The threat of a huge financial crisis

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By JACQUES ATTALI*

A few rare experts are now murmuring that a major financial crisis will be unleashed. How to avoid it?

A huge financial crisis looms. If we don't act quickly, it will hit us, probably in the middle of 2023. And if, due to widespread procrastination, it is postponed, it will only hit us harder later. We still have everything we need to really master it, as long as we understand that our entire development model is at stake.

The world situation today is maintained only by the strength of the dollar, legitimized by the economic, military and political power of the United States, which continues to be the main refuge of global capital. However, this country is currently under threat of a serious fiscal, financial, climate and political crisis:

The US public debt reached 120% of GDP, without considering the guarantees provided by the federal administration to the federal agents' pension systems or the necessary financing for future climate catastrophes. Since mid-January 2023, the US Treasury has already reached its borrowing limit (31,4 trillion dollars); the salaries of employees and the army are only paid through palliative resources (which the Secretary of the Treasury says cannot be extended beyond the beginning of July 2023).

Republicans, who control the House of Representatives, are preparing to propose what the White House has already accused of being "devastating cuts that will weaken national security and hurt working-class and middle-class families." And the Democrats' project, which aims to reduce the deficit in 10 years through a massive increase in taxes on the richest, does not have much more chance of being approved by Congress. Americans can, once again, get out of this by taking advantage of a new increase in the debt ceiling, which nobody wants. And that wouldn't solve anything.

Private debt is not in a better situation: it reached around 16,9 trillion dollars, which means 2,75 trillion more than before the crisis caused by Covid-19; about $58 per US adult, or 89% of US household disposable income. A good part of it is used only to finance consumption expenses and the purchase of houses; housing debt, in particular, accounts for around 44% of disposable income for American families, the highest level in history, surpassing that of 2007, when this type of debt was the trigger for the previous crisis.

And the poorest Americans continue to borrow, backed by the Federal Housing Administration, to buy houses with a minimum down payment limited to 5% plus monthly payments, which can amount to around 50% of your income! An unsustainable system. 13% of these loans are already in default and that percentage is increasing every day. Added to this is the indebtedness of construction companies, which also reaches unprecedented levels. $1,5 trillion of commercial property loans must be repaid or refinanced before the end of 2025, at rates much higher than today. All this while the banks are highly weakened by what happened recently and cannot participate in these refinancings.

In addition to all this, there is a revolutionary climate, in which no one excludes the possibility of a constitutional crisis that could even lead, according to the opinion of some, to the secession of some states.

The rest of the world would suffer terribly from a crisis like this. Europe, itself terribly indebted, would sink into recession, losing export markets that could not be matched by domestic demand. The same goes for China. Only Russia, which has nothing left to lose, could gain something from this; and she will certainly contribute to the disorder, through cyberattacks, as she undoubtedly did a month ago when Californian banks were attacked.

We can no longer think that current growth will be enough to clear this debt, as was the case in 1950. The IMF Annual Meeting report is quite lucid on this point, however incredibly discreet it is about the systemic financial risks that are eroding the economy of its main shareholder, the Americans.

A few rare experts are now murmuring that a major financial crisis will be unleashed, like many others before it, in the second half of an August: as in 1857, 1971, 1982 and 1993. But which year? Possibly in August 2023. How to avoid it?

There are four solutions: radical economies, maintaining the same pattern of development (which would only create misery and violence); monetary stimulus (which would only delay your end date); the war (which had led to the worst case scenario, before possibly creating very rare opportunities for survivors). And, finally, a radical reorientation of the world economy towards a new model of development, with a totally different relationship with the ownership of consumer goods and housing, at the same time reducing debt and the climate footprint.

Naturally, nothing is ready to implement it; and if we ever adopt it, it will probably not happen instead of the catastrophe, still perfectly avoidable, but after it has happened.

*Jacques Attali He is an economist and writer. Author, among other books, of Karl Marx or the Spirit of the World (All time lap record).

Translation: Daniel Pavan.

Originally posted on the blog of Jacques Attali.


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