The Great Moderation is dead and a stagflationary debt crisis looms

Expect higher war spending by governments, large deficits, debt monetization and inflation to go with global supply shocks

- NOURIEL ROUBINI

Inflation rose sharply throughout 2022 across both advanced economies and emerging markets. Structural trends suggest that the problem will be secular, rather than transitory. Specifically, many countries are now engaged in various 'wars'-some real and some metaphorical-that will lead to even larger fiscal deficits, more debt monetization, and higher inflation in the future.

The world is currently going through a form of geopolitical depression' topped by the escalating rivalry between the West and aligned (if not allied) revisionist powers such as China, Russia, Iran, North Korea and Pakistan. Cold and hot wars are on the rise. Russia's brutal invasion of Ukraine could still expand and involve NATO. Israel, and thus the US, is on a collision course with Iran, which is on the threshold of becoming a nuclear-armed state. The broader Middle East is a powder keg. And the US and China are facing off over the questions of who will dominate Asia and whether Taiwan will be forcibly reunited with the mainland.

Accordingly, the US, Europe and NATO are re-arming, as is pretty much everyone in the Middle East and Asia, including Japan, which has embarked on its biggest military build-up in many decades. Higher levels of spending on conventional and unconventional weapons (including nuclear, cyber, bio, and chemical) are all but assured, and these expenditures will weigh on the public purse.