of a particular trigger to watch for as to “when things will break.” Falling real wages and potential unemployment could lead to reduced household incomes, and reduced revenues could impact company profits, causing stress. 

Asset prices have already fallen due to high interest rates, causing companies to face higher borrowing costs and reduced liquidity. Moreover, even cash provided a negative real return due to inflation.

Highly leveraged households or companies would suffer a shock to their debt servicing capacity. This could result in a more costly mortgage, credit card, or auto loan payments for consumers. For companies, bank loans may become more difficult to pay off. For example, according to data released by Cox Automotive, the severe delinquency rate on car loan payments in America was the highest in 17 years.

Roubini likens the danger to the Bermuda Triangle, explaining that the hit to income, asset values, and financing liabilities can lead to distress for highly leveraged households or business firms. If the distress is widespread, it can result in a systemic household and corporate debt crisis, with defaults and delinquencies. Roubini believes this crisis is not far away.

In conclusion, Roubini’s warning of a “severe recession” and “mother of all debt crises” is not to be taken lightly. With a dangerous “Bermuda Triangle” of threats to the economy, including a massive buildup of debt worldwide, it is crucial to watch the signs of impending distress. 

As Roubini notes, the game is over, and the time to act is now.