Opinion

When Recession Comes, Expect Central Banks to Rewrite the Rules

Nouriel Roubini

By Nouriel Roubini

Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetised by central banks should be used to stimulate aggregate demand in the event of the next slump.

By Nouriel Roubini

A cloud of gloom hovered over the International Monetary Fund’s annual meeting this month. With the global economy experiencing a synchronised slowdown, any number of tail risks could bring on an outright recession. Among other things, investors and economic policymakers must worry about a renewed escalation in the Sino-American trade and technology war. A military conflict between the US and Iran would be felt globally. The same could be true of “hard” Brexit by the UK or a collision between the IMF and Argentina’s incoming Peronist government.

Still, some of these risks could become less likely over time. The US and China have reached a tentative agreement on a “phase one” partial trade deal, and the US has suspended tariffs that were due to come into effect on 15 October. If the negotiations continue, damaging tariffs on Chinese consumer goods scheduled for 15 December could also be postponed or suspended. The US has also so far refrained from responding directly to Iran’s alleged downing of a US drone and attack on Saudi oil facilities in recent months. The US president, Donald Trump, doubtless is aware that a spike in oil prices stemming from a military conflict would seriously damage his re-election prospects next November.

The UK and the EU have reached a tentative agreement for a “soft” Brexit, and the UK parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point. Finally, in Argentina, assuming that the new government and the IMF already recognise that they need each other, the threat of mutual assured destruction could lead to a compromise.

Read the full article in The Guardian.

___
Nouriel Roubini is a Professor of Economics and International Business and the Robert Stansky Research Faculty Fellow.