The size of US debt, both public and private, is seen by some leading economists and investors as a warning sign of the next financial crisis. Some elements indicate that this storm is already in the making.
This is the biggest fear of Nouriel Roubini, also known as “Dr. Doom” because he saw the financial crisis of 2008 coming. The economist, who has since redefined himself as a prophet of doom, predicts a perfect storm in 2023, caused by a combination of recession, spiraling inflation and a debt crisis. That’s a fear he expressed in January, but has not yet materialized as the risk of recession in the United States recedes and inflation has taken a serious hit, although it rose slightly in July, to 3.2 percent .
But Nouriel Roubini is not alone in thinking this. Ray Dalio, former CEO of Bridgewater, one of the largest investment funds in the world, also believes that the third element – the US debt crisis – is a sword of Damocles over the economy and markets. Ray Dalio should be taken seriously given that his fund returned 32% last year while all markets collapsed.
Still, last week’s downgrading of the credit rating of the United States by the rating agency Fitch Ratings did not make much of an impression. Nor is the downgrade of 10 US banks by Moody’s. But with massive debt and rising interest rates, all the ingredients for a blowout are at hand. The crisis of regional banks in the United States in March this year was probably the first manifestation of this.
Business Insider has gathered some numerical data indicating that a perfect storm is on its way. We added a few more that seemed relevant.
Private debt knows no boundaries anymore
Credit card debt has surpassed $1,000 billion for the first time, according to data released by the Federal Reserve last Tuesday. U.S. household debt totals $17,060 billion, mostly for mortgage loans. Corporate debt has risen to $7.8 trillion, according to Janus Hendersonan increase of 6.2 percent from last year.
Government debt is even worse
The national debt balance has surpassed $32 trillion for the first time this year, with a potential of 5 billion dollars extra per day over the next 10 years, according to Bank of America. The United States needs to borrow a total of $1,859 billion from the financial markets during the third and fourth quarters of this year, including $103 billion last week alone to refinance its debt. The interest the United States pays on its government debt is nearly $1 trillion a year and continues to rise, a result of rising interest rates.
Business defaults are on the rise
By 2023, corporate defaults have already exceeded last year’s volume. In addition, payment arrears are piling up before loan repayments. The rate has risen to 2.23 percent in the first quarter of this year from just 1.7 percent in the first quarter of 2021, according to data from the Fed. In a recession, U.S. companies could default by a total of $1 trillion, Bank of America estimates, though this is no longer the most likely scenario for 2023, according to the financial institution.
Banks waive their loans with a high risk of default
This is especially true for commercial real estate, a sector in crisis. JPMorgan, Goldman Sachs and Capital One are among Wall Street banks trying to sell major commercial real estate assets, reported Bloomberg last week.
2023-08-20 14:21:48
#financial #crisis #making
