US economy on the edge of the abyss

BANG!!

Western US economy on the edge of the abyss

By

John Le Sueur

July 12, 2024

AS YOU know from my previous TCW articles, I am no economics expert. I do a lot of research and listen to many people who are experts. So my view of the current situation is culled from many sources. It is not good. By any measure, the West’s economic primacy is teetering on the brink.

The Bretton Woods Agreement seems a good place to start. The conference took place exactly 80 years ago in July 1944 and was intended ‘to make the US dollar the de facto steward of the global economic system’. In essence, all the world’s currencies were pegged to the US dollar which in turn was pegged to gold.

In 1971 President Richard Nixon removed the USD from the gold standard because foreign-held dollar debt exceeded the gold reserve. From that point the USD has essentially been backed by nothing but debt. In fact, believes finance consultant Paul Goncharoff, since then time has tested the US Government and found it wanting ‘as what should have been sound objective decisions steadily degenerated into politically weaponised short-term actions that were hugely expensive for the rest of the world‘.

The whole US economy is based on a revolving door of debt. Bring it to an abrupt halt and mayhem will occur. We are almost at that point, in my opinion, as happened in 2008, but was then saved by the intervention of central banks.

The first problem is that US government debt is $34trillion and growing at $1trillion a quarter. Interest alone on this debt is more than US spending on defence, and it is close to the time where servicing the interest will be stressful. Effectively broke, the US spends like a drunk having a good time on credit.

The second problem is that governments have forgotten, though billionaires have not, that gold is not just a pretty metal. It is money. The last time gold reserves in the US were audited was in the 1980s, which raises the question: do US gold reserves still exist? Or are Fort Knox and other strongholds empty? (A scenario for a crime thriller if it has not already been used.) The US still holds gold securely for other countries, though France had to send a warship to New York to demand its gold back in 1971. Nigeria is currently trying to repatriate its gold reserves. Why the reluctance to pay? How come audits are not up to date? Both are worrying questions.

The third problem is that the biggest holders of US securities in the form of treasury bonds are China and Japan. China sold off $53billion recently. Japan’s Nochu bank has just decided to sell $63billion, ‘before the market goes soft’ (paraphrased from bank speak). In April this year Japan reduced its US treasury bond holdings by 18.5 per cent and now holds $1.82trillion in the bonds. This will have a ripple effect on the value of US debt, making it more expensive for the US to borrow money. US treasury bonds are in a great deal of trouble as other banks around the world will be watching with alarm and are likely to sell off their bond positions. Treasury bonds, for the uninitiated, are marketable fixed interest government debt security.

Gold is now seen as a safer investment: billionaires and countries are investing in it. China last year was the biggest single investor in gold at 224.8 metric tons and the second-largest buyer of gold in 2022 at 62.21 metric tons. The reason for this might be to do with the launch of a BRICS* currency in the near future when a gold reserve will be necessary to announce the currency’s strength.

Meanwhile finance experts say there are 63 US banks on the ‘at risk’ list. Of about 4,000 US banks recently analysed, 282 were found wanting, facing the dual threat of commercial real estate loans and potential losses tied to higher interest rates. They don’t tell us which ones, as they did not in 2008.

Commercial property in the US is in a lot of trouble and much of it will not rent out. Owners are giving the property back to the banks and walking away as they cannot make the payments on the mortgages. The amount of commercial loans falling due is around $900billion. This is happening now. An Ohio skyscraper recently sold for 10 per cent of the sum it was mortgaged for.

To make matters worse, many banks are carrying ‘unrealised losses’, which are losses they have yet to take against their profits. The amount is some $525billion. This is head-in-the-sand, don’t-face-reality behaviour. Hoping things will get better to absorb the losses, but the reality is things are about to get a whole lot worse. The spectre of vast bank holdings of derivatives is likely to raise its head again as it did in 2008. In those derivatives will be parcels of bad debt as we saw in 2008.

Prime finance is for those who have a good payment record, sub-prime finance is for those who do not, as 2008 should have taught us. In the US auto industry, sub-prime finance is currently 60 per cent in ‘delinquency’. ‘Repo’ men cannot keep up with the repossessions, which are expected to be in the millions this year.

Mortgages fall into the same categories, and you can safely bet sub-prime mortgages are facing delinquencies too.

Add to all of that, US consumer credit card debt is a staggering $1.13trillion, with an average balance of more than $10,000. A surprising number of people carry balances of $100,000. Credit cards are maxed out as people struggle to pay their bills, and the financial crash has not happened yet.

US employment indices are not good either. In the first six months of 2024, the unemployment rate climbed 0.4 percentage points to 4.1 per cent — an increase of 0.7 percentage points from its historic low. Earlier this year it was reported that 8.7million are working two to three jobs to make ends meet. Many have lost good jobs, and ended up in menial jobs just to survive.

On June 9 another calamity struck. Appalling diplomacy and foreign policy caused the end of the petrodollar, meaning the end of a commitment by Saudi Arabia to use US dollars as the currency in which to transact oil for all countries in the world. Saudi Arabia now accepts payments in most currencies, not just USD. This is a day history was made and will be seen in history as the day the US fell on its knees.

This comes on the back of the BRICS countries no longer using 100 per cent USD as a payment method. The BRICS countries now use the USD for only 28 per cent of their transactions and this percentage is falling.

You may ask why there is so much concentration in this article on the US? Well, where the US leads, the UK follows; a lot of US fiscal policy is masked in UK statistics where you will likely see similar trends.

In 1929 the US stock market crashed, leading to the Great Depression which lasted for ten years. It affected the world and the UK suffered too. In those days the US and UK had a manufacturing industry which pulled them through and out of it. Neither do today. Their manufacturing has long since been outsourced to other countries.

JP Morgan is the first bank openly to admit a stock market crash is coming. It predicts a 20-30 per cent devaluation of stocks, which might prove conservative. Financial experts generally say stock prices are too high, and in a bubble.

With all these body blows to the Western world’s premier economy, there is only one question: how long can it go on?

Will the central banks be able to step in again? Will they be able to save the day from such a large banking problem? Or is the problem simply too big?

*BRICS is an intergovernmental organisation comprising Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates.

TCW