He referenced economic theory that a recession occurs when a business cycle reaches its natural endpoint and before the next cycle really takes flight, but he said this time won’t be one more turn of the “economic wheel,” as he sees the world experiencing major changes that “will outlast the current business cycle.” He highlighted three trends that suggest a transformation in the global economy is under way.
But as time went on, El-Erian said, it became clear that the issue of supply “stemmed from more than just the pandemic.” It’s tied to Russia’s invasion of Ukraine that resulted in sanctions and geopolitical tensions, along with a widespread labor shortage brought forward by the pandemic.
“Making matters worse, these changes in the global economic landscape come at the same time that central banks are fundamentally altering their approach,” El-Erian said.
Markets have been trained to expect easy money from central banks, he said, and the “perverse effect” of that has been for “a significant chunk of global financial activity” to flood into asset management, private equity and hedge funds, among other less-regulated entities.
“The fragility of the financial system also complicates the job of central banks,” he said
“Instead of facing their normal dilemma—how to reduce inflation without harming economic growth and employment—the Fed now faces a trilemma: how to reduce inflation, protect growth and jobs, and ensure financial stability.”
“If you raise interest rates, you can also have a crash of equity markets, bond markets, credit markets, and asset prices in general that causes further financial and economic damage,” Roubini told Fortune