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A silent crisis is rapidly growing while most of the United States remains focused on the looming bust of asset bubbles, with politicians and policymakers artificially fueling an economic boom to hide the cracks that are threatening to break our entire system. As our businesses go bankrupt and our workers continue to be pushed out of the labor market, the foundations of our economy have started to crumble due to the overwhelming amount of debt accumulated up until this point. Corporate debt, housing and commercial real estate debt, and of course, our debt-fueled growth are all weighing upon U.S. banks like never before. “But this time is different,” they say, while trying to persuade us that everything is under control.
The truth is that America’s debt load, including households and businesses, is setting the stage not only for a brutal bank meltdown but also putting us at risk of experiencing the worst financial crisis in all of our history. As insolvency risks mount, and delinquency rates soar, banks will have to face a fatal blow. That is to say, all evidences are pointing U.S. banks and other financial institutions will be forced to absorb a staggering amount of non-performing loans, which will lead to billions in losses and result in a credit crunch that will impair the growth of our country for decades. Even though the health crisis did not start as a financial meltdown, several economists are warning it is quickly morphing into one. And that’s what we’re going to expose in this video.
A quieter crisis is now gaining momentum, as the financial fallout of the health crisis generated a monumental mountain of debt, and non-performing loans are threatening to collapse U.S. banks and several other financial institutions and jeopardize economic recovery prospects for years to come. And when balance-sheet problems begin undermining confidence, runs on banks and financial institutions rapidly turn the crisis into a fully-fledged panic.
The run-up to the credit crunch expected to occur in 2021 transcends the historical “boom-bust” narrative we have seen before. First, because we haven’t experienced a lengthy economic expansion as it happened in the periods that preceded previous credit crunches. Second, because we don’t have one but several overly-inflated asset bubbles. Third, because the imminent balance-sheet crisis and the credit crunch will likely extend longer than in other historic periods due to the potential persistence of the slump in economic activity. And last, but not least, now we have a profoundly regressive crisis, disproportionally impacting low-income households and smaller firms that have fewer assets to pay their debt and avert insolvency.
Crises like these worsens the overall economic conditions, as those who rely the most on credit are small and medium-sized businesses and lower-income households, and with limited to no access to credit they cannot fund new expenses and, therefore, they cannot help to boost the economy. Different from most previous crises, after the sanitary outbreak exploded, the government’s expansionary monetary and fiscal policies were supported by banks through macroeconomic stimulus with a variety of temporary loan moratoria.
The commercial real estate collapse is other source of concern for banks. Since the burst of the outbreak, the rapid deterioration of the commercial real estate sector was sparked by a major change of habits, as employees started to mostly work from home, and online shopping accelerated the decay of brick-and-mortar retailers, that has caused an enormous impact on rents, with late payments marking the range of hundreds of billions of dollars.
Even the Congressional Budget Office released a report alerting that America’s huge corporate and household debt load, in addition to our skyrocketing national debt are heightening the risk of a dramatic financial crisis in the U.S. If the pace of debt creation doesn’t ease up shortly enough, our federal debt will hit 102% of GDP by the end of this year. “Such high debt levels could increase borrowing costs, slow economic output, and increase the danger of a financial crisis,” the CBO said.
Keeping in mind that households and corporations in the world’s two largest economies, the United States and China, are highly indebted and include many high-risk borrowers, a banking crisis on both sides of the world will undoubtedly trigger the worst financial meltdown we have ever seen. This silent crisis will evolve into a roaring explosion, and while bank meltdown, the financial system breaks down and our economic growth remains stalled for years and years. Dark clouds are ahead and we should brace for an era of widespread decay. And you should stay turned with the next unfoldings of this ravaging crisis, here, on Epic Economist.