Perfect storm can wreck the US economy

You may have noticed that over the past ~14 months the US Federal Reserve raised interest rates from practically zero to the current range of 5.00 – 5.25 percent. With these rate hikes, the central bank hopes to curb inflation, but the danger is that they will cause problems for the economy. Peter St Onge, an economist by trade, is now warning of a possible “perfect storm” that could wreck the US economy.

In a new video update, St Onge shares that growth in many urban areas in particular is starting to slow down.

What does this mean?

A decline in growth in the more urban areas means that many real estate firms could be in trouble. They have a lot of outstanding debts with regional banks. If the real estate sector in the cities collapses, this could not only cause problems for that sector, but also for the banks, which are largely dependent on those parties.

“What we are seeing now is the mass extinction of poorly managed companies and real estate projects because money is no longer free, thanks to the Federal Reserve’s rate hikes. In fact, the interest rate for the best companies is currently 8.25 percent, while they have been able to borrow at an average of 3.25 percent over the past 15 years,” says St Onge.

The problem is that the economy has become accustomed to those low interest rates and now suddenly has to make do with interest rates that are 5 percent higher. That may go well for a while, but the longer this situation lasts, the more parties will get into trouble.

The perfect storm

Furthermore, the analyst warns that the full scope of the problem is not yet clear and known at this time. According to St Onge, the combination of bleeding government bonds, rising interest rates and large amounts of bad loans within the regional banks is the ideal recipe for the perfect storm that can blow the US economy over.

The problem for the regional banks is that their assets pay out about 2 to 2.5 percent, while debt now costs around 5 percent. Furthermore, 43 percent of loans from regional banks consist of commercial real estate.

That is what they specialize in for their local environment. About 40 percent of those loans are in office buildings. That could become problematic if the predictions about a crash for that sector come true.

“Taken together, that is the death sentence for the regional banks, given the size of the bubble,” said St Onge. In recent weeks, Bitcoin has performed well during the banking crisis, so perhaps this can also be a good thing for the digital currency.

However, an economic crisis of this magnitude cannot bode well for a risk asset like Bitcoin. At those times dollars are needed and people are willing to sell anything to get those dollars.

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