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The US Economy Is Cooling, Yet It's Like a Frog in Boiling Water

The article compares the current state of the U.S. economy to a frog in gradually heating water, drawing on the Congressional Budget Office's (CBO) Budget and Economic Outlook: 2024 to 2034. Here are the main points:

1. Increasing Deficits: The deficits are expected to rise from 5.6% of GDP to 6.1% over the next decade, exceeding the 50-year average of 3.7% of GDP.

2. Growing Government Debt: Publicly held government debt is predicted to increase from 99% of GDP to 116% by 2034, more than double the 50-year average and surpassing the record high set in 1946.

3. Missed Opportunities: The article points out that there were chances in the past to cool down the economy's rising temperature, but they were overlooked.

4. Broader Spending Restraint Needed: To control spending, measures must go beyond annual appropriations and include mandatory programs like Social Security, Medicare, and Medicaid, which contribute to higher spending.

5. Higher Revenue Required: Due to an aging population, rising healthcare costs, and increased debt servicing costs, future revenue needs will be greater. To balance the budget, revenues must rise to at least 19% of GDP.

6. More Workers Needed: Slowing workforce growth due to an aging population and low fertility rates constrains economic growth. Immigration could help boost workforce growth, which is crucial for managing the growing debt burden.

The article concludes that tackling these issues will demand tough choices and bipartisan collaboration; otherwise, the U.S. economy could face dire consequences, similar to the fate of the frog in the allegory. Read More.

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Fund Managers Warn of Systemic Credit Crash Due to Commercial Real Estate Troubles

Fund managers are increasingly concerned that troubles in the commercial real estate sector could lead to a credit crisis in the U.S., as per a Bank of America survey. About 16% of respondents in February, up from 11% the previous month, see a "systemic credit event" as the top market risk, ranking behind inflation and geopolitics.

The commercial real estate market is viewed as the most likely source of a credit event. Other potential sources include shadow banking and U.S. corporate debt. The sector faces challenges with $1.5 trillion in commercial mortgage debt due by 2025, higher borrowing costs, tighter credit conditions, and decreased property values due to remote work.

Small and regional banks, holding about 80% of the sector's debt, are the main credit sources for the $20 trillion market. The collapse of Silicon Valley Bank last year raised concerns about lending standards becoming more restrictive. A credit crunch could lead to higher lending standards and interest rates, making it harder for businesses and households to obtain loans.

New York Community Bank's recent dividend cut and unexpected quarterly loss on real estate loans have reignited these fears. Treasury Secretary Janet Yellen downplayed the sector's woes, expecting some bank stress but not seeing it as a systemic risk, particularly for larger banks, though smaller banks may be stressed. Read Now.