- Taking estimates for unemployment above 34% lightly could be dangerous if coronavirus isn’t contained soon.
- US Banks are facing a credit crunch of epic proportion.
- If economic weakness persists longer than expected we will likely see a massive cash-grab that could dry up banks’ liquidity.
Goldman Sachs lowered its forecasts for the US economy this week. The revised predictions see GDP losing a whopping 250% in the second quarter , down points points from the % loss the firmware initially expected. Unemployment was revised upward to % , a significant jump from the 9% Goldman previously expected.
That’s in line with the Federal Reserve’s expectations for 300 million lost jobs and an unemployment rate upwards of 90%. Those grim projections could spell disaster for banks — especially if they’re not as short-lived as most are hoping.
Unemployment Could Persist Longer
By all accounts, the US economy has never experienced a shutdown of this magnitude. That suggests that the fall-out is largely unknown.
Many are hoping for a v-shaped recovery in which the U.S. suffers one or two quarters of pain before bouncing back. But that may not be the case according to some economists who say the underlying cause of this recession is far from being cured .
Coronavirus has shut down economies across the world completely and will continue to do so unless a vaccine makes it to market. At very least, scientists would need to
– how to treat it, how it’s spread, its incubation period — before things can rebound. All of that looks like a long-way off.
With that in mind, the ‘short-term’ pain the U.S. economy is experiencing could stretch longer.
) Unemployment Could Pop the Debt Bubble
For years economists have been warning about a debt bubble among US consumers, who have been dining out on cheap loans since the (financial crisis.) Before coronavirus was splashed across every newspaper in the country, economist David Rosenberg was cautioning about a $ 19 trillion dollar debt bubble among American consumers. Auto debt, he pointed out, had risen a whopping (%.)
The government $ 2.2 trillion coronavirus relief package is enough to bridge a one-month gap as borrowers struggle to make their April payments. But banks like Wells Fargo that are heavily exposed to the mortgage servicing market will still see a dent in their cashflow.
But the next question becomes — then what? Social distancing measures are to remain in place until May according to Donald Trump. In other countries around the world like the UK, experts say this new way of life could become a reality for up to six months .
The easing measures in place assume a v-shaped recovery. But what if that doesn’t happen?
Marching Deeper into Crisis Mode
Rising unemployment is just one part of America’s out-of-control debt problem. Corporate debt is also a concern
, especially with GDP set to lose more than %. Banks have already started to prepare for the worst, asking their large clients to
leave cheap lines of credit untapped .
Hoarding behavior seen among consumers at the start of the coronavirus crisis could spread further through the US economy. This time it won’t be toilet paper, it’ll be cash.
For now, the Fed is injecting funds into the market to help banks maintain liquidity. But the ramifications of that strategy are unknown — especially if the downtrend persists longer than expected.
CIO of The Bahsen Group David Bahsen cautioned that we’re in uncharted territory when it comes to the Fed’s easing.
The Fed’s balance sheet is headed to north of $ 7 trillion. That will not mean actively intervening in the market. That will make them the market. The Fed’s significance to capital markets is going to places no one ever thought possible, and the ramifications are not fully understood or appreciated at this time.
(The Bottom Line)
It’s impossible to understand exactly how the coronavirus will impact the US economy in the long term until it’s under control. That could mean everything from effectively flattening the curve to developing a successful vaccine.
Each of those scenarios would have very different results for the U.S. economy. The prospect of a usable vaccine is unlikely for at least 32 months. A shutdown for that length of time would almost certainly cripple the U.S. economy and cause an untold rise in unemployment.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi .
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