Against this background, political dysfunction is increasing in both advanced economies and emerging markets. The US midterm elections may offer a preview of the full-blown constitutional crisis—if not outright political violence—that could follow the presidential vote in 2024. The US is experiencing near-unprecedented levels of partisan polarization, gridlock, and radicalization, all of which poses a serious systemic risk.
Populist parties (of both the far right and the far left) are growing stronger around the world, even in regions like Latin America, where populism has a disastrous history. Peru and Chile both elected radical leftist leaders in 2021, Brazil and Colombia may follow suit in 2022, and Argentina and Venezuela will remain on a path to financial ruin. Interest-rate normalization by the Fed and other major central banks could cause financial shocks in these and other fragile emerging markets such as Turkey and Lebanon, not to mention the many developing countries with debt ratios that are already unsustainable.
As 2021 draws to a close, financial markets remain frothy, if not outright bubbly. Public and private equity are both expensive (with above-average price-to-earnings ratios); real-estate prices (both housing and rent) are high in the US and many other economies; and there is still a craze around meme stocks, crypto assets, and SPACs (special purpose acquisition companies). Government bond yields remain ultra-low, and credit spreads—both high-yield and high-grade—have been compressed, owing partly to direct and indirect support from central banks.
As long as central banks were in unconventional policy mode, the party could keep going. But the asset and credit bubbles may deflate in 2022 when policy normalization starts. Moreover, inflation, slower growth, and geopolitical and systemic risks could create the conditions for a market correction in 2022. Come what may, investors are likely to remain on the edge of their seats for most of the year.
Nouriel Roubini, professor emeritus of economics at New York University’s Stern School of Business, is chief economist at Atlas Capital Team, CEO of Roubini Macro Associates, and co-founder of TheBoomBust.com.