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Tuesday, June 25, 2024
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HomeStatesideBatten down the hatches, a financial hurricane is on the way

Batten down the hatches, a financial hurricane is on the way

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HUGE financial trouble is coming to the US this year. That spells trouble for all Western economies as all are intertwined with the US.

I do not pretend to be an expert on these matters: the information I am giving you here is culled from many sources. I am, if you like, the man in the street, reading and watching.

It is said when the US sneezes, the UK catches a cold. This time it will be far worse as so many things are happening at once. It is time to batten down the hatches, pay off debts and not commit to new ones, and prepare as much as you can. No one can yet predict what things will look like at the end of this turbulent time. Nor can we predict when it will end.

We have all seen high streets closing down. We blame Amazon, and that is partly true. A far bigger problem is that high street rents and taxes are so high that shops cannot compete. As a general rule, landlords cannot reduce them either. This is because the property value is determined by its rental price, and if you devalue the property by renting it cheaply it will damage the value and the financial gearing of your property portfolio, potentially causing bankruptcy. So it is better to sit with an empty commercial property and hope things turn a corner.

In my view that is a forlorn hope for the next few years.

In the US, vast swathes of office space are empty. The landlords have some brutal decisions to make as $117billion is due in financial payments this year for commercial property. If the landlords cannot re-negotiate their loans, they go bankrupt, dumping property on the banks, which in turn will have to face their loan portfolios going delinquent. Which could of course cause them bankruptcy.

Banks are already tightening up on their lending as hard times come. They know full well which clients are a lost cause, which are liabilities and which will be able to re-negotiate. It is thought some 30 per cent of bank loans in America are already delinquent and in arrears. No one knows, as the banks are not telling anyone yet.

Meantime banks are queueing up for central bank loans and help. Which indicates that the banks have a problem.

In the US some 60 per cent of car loans are in negative equity due to the practice of rolling over residual debt from the previous loan to the new car. The customer has a choice: run the car until the loan is paid off or renegotiate the loan. If the car is old or has a high mileage the customer might have few options to keep it running.

Americans are already in a situation where their credit cards are maxed out. Renegotiating loans might not be possible. Some banks are already stopping credit cards without warning. The Bank of America is getting many complaints about this. Customers are saying: ‘I was already hungry and now I’m starving.’

With regard to finance customers, some are branded ‘prime’ with a good payment record, or ‘sub prime’ with a poor payment record. Sub prime auto loans in the US now stand at 50 per cent in payment arrears. Sub prime represents people who already have financial issues, and some who are struggling now will default badly soon. This further increases pressure on the banks which finance sub prime loans.

I am sure many readers will remember the Freddie Mac and Fannie Mae sub prime mortgages that featured in so many derivatives being sold during the 2008 crash. What is coming is many times worse .

The Biden administration took over an economy that was performing well under Trump, and crashed it like a teenager on a joyride. So many appalling decisions have been made that have seen the US debt climb to $34trillion. This means that 40 per cent of personal taxes in America goes to paying off the interest alone, but not the capital. It is calculated that each American taxpayer accounts for $100,000 of US debt, on top of their own personal financial burdens. It is currently anticipated that US national debt will get to $40trillion, maybe by the end of this year as it is rising by $3trillion each quarter.

The Biden administration is responsible for many economic nightmares the US faces, but one stands out above all others: the destruction of the dollar as a reserve currency.

The USD as a reserve currency is often referred to as the petro dollar. If, say, Spain wants to buy oil from Saudi, it buys USD and then pays for the oil in USD. Not euros. This makes money for the US Federal reserve and costs Spain as it converts euros into USD.

The USD was taken off the gold standard by Nixon. It is backed by nothing but debt.

Biden’s policies have meant that Saudi is now accepting payments for oil in a country’s own currency if Saudi approves of that currency. Saudi approves Chinese yuan because it is backed by China’s huge gold reserves. Russia put the ruble on to the gold standard two years ago to stop the US attacking its currency, so it is well regarded by Saudi. Spain, for example, being part of the EU has to pay in US dollars as Saudi does not accept euros, which are regarded as not sufficiently stable nor backed by gold.

Saudi accepted Chinese yuan in payment for oil. India did such a transaction recently. This is because BRICS (Brazil, Russia, India, China, South Africa) has risen as a backlash to US policies, hegemony and currency. BRICS has close to half the world’s population supporting it while US influence is dramatically diminishing, placing the USD under the greatest threat of serious devaluation it has ever seen. Imagine, if you will, that the USD is worth 25 per cent of what it is today – that is a possible future for the US. It is that possible future that is terrifying world bankers, investors, speculators and economists.

Yet Janet Yellen, US Treasury Secretary, crows that US is in for a soft landing with the economy. She, like Biden, crows about creating jobs. But the jobs created are second jobs as Americans are working two jobs just to stay afloat in many cases.

The fact of the matter is that the USD is a paper currency. Real money is now gold or silver. Silver is about to accelerate in values and gold is predicted to rise anywhere from 30 per cent to 3,000 per cent. Will gold do this because paper currencies become worthless? Or because people are panicked that the only safe investment is to buy gold which drives the gold price?

You may well ask what will happen to sterling: my guess is that it is likely to face a similar fate to the USD. As for the euro, it surely cannot survive this, with Germany and France in recession and other euro countries being dragged into the mire.

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John Le Sueur
John Le Sueur
John Le Sueur is retired after a long career in the motor industry and lives in Spain. He is a qualified private pilot.

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