The strong optimism for the U.S. economy and stock market in 2025 was abruptly replaced with simmering dread following the last Federal Open Market Committee (FOMC) meeting of 2024.
Specifically, the news that the inflation projection for the current year was raised from 2.1% to 2.5% raised concerns about the actual state of the economy as well as about the actual fruits of regulatory efforts.
Furthermore, there has been no shortage of worrying data both before and after the press conference, and the latest possible danger to come to public attention is the state of American banks and, specifically, the state of their investments.
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Are American banks at risk of insolvency amidst $329 billion in losses?
Recent Federal Deposit Insurance Corporation (FDIC) shows that the sector is facing $329 billion in unrealized losses, making the situation precarious for some of the U.S.’ most important institutions.
Though unrealized losses, no matter how large, are not necessarily a road to catastrophe, the 2022 regional banking crisis made the public wary of such information. Still, for the current issues to materialize into a catastrophe, additional adverse developments, such as a major ‘bank run’ like in the aforementioned crisis, would have to unfold.
Finally, as dire as the $329 billion number sounds, it is worth pointing out that the situation is better than approximately 6 months ago when Finbold reported banks were facing more than $500 billion in unrealized losses.
Still, the situation remains precarious as numerous factors putting the financial sector and the broader economy in danger have been growing more dire and more numerous.
Why the U.S economy is at risk in 2025
Along with the significant unrealized losses for banks and the heightened expected inflation, the stock market – for all of its 12-month gains – is a point of contention.
On the one hand, concentration in but a handful of firms has been exceptional, with 10 technology companies accounting for $6.6 trillion in gains in 2024.
On the other, the famous Warren Buffett indicator – also known as market cap-to-GDP – has been consistently estimating that the American equity markets are extremely overvalued.
Though none of these factors has so far provided a coup de grace – nor appears poised to do so – they all contribute to the more long-standing issues.
The American national debt has been a hot topic for years, if not decades, and is, at approximately $36 trillion, a major risk factor whether one chooses to interpret it as a major revenue and allocation policy failure, a superfluous distraction, or the result of rampant unnecessary spending.
Will Donald Trump make or break the U.S. economy?
Additionally, while Donald Trump’s re-election is frequently cited as ‘bullish’ for America’s economy, it would be unwise to completely discount the geopolitical tensions with traditional allies such as Canada and Denmark he has brought to the table even before the inauguration.
Furthermore, Trump’s announced and beloved tariffs remain a significant risk factor, particularly given the heightened inflation forecast.
Finally, the potential issues go well beyond the more traditional measures of the economy.
California’s tragic and ongoing fires arguably serve as a microcosm of many of the dangers facing America.
The most concerning is the fact they have highlighted Governor Gavin Newsom’s perceived and real failures, while on the other, they have showcased the incoming administration’s willingness to throw protections for endangered species under the bus while some actors within it are building factories that need 8 million gallons of water per day in other dry areas of the country.
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