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Anatomy of a Financial Meltdown

In this February 2008 commentary, I warned that the 2006-07 US housing bust would lead to a severe US and global recession and a global financial crisis. Fifteen years later, we may once again be on the verge of a twin economic and financial crisis – only this time the outcome could be even worse. After all, private and public debt-to-GDP ratios are much higher today, and the past few years have laid bare the costs and limitations of unconventional monetary, fiscal, and credit policies.

Moreover, back in early 2008, inflation was falling and leading to deflation, and a demand shock and a credit crunch allowed for unconventional policy easing on a massive scale. Today, negative supply shocks have caused inflation to surge, forcing central banks to tighten monetary and credit policies even as many economies have been heading toward recession.

And, on top of it all, serious new megathreats – stemming from a “geopolitical depression,” climate change, and the risk of new pandemics – are looming, and a widespread populist backlash continues to jeopardize the future of globalization and democratic capitalism. Across many dimensions, the risks are even more severe today than in 2008.
– Nouriel Roubini, February 2023

A vicious circle is currently underway in the United States, and its reach could broaden to the global economy. America’s financial crisis has triggered a severe credit crunch that is making the US recession worse, while the deepening recession is leading to larger losses in financial markets – thus undermining the wider economy. There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.