The following paragraphs come from the latest newsletter by Nouriel Roubini’s RGE Monitor. The article provides a thought-provoking summary of the key issues facing the global economy.

“The financial wildfire has turned around the stagflationary trends seen earlier this year into a vicious cycle of global deflation in debt, assets, wages, and goods. Headline consumer inflation has peaked in most of the developed and emerging world, except in places where food/fuel subsidies were recently rolled back or post-Q3 data are still unavailable. According to the IMF’s October World Economic Outlook, the world’s average consumer prices have increased 6.2% y/y Q2 2008. JPMorgan expects world CPI inflation to slow to 2.6% y/y Q2 2009.

“Core inflation has yet to show a significant decline but a feedback loop of debt deflation, asset deflation, commodity deflation, wage deflation, and slower global growth will likely lead to flat or lower headline and core consumer and producer prices in Q4 2008 through 2009. But in the short- to medium-term, stag-deflation seems the most likely scenario for the world economy.

“The continued fall of US house prices has morphed into global de-leveraging, which threatens to spark global deflation. Debt deflation at first sent investors seeking safety in commodities as inflation accelerated worldwide due to the weakening dollar. The dollar weakened as the world seemed resilient to the US slowdown. But the lag between US growth and growth in the rest of the world soon ended and so did the lag between growth and inflation.

“Commodity prices slid on fund liquidation to cover losses in other asset classes and on expectations that commodity demand will weaken in a global recession. The prospect of a US hard landing and a global recession, and demand destruction triggered by high commodity prices earlier this year, has already led to an across the board commodity selloff, with the CRB falling almost half from its July peak.