America is today at the most critical point in its modern history. It is threatened with a collapse which, if it happens, will drag most of the world down.
The US debt has now, amid high inflation, rising interest rates—most economic analysts expect the US central bank to continue raising rates—and growing economic uncertainty, in September 2023, topped $33 trillion and amounts to 124% of GDP. And the deficit of the general government – which is the federal and local government together – is over 7% of GDP. This level of debt is more than three times the level of debt in 2008 ($10 trillion) and 10 times the level in 1990 ($3.2 trillion). US debt levels have ballooned significantly in recent years, especially after a 50% increase in federal spending between fiscal years 2019–2021, according to data from the US Treasury Department.
This stark reality resulted in the House and Senate passing necessary legislation in early June 2023 that raised the ceiling on federal borrowing while imposing some limits on spending.
This, of course, was done in order to prevent a catastrophic bankruptcy of the government, i.e., the scenario of the country declaring default, unable to pay its creditors and pay salaries and pensions, which would obviously have a catalytic negative impact on international markets, as well as in the American and global economy, given the size of the American debt.
In particular, the agreement on the debt allows the suspension for two years, until January 1, 2025, i.e., the period after the extremely critical for the entire planet presidential elections in November 2024, the maximum borrowing limit of the American public (31.4 trillion dollars).
The world’s largest economy, however, was once again faced with the prospect of a government shutdown. So, Congress recently passed the short-term funding bill to avoid a government “shutdown” (i.e., US bankruptcy) just hours before the deadline and ensures funding through November 17, while ruling out any new aid to Ukraine. A government shutdown that would furlough tens of thousands of federal employees without pay and suspend various government services would begin at 00:01 ET (04:01 GMT) on Sunday 10/1/2023. An exception, however, would be personnel required for state functions such as defense, police duties or other vital functions, who would remain on duty without pay.
The recent 45-day deal to keep the government open has thrown up a risk from October to November—a point where it could end up doing more damage to fourth-quarter GDP numbers. Bloomberg Economics estimates that each week of shutdown shaves about 0.2 percentage points off annual GDP growth, with most but not all recovered once the government reopens.
At the same time, in March 2023 three banks in the United States of America with significant activity in the field of technology and cryptocurrencies collapsed. Specifically, these are Silvergate Bank, Silicon Valley Bank and Signature Bank. This was followed by the collapse, takeover and closure of another bank, First Republic Bank, in May 2023.
There are currently 725 US banks on the FDIC’s death list. The strain on the financial sector caused by bank failures remains a threat. The banking crisis is not a problem of quality of credit conditions, but is caused – now – by the inability to finance the ever-expanding US debt.
In addition, some new threats threaten to derail the American economy. September’s selloff in stocks pushed the yield on the 10-year note to a 16-year high of 4.6%. Borrowing costs higher for a longer period of time have already sent equity markets tumbling. They could also jeopardize the housing recovery and deter companies from investing.
Also, many financial analysts are calling the impending reactivation of federal student loans, after the end of a 3 1/2-year pandemic freeze, a potential shock to the economy. Nearly 44 million borrowers will start paying an average of $393. Inevitably, this will mean less spending elsewhere, at least for some households.
Since September 15, moreover, the United Auto Workers union has been engaged in a historic strike against Detroit’s three major automakers: Ford, GM and Stellantis N.V., which, according to a study by the Anderson Group, in just one week, cost the US economy over $1.6 billion.
At the same time, oil price crises have typically, throughout US history, helped trigger recessions. In other words, the oil price crises were followed by a recession. High black gold prices increase costs for a wide range of companies and strain consumer budgets, leading to higher inflation and lower consumer spending. It is a recipe for economic disaster that the world is being asked to face once again.
It should also be noted that oil prices have soared since June due to production cuts by the world’s largest crude producers (OPEC+, which includes Russia and Saudi Arabia). International benchmark Brent crude oil prices rose 28% from their June 11 low of $74 a barrel to over $95 a barrel, speeding toward $100 a barrel.
But events in the rest of the world could also drag the US down a downward path. The world’s second largest economy, China, is mired in a real estate crisis. In the euro area, lending is shrinking at a faster pace than at the nadir of the sovereign debt crisis, a sign that already stagnant growth is set to move lower.
In closing, I would like to emphasize that the horizon in the American economy and in the markets is becoming increasingly dark. The dark clouds in the financial sky are thickening, naturally causing worry and fear, and foretelling that the storm will, unfortunately, not be long in coming.
