The next global recession will be triggered largely by politics and international relations, and monetary solutions will not be enough to stop it from hitting some of the world’s largest economies, according to Nouriel Roubini, the economist famously known as “Dr. Doom”.
Roubini said the decline of the world’s economy will be triggered largely by the U.S.-China trade and currency war that is expected to escalate by the end of 2019 as President Donald Trump threatens more tariffs on Chinese goods.
He predicts that three shocks will tip the global economy over, and all hinge on U.S.-China relations: the Sino-American trade and currency war, the technology cold war and concerns over oil supplies.
“All three of these potential shocks would have a stagflationary effect,” Roubini said in an opinion piece.
“Worse, the Sino-American conflict is already fuelling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains,” Roubini added.
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Citing stagflation – high inflation combined with unemployment and subdued demand – shocks of the 1970s, Roubini said that monetary policymakers have been rendered ineffective by the easing cycle they have entered due to low inflationary pressures.
“Major central banks such as the U.S. Federal Reserve are already pursuing monetary-policy easing because inflation and inflation expectations remain low,” he said. “The optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing.”