At a time when the central bank is raising interest rates one after another, economist Nouriel Roubini spoke of a “long and ugly” recession that will begin in late 2022 and may continue until 2023, in an interview this week. This “prophecy” of Roubini is also taken seriously by many people because of his predictions that turned out to be correct in the 2008 crisis. In fact, the prospect of a recession is nothing new; For almost six months, markets have been pricing in this possibility. What is new is that this recession will be “long” and “ugly” rather than short and mild.
The picture painted by Roubini and other economists is a gray rhino situation for the markets.
Roubini has used the Black Swan metaphor a lot, but two years ago he first mentioned “White Swans” on the horizon. With the White Swan, it points to the risks in the market outlook. We all know the Black Swan metaphor very well. We use it for events that give no indication before they happen and are unlikely to happen, but when they do, they have a big impact. There is also “Grey Rhino” which appeared after “Black Swan”. It is used for events that are not aware of the existence of the Black Swan. The Gray Rhino, on the other hand, refers to events that are known to exist but are considered as “it would not happen to me”. Michele Wucker used it in her 2016 book “The Gray Rhino” for threats that are likely to happen and will have a big impact when they do, but have been overlooked. The wave of global inflation was actually a positive example for the gray rhinoceros. Almost everyone knew that inflation would reach historical peaks, but no one took any precautions and expected that it would be temporary.
The gray rhinoceros is now approaching recession. In the face of inflation rising to historic levels, central banks react as they should; So they raise interest rates. In particular, the Fed, the biggest monetary institution in the world, began a process of unexpectedly strong increases. Yesterday, it made a significant increase again. Similarly, England and the European Central Bank have entered the process of raising interest rates. Even Sweden rose by one point this week, well above expectations. Many more central banks are tightening their monetary policies. These steps will curb inflation in countries that take the step and pull it down. But past examples show that these strong processes increase rates are more likely to cause recession. It will be so this time too.
Are central banks sadistic?
So why do central banks increase interest rates knowing that they will enter a recession? That is a fair question. They increase it because they have no other choice. Central banks have limited options. Because the high rate of inflation is very costly for society. Fixed income earners and low-income groups in particular suffer from inflation. Uncertainty increases during periods of high inflation; anxiety about the future; people and companies avoid making long-term decisions. It has become a necessity for the central bank, which knows the importance of price stability, to take the necessary measures in monetary policy to get rid of this situation that disturbs everyone. These steps should be taken even if the economy goes into a recession or recession, and it seems that; will continue to throw. In fact, a short-term recession is seen as a natural consequence of the disinflation process, but also as a step in the “correction” of the economy. Roubini says it is not possible for the Fed to reduce inflation to its target of 2 percent without a hard landing in the economy. Therefore, the Fed will continue to raise interest rates in the next meeting.
The factor that will make this recession long and ugly is that governments have a lot of room to maneuver to revive recessionary economies. Every step to be taken will face the risk of both debt problems and a further increase in inflation, which is already high. In his interview, Roubini said, “many zombie institutions, zombie houses, companies, banks, shadow banks and zombie countries will die… So we will see who swims naked.” He predicted that there would be a radical correction that could lead to a recession. If such a wave of recession occurs, his reflection on emerging markets and emerging economies will be more profound. In some of these countries, financial crises may occur. Unemployment can rise to very high levels, stagflation and even depression can occur. ugly face…