At a time when central banks are raising interest rates one after another, economist Nouriel Roubini spoke about a “long and ugly” recession that will start at the end of 2022 and could continue through 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, the markets have been pricing in this possibility. What is new is that this recession will be “long” and “ugly” rather than short-lived and moderate.
The picture drawn by Roubini and other economists is a gray rhino situation for the markets.
Roubini used the Black Swan metaphor a lot, but two years ago he first mentioned the “White Swans” on the horizon. With the White Swan, he pointed to the risks in the market’s outlook. We all know the Black Swan metaphor very well. We use it for events that give no indication before they happen and are very unlikely to happen, but when they do happen, they have a huge impact. There is also the “Grey Rhino” that appeared after the “Black Swan”. It is used for events that are not aware of the existence of Black Swan. The Gray Rhino, on the other hand, refers to events that are known to exist but are regarded as “it wouldn’t happen to me”. Michele Wucker used it in her 2016 book “The Gray Rhino” for threats that are likely to occur and will have a high impact when they do, but have been neglected. The global inflation wave was actually a good example for the gray rhino. Almost everyone knew that inflation would reach historical peaks, but no one took any precautions with the expectation that it would be temporary.
The gray rhino that is now approaching is called recession. In the face of inflation rising to historical highs, central banks are reacting as they should; So they raise interest rates. In particular, the Fed, the world’s largest monetary institution, started an unexpectedly strong increase process. Yesterday, it made a significant increase again. Likewise, the UK and the European Central Bank interest entered the process of increase. Even Sweden has increased by one point this week, well above expectations. Many more central banks are decisively tightening their monetary policy. These steps will curb inflation in the countries that take the step and pull it down. But past examples show that such strong rate-raising processes most likely resulted in recessions. 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’s a fair question. They increase it because they have no other choice. Central banks have limited options. Because the high inflation rate is very costly for the society. Fixed wage earners and low-income groups in particular suffer from inflation. Uncertainty increases during periods of high inflation; concern for the future arises; individuals and firms avoid making long-term decisions. It has become a necessity for central banks, who know the importance of price stability, to take the necessary steps 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 be thrown. In fact, a short-term recession is seen as a natural consequence of the disinflation process, but also as a step towards the “correction” in the economy. Roubini says that 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 increase interest rates in the next meetings.
The factor that will make this recession long and ugly is that governments have very limited room for maneuver to revive recessionary economies. Every step to be taken will face the risk of both debt problems and a further rise in inflation, which is already high. In his interview, Roubini said, “many zombie institutions, zombie households, companies, banks, shadow banks and zombie countries will die… So we’ll see who swims naked.” He predicted that there would be a drastic correction that could lead to a recession. If such a recession wave occurs, its reflection on emerging markets and developing economies will be more profound. In some of these countries, financial crises may occur. Unemployment may rise to very high levels, stagflation and even depression may occur. ugly” face…