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Growing Realization That a Major Economic Explosion Is Imminent This Summer

June 11, 2020 (EIRNS)—There is a growing realization that a major economic train wreck is just around the corner in the United States, as the massive influx of funds into the banks (mainly) and to some degree the population, is about to run its course.

A June 10 BuzzFeed article focused on how the consumer house of cards—based on mortgage and other debt postponements, and an influx of unemployment insurance cash to millions of Americans—is about to collapse. The article, “The Real Economic Catastrophe Hasn’t Hit Yet. Just Wait for August,” begins: “After a terrifying spring spent in lockdown and a summer of protests in the streets, things are going to get a lot worse in the fall.” The article adds colorfully:

“The U.S. economy right now is like a jumbo jet that’s in a steady glide after both its engines flamed out. In about six weeks, it will likely crash into the side of a mountain. What’s kept us in the air so far is an extraordinary government relief effort. In most states, evictions have been temporarily banned, preventing a mass homelessness crisis. Most federal student loan payments have been put on hold, removing one of the largest recurring monthly expenses that millions of people face. Banks were ordered to give their customers a six-month break on mortgage payments if requested.”

But all of that will be coming to an end in the summer. Mortgage foreclosures are a particularly serious problem: “This month, about one-third of renters were unable to pay their rent in full or at all, despite all the stimulus money. A federal law that bans evictions in any properties financed by federally backed mortgages—more than a quarter of all households, according to one estimate—expires on July 25, just a week before millions of people’s main economic lifeline is pulled away [the $600 weekly unemployment payment]. Unless they are extended, statewide orders banning all evictions in places that have been hardest hit by the unemployment crisis will also expire around then: Florida’s on July 1, California’s on July 28, and New York’s on Aug. 20....

“Payments on millions of paused student loans will begin again at the beginning of October; the more than 4 million homeowners who received a six-month pause on their mortgage after April’s mass layoffs will need to start making payments again at the end of October.” There are estimates as much as one-third or all rents in the country, residential and commercial, won’t be paid for July.

Nor will the problem be solved by massive rehiring of all the laid off workers: “By some estimates, more than 40% of all the job losses of the last few months could be permanent, not temporary.”

As for the banking side of the blowout, in a lengthy article in the Atlantic, Frank Partnoy complains that “The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.” As a former banker (“I was part of the group that structured and sold CDOs and CLOs at Morgan Stanley in the 1990s”), Partnoy notes that the CDO bubble which triggered the 2008 blowout, has been replaced by an even more explosive CLO (collateralized loan obligation) bubble. “It lurks on the balance sheets of the big banks, and it could be cataclysmic.... As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse.... There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.”

Readers of EIR, of course, were made aware of this ticking time-bomb over a year ago, for example in March 2019 coverage in the EIR Daily Alert.

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