Issues are approaching the global economy in the form of battalions, not lone spies. They are pursuing this on several fronts in Europe, China, and the US. When combined with the resurgence of geopolitical tensions in the Middle East, those issues increase the likelihood that by mid-year there will be a global financial and economic crisis.
The recent increase in the yield on US Treasury bonds, which is a crucial interest rate in the global economy, is one of the biggest risks to the recovery of the US and global economies. The yield on a 10-year Treasury bond shot up to a 16-year high in just two months, rising from less than 4 percent to over 4 ½ percent. It did so in reaction to mounting market concerns about how the U.S. government will pay for its budget deficit, which is set at 8% of GDP, and Federal Reserve warnings that interest rates will remain high for longer in order to manage inflation.
The 30-year mortgage rate has already risen to 8% due to the sudden increase in interest rates, and the cost of borrowing money for car purchases has also significantly increased. This could be anticipated to soon provide a significant obstacle for the sales of both homes and cars, at a time when the majority of people have depleted their pandemic reserves and the government is facing yet another shutdown.
Additionally, in a post-COVID environment, it is probably going to make matters worse in the commercial real estate market, where developers are already having trouble with low occupancy rates. These developers really didn’t need to worry about paying higher interest rates on the approximately $500 billion in commercial real estate loans that are coming due in the upcoming years.
Even worse, a credit crisis in the United States is definitely imminent given the recent increase in Treasury bond yields. Large portions of the American banking sector in general and the regional banks in particular are expected to have solvency issues as a result.
It was projected that the U.S. banking system faced mark-to-market losses on its bond holdings exceeding $600 billion even prior to the current increase in bond yields. These losses will be significantly increased by the subsequent decline in bond prices. Due to this, the regional banks, which hold over 20 percent of their balance sheet in commercial property loan portfolios, are especially ill-equipped to handle the anticipated wave of defaults.
China, the second-largest economy in the world and, until recently, the main driver of global economic growth, should never be allowed to fall into a path of significantly slower economic growth. An event of this like would be especially untimely given that it seems the US is about to enter a significant economic downturn. However, it appears that this is exactly is happening now that the country’s inflated housing and credit market bubbles have burst. There are now grave concerns that China is headed for a lost economic decade a la Japan due to the implosion of that bubble and the country’s extremely low demographics.
In a similar vein, it appears that Europe is at a bad time to enter a recession and go through another cycle of the sovereign debt crisis that is centred on Italy, a nation whose economy is about ten times larger than Greece’s. However, given that the Italian government has introduced an expansionary budget while the country’s public debt is significantly higher than it was in 2012 and the European Central Bank is continuing to raise interest rates in an effort to regain control over inflation during a period of economic weakness, that seems very much in prospect right now. As the difference in yields on Italian and German bonds continues to widen, the German economy has already seen three quarters of negative economic growth.
It would appear that all of this has obvious ramifications for American economic leaders. In addition to abandoning its dogma of high interest rates for an extended period of time, the Federal Reserve should begin making plans for a global financial and economic disaster. Meanwhile, Congress needs to get its act together and begin tackling the nation’s chronic budget deficit issue.