It is important to remember that the economic crises of 2001 and 2008 each took the better part of two years to fully unfold. Time and time again during each of those crises, government flacks and media hacks would tell us: “Relax, the crisis has been resolved.” Then, a few weeks or a few months later, something else would break, and the next chapter of the crisis would unfold.
I believe we will see a similar pattern unfold over the next two years: periods of relative calm punctuated by economic emergencies of increasing magnitude.
Because no banks have collapsed this week, it can appear that the current crisis is over. Those in government and the media, would love you to believe that. It isn’t so.
It is normal in capitalism for unsustainable levels of debt to build up from time to time until such debts exert an untenable drag on the economy. Historically when this happened, during the resulting recession/depression, large numbers of bankruptcies and defaults of all kinds would occur, wiping out most of those debts, and allowing the economic system to start over, free from the drag and drain of massive indebtedness.
The economic crises of 2001 and 2008 were different, in that governments intervened to prevent this natural cleansing. Both debt crises were ‘solved’ through massive increases in government money-printing which largely prevented the unravelling of cascading bankruptcies, but now leaves us facing a debt crisis ever so much bigger than either 2001 or 2008.
It took the US Government 225 years to accumulate 6 trillion dollars in debt. Then, in the 20 year period between 2002 and 2022, US Government debt quintupled, rising to almost 31 trillion dollars.
By printing 24 trillion dollars over the past 20 years, the US Government was able to prevent the full unravelling of unsustainable debts that normally would have taken place in 2001 and 2008. It also softened the economic crashes which otherwise would have occurred. (After 2008, Governments also artificially reduced interest rates for a dozen years, which further forestalled the normal cleansing of unsustainable debt, and prevented the full collapse of inflated asset prices.)
The result though, is that the crisis of indebtedness the US faces today in 2023 is an order of magnitude larger than the crisis it faced in either 2001 or 2008. I cannot tell you what specific collapse or meltdown will come next, but I can say with certainty, there will be one.
Here are three of the worst pressure points:
De-dollarization: India and Bangladesh today agreed they would trade goods using their own currencies. Bangladesh is the nineteenth country India has made such an arrangement with. On an almost daily basis, more and more countries are deciding to conduct trade in their own currencies, bypassing the US dollar. When a country uses the US dollar less and less in trade, there is no reason for it to hold large US dollar reserves: it will divest itself of both US dollars and US bonds. As more and more countries do so, it will push down the value of both the US dollar and US Government bonds, giving all countries an ever larger incentive to get rid of both as much as possible.
Commercial Real Estate: Work from home has become so common since the COVID pandemic that 20 percent of US office space is now empty. That means all those half-empty office towers are losing money, which is causing them to crash in value. Many of those office towers were built with massive loans at very low interest rates. As those loans roll over, it is not uncommon for interest charges on such loans to double, which puts a further squeeze on the owners. Many will end up going broke. Who loaned them the money? Mostly it was the small regional banks that have recently lost billions in deposits, and also have billions of dollars in unrealized losses in long-dated US Government bonds. How many such banks will commercial real estate developers take down with them?
Credit Squeeze: Banks large and small are extremely worried about depositor flight. They are protecting themselves by lending far less. Which is not good news if you need a mortgage to buy a home, or a loan to expand your small business, or you’re old enough to want your first credit card. Credit is the lubricant that keeps the economic wheels turning: without it, recession is just around the corner. And a US recession will only make the problems of commercial real estate, troubled banks, and de-dollarization that much worse.
If I had to, I could probably enumerate another dozen flash points which could be the cause of whatever financial emergency comes next - but you get the picture. There are huge stresses at play, and something will break in the not-too-distant future.
So, yes, on the surface everything is calm, but that won’t last. There’s great turbulence going on underneath. Every day there are more warning signs for those who are paying attention.
PS: Recently Michael Snyder at Economiccollapseblog.com also identifies de-dollarization and a collapse in commercial real estate as potential flash points for the next leg down in the current economic crisis. He identified the credit crunch as a big risk in a separate post. Snyder’s top five risks include increasing corporate debt defaults, mass layoffs, and rapidly increasing corporate bankruptcies. Snyder also points to polling data which says that Americans have never been more negative about the country’s economic future than they are right now. Snyder’s posts includes multiple links for those wanting documentation on any of these issues.
This is what I've been telling my family and friends for the last couple of years too. Not that I'm at all educated about international finance, but I can spot red flags and patterns of problems repeating, and it doesn't look good. At some point (probably fairly soon) it will suddenly escalate from a simmer to rolling boil, and things will get very ugly very quickly.
Now it appears that First Republic Bank could be the next domino to fall. After that, who knows... I need to run out and invest in more precious metal (lead).
Thanks for the reality check.