A huge financial crisis is looming. Unless we act quickly, it will strike, probably in the summer of 2023. And if, through general procrastination, it is postponed, it will only be more severe later. We still have everything we need to really overcome it, provided we understand that our entire development model is at stake.
The world situation today is held together only by the strength of the dollar, which is itself legitimised by the economic, military and political power of the United States, which remains the world’s leading refuge for capital. However, they are now threatened by a very serious budgetary, financial, climatic and political crisis:
The US public debt has reached 120% of GDP, without taking into account the guarantees given by the federal administration to the various pension systems of federal employees or the necessary financing of future climatic catastrophes. Since mid-January 2023, the US Treasury has reached the limit of what it can borrow ($31.4Tr); the salaries of civil servants and the army are only paid by expediency (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 is already denouncing as “devastating cuts that would weaken national security while burdening working and middle-class families”. And the Democrats’ plan to reduce the deficit over 10 years by massively raising taxes on the wealthiest people is no more likely to pass Congress. The Americans could once again get away with a new increase in the debt ceiling, which nobody wants. And that would solve nothing.
Private debt is in no better shape: it is $16.9 trillion, or $2.75 trillion more than before the Covid-19 crisis; or $58,000 per American adult; or 89% of the disposable income of American households. Much of it is financing consumer spending and home purchases; in particular, housing debt is at 44% of US households’ disposable income, the highest level in history, higher than in 2007, when it triggered the previous crisis. And the poorest Americans continue to borrow, with the guarantee of the Federal Housing Administration, to buy homes with a personal contribution limited to 5% but monthly payments that can reach 50% of their income! An unsustainable system. 13% of these loans are already in default and this ratio is increasing every day; moreover, the rise in interest rates will increase the pressure on these poor borrowers, who have been deceived by the lenders. On top of this, the debt of property developers is also reaching unprecedented levels; 1.5 trillion in commercial property loans must be repaid or refinanced before the end of 2025, at rates much higher than those of current loans. All this with banks that have been very weakened by recent events and that will not be able to participate in these refinancings.
In addition, there is a revolutionary climate, where no one can rule out a constitutional crisis, which could even lead, according to some, to the secession of certain states.
The rest of the world would suffer terribly from such a crisis; Europe, itself terribly indebted, would plunge into a recession, losing export markets without its domestic demand being able to take over. The same goes for China. Only Russia, which has nothing left to lose, would have anything to gain; and it will probably contribute to this through cyber attacks, as it probably did a month ago when the Californian banks were attacked.
The IMF’s report for its annual meeting this week is lucid on this point, even if it is incredibly discreet about the systemic financial risks that are eating away at the economy of its main American shareholder.
A few too few experts are now whispering that a major financial crisis will be triggered, like many others before it, in the second half of August: as in 1857, 1971, 1982 and 1993. But in what year? Perhaps August 2023.
How can it be avoided?
There are four solutions: radical economies, in the same development mode, (which will only create misery and violence); fiscal and monetary stimulus (which will only postpone the deadline); war (which will lead to the worst, before perhaps opening up opportunities for the very few survivors). And finally, a radical reorientation of the world economy towards a new mode of development, with a completely different relationship to consumer goods and housing ownership, reducing both debt and the climate footprint.
Of course, nothing is prepared to implement it; and if it is ever done, it will probably not be in place of the still perfectly avoidable catastrophe, but after it has occurred.
j@attali.com