After all, debt ratios in advanced economies and most emerging markets were much lower in the 1970s, which is why stagflation has not been associated with debt crises historically. Conversely, during the 2007-08 financial crisis, high debt ratios (private and public) caused a severe debt crisis—as housing bubbles burst—but the ensuing recession led to low inflation, if not outright deflation. Making matters worse, central banks have effectively lost their independence, because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. But even in the second scenario, policymakers would not be able to prevent a debt crisis. When former US Fed chair Paul Volcker hiked rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America.

Source: Mint July 04, 2021 16:41 UTC