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Too Much Gloom and Doom?

Souring macroeconomic conditions and monetary-policy tightening have led some commentators to warn of an impending mega-crisis. Yet there is ample evidence to suggest that such a disaster is neither inevitable nor even the most likely near-term scenario.

NEW YORK – 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, 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 GDP 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 reminder that unanticipated inflation is always the debtors’ best friend.