Global Economic Crisis

Canada’s Budgetary Officer, known as the PBO, recently  released a report that stated that unless major fiscal consolidation occurs in government spending, deficits at a high level are projected to continue until at least 2070. That is, high deficit spending is baked into the cake for the next half-century. That projection excluded likely future scenarios such as more pandemics, natural disasters and military conflict, not to mention internal issues. It is a dystopian prediction for government spending, and it is unsustainable.

The PBO projection for government spending is a mirror image that can be applied to every economy on the glove, in particular all the G7 countries.

No nation is as entrapped in high deficit spending to as a high degree as the United States. When the U.S. briefly went into budgetary surpluses in the latter years of the Clinton administration, the incoming George W. Bush presidency swiftly headed back into deficit spending due to the enactment of major tax reductions , particularly those affecting higher income earners. The rationale? The Vice President , Dick Cheney, told the GOP, supposedly the party of fiscal conservatism, that former president Ronald Reagan had “proved” that fiscal deficits “don’t matter.”

However, the low to mid single digit proportion of GDP reflected by the size of deficits has now morphed into  high single digits and even double digit fractions of national GDP since politicians throughout the world opened the spigot of sovereign debt spending, abetted by the near-zero interest policies of central banks, such as the U.S. Federal Reserve.

In the current fiscal year, the United States  federal government has generated  $3.1 trillion dollars in revenue and $5.3 trillion in spending, resulting in  a deficit of $2.2 trillion.  The current national debt has skyrocketed past $28 trillion. This figure represents  130 % of America’s GDP. By way of comparison, in 2001, only twenty years ago, the U.S. national debt was $5.8 trillion, and represented 55 % of GDP.

The trajectory regarding America’s-and many other nation’s-government spending  patterns are clearly and inalterably headed in the wrong direction. This cannot be sustained indefinitely. Already, inflation is raising its ugly head as a form of stealth taxation. At some point, probably when central bank are compelled by inflationary pressures to significantly raise interest rates, the whole illusory edifice will implode.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

He predicted the 2007-09 Global Financial Crisis with uncanny accuracy, even while experts including then Federal Reserve chairman Ben Bernanke were dismissive of him. He’s Nouriel Roubini, economics professor at NYU and a highly distinguished economist. Though his correct forecast of the 2007-09 financial implosion earned him the nickname of Dr. Doom, he prefers to think of himself as Dr. Realist. His latest exercise in realism makes chilling reading.

As the Covid pandemic erupted, Roubini was already warning that the world faced a global economic depression sometime during the course of the present decade. With unprecedented sovereign debt expansion during the past year  unleashed by governments under the guise of providing Covid relief, Professor Roubini has taken a fresh look at the data, and published his conclusions in a recent article that appeared in The Guardian.

“Conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis,” reads the headline of Roubini’s article.  “Warning signs are there for global economy, and central banks will be left in impossible position,” he writes.

In essence, Roubini points out that current trends, which include not only the massive expansion  of sovereign debt but also contributing  factors such as the loss of independence by central banks coupled with the decoupling between the United States and China, leading to fragmentation of global supply chains, point to an unavoidable train wreck  for the global economy. It is a hellish forecast, which unfortunately has the ring of truth.  If Professor Roubini’s forecast is as accurate as was his previous warning of the impending Global Financial Crisis of 2007-09, the world stands on the verge of the Global Economic Crisis of the 21st century, a Great Depression 2.0 coupled with high inflation. And, as Roubini warns, central banks  will be powerless to stop it.