With the pandemic comes a liquidity crisis that will magnify countries which have debt to GDP ratios that are unsustainable. These include countries like Japan, Italy and the United States.
So while small business die in the short term, the helicopter money we’re getting to survive as citizens is accelerating national debts and debt to GDP ratios that will impoverish even strong economies in the 21st century, possibly creating a financial meltdown of the global economy.
That sounds pretty dramatic, but what if it were true? While China’s economy is a shadow-banking economy, the U.S. economy (thought to be among the strongest) is actually a debt driven economy. The U.S. already had before the pandemic the 8th largest national debt of any country in the world.
According to the U.S. Bureau of Public Debt, in 2015 and 2017, the United States had debt-to-GDP ratios of 104.17% and 105.4%, respectively. So what does it become in 2020?
The liquidity crisis first created an oil price war in 2020, but it will create many other things, as well as possibly a national debt and corporate debt crisis. The U.S. debt has by the way, hit $24 trillion (before the pandemic).
While companies gorge on cheap money and handouts, a reckoning could indeed be coming. Just as individuals have a credit karma that can catch up with them, even the most successful and largest economies can become vulnerable to over spending.
While China is at risk for a major corporate debt bubble to burst, America suffers potentially from something much more long term and sinister. China’s debt to GDP ratio is approximately half of that of the U.S. and its emerging middle class is more resilient than the fading middle class of America where the pandemic is likely to redistribute wealth upwards in a marked spike.
The U.S. will have to make cuts in social programs or its military (likely both) and raise taxes in the foreseeable future. This as competition ramps up with China that has more leverage and a faster acceleration rate in how technology and AI will scale in the future.
The pandemic hitting the U.S. harder means a shock to an increase of debt in all of its forms. The U.S. already has a student debt crisis and poor debt to household income figures especially for the young. This creates a vulnerability to the economic shutdown of 2020.
Liquidity crisis + small business collapse = likely debt global crisis. Coronavirus shutdown = a financial crisis with several additional variables (oil price war being the first to appear in early 2020). What does Q2 and Q3 hold? The answer is simple: more debt.
With nearly 17 million filing for unemployment in the last three weeks, nearly one third of Americans didn’t pay their rent on April 1st.
What does this suggest amid retail brands that are going bankrupt day by day and small businesses that are disappearing? The potential for a real estate crisis and the rising unemployment to heavily impact banks and the financial sector. At worst, social order could decline as a result.
From interviews with Bill Gates to Nancy Pelosi, it’s still unclear when the U.S. economy can open again.
According to Justin Trudeau, the end of the first wave only occurs in the summer of 2020. Any return of the consumer and the economy won’t be quite the same until a vaccine is found that could take between 12 to 18 months, so in the area of February to September of 2021. That’s a lot of time for the financial crisis to deepen and debt to build up.