An Economic Collapse is a Stretch,
But Here are 7 Facts to Be Aware of…

National Debt Concerns

The U.S. national debt exceeded $33 trillion as of September 15th, 2023.ⁱ This is more than America's annual economic output measured by its gross domestic product. The last time the debt-to-GDP ratio was more than 100 percent was in 1946, when the nation had to pay for World War II.ⁱⁱ In a true emergency, incurring higher debt may be a necessary step. However, much of today’s $33 trillion was accumulated during peaceful, prosperous times.

Inflation and Interest Rates Leave Little Room to Cut Rates

The Federal Reserve has traditionally used interest rate reductions as a powerful stimulus. Before the crisis erupted in August of 2007, the federal funds interest rate sat at 5.25%, higher than today. And the inflation rate today is almost double that of 2007.

As a result, the Fed will have less room to lower rates should another crisis occur. And if it does, that may stoke inflation further, which could potentially hasten financial distress and spark a potential economic collapse.

The Biggest Banks are Even More Dangerous

In 2008, many watched in disbelief as some of the world’s largest banks and financial institutions teetered on the verge of collapse. And we now know how the story ends: a massive taxpayer bailout. This situation brought about the 2008 event now termed the Global Financial Crisis (GFC).

Legislators and regulators promised these vulnerabilities would be rectified once the crisis was resolved. Yet years later, the five biggest banks are much larger and more critical to keeping the economy afloat than before the Great Financial Crisis started.

The government made matters worse when it mandated that some of these alleged “too big to fail” banks absorb the failing banks. According to a 2022 Barron's article, “Regulators Still Aren’t Serious About Ending Too Big to Fail,” a spate of recent mergers has again ramped up leverage and risk.ⁱⁱⁱ

Consequently, the failure of these banking giants today would be catastrophic. And given the interconnectedness of these large banks across the globe, that could finally trigger the anticipated economic collapse that will likely have negative consequences worldwide.

Danger from Derivatives is Worse than in 2008

Warren Buffet famously referred to derivatives as “weapons of mass destruction.” The world saw that potential in 2008 as they threatened the existence of decades-old banking institutions.

Post bailouts, the dangerous derivatives on bank balance sheets back in 2008 did not disappear as regulators promised. Today the derivatives exposure of the five biggest American banks is significantly higher than before the Great Financial Crisis. The derivative bubble is disconcertingly far higher today.^iv

The FDIC Lacks Reserves to Cover Another Crisis

The FDIC’s website states that its role is to “protects depositors' funds in the unlikely event of the financial failure of their bank or savings institution.”^v But here's the problem: who will bail out the FDIC if it doesn’t have enough to cover deposits in a large shock?

That happened in 2008, and since then, there has been no significant addition of reserves. The FDIC targets a 2% reserve ratio. This may be sufficient in good economic times but is unlikely to do much should an economic collapse occur. In addition, you are only covered up to $250,000 total per bank if you have multiple accounts.

One economist told PBS on January 30, 2014, that he was removing his money from a big bank, leaving only $10,000, due to these risks. Sound logic especially now as it was back then.

The Fed Balance Sheet is Still Expanded from the 2008 Crisis

The Federal Reserve’s balance sheet is one way to measure Quantitative Easing (Q.E.). During the 2008 Financial Crisis, the Fed dramatically expanded its balance sheet to counter the crisis and help rebuild the economy. From a starting point of $910 billion in September 2008, the balance sheet increased to $4.52 billion by 2014.

The COVID-19 pandemic saw the Fed aggressively grow its balance sheet with Q.E again. The total ballooned from $4.52 trillion to nearly $9 trillion by mid-2022.

One of the many drawbacks of quantitative easing is that it usually leads to surging inflation, which is now apparent. But now, the Fed has much less room to fight it.

In addition, the Fed still has nearly $1.8 trillion in mortgage-backed securities on its balance sheet. This is more than double the less than $1 trillion it held before the Great Financial Crisis began. If mortgage-backed securities falter again, the Federal Reserve has less maneuverability to absorb bad assets than before.

A New Trend of High-Tech Layoffs Has Started

Unemployment has not been on the minds of Americans for a while due to a red-hot job market. However, things are changing fast. A wave of layoffs is sweeping America's tech industry. These are high-paying jobs, making their loss more economically significant. And since technology companies are losing favor with investors, layoffs are likely to be a continuing trend.

Financial crises or potential economic collapses worsen significantly due to job losses, which destroy consumer demand when it is most crucial. Moreover, with Americans saving less and increasingly relying on credit cards, the country remains unprepared for such crises.