Hello my friends, today is October 26th and this is Markets Weekly. So this past week was another good weekend markets. We even had the NASDAQ make new all-time highs on Friday although briefly. Not just that, as of this morning, it seems like the Israel did their retaliatory strike against Iran and it was very limited and well managed. So maybe that tail risk is behind us. In any case, today let's talk about three things.
First, this past week we had the big BRICS Summit held in Russia and they talked about ways to potentially create a new financial system that circumvents the dollar. Let's hear their plans. Secondly, the IMF the past week released their new fiscal monetary report and they're highlighting the very very dire financial position of the United States. Let's see what they're saying and what they propose as potential fixes. And lastly, it looks like home buyers in the US finally finally are getting some reprive because according to many metrics, homes in many metro areas are becoming slightly more affordable although still much less affordable than pre-pandemic.
Let's talk about what's happening there and what might need to occur to make homes affordable again to the average American. Okay, starting with BRICS. So BRICS is basically a collection of middle and low income countries. It's like a club for them to talk about their own interests and this is in contrast to the G7 which is largely wealthier and Western countries. Now this year BRICS was hosted in Russia and you have to know and center they're going to be concerns about the international financial system.
As we all know, not too long ago, Russia was kicked out of the dollar system, kicked out of Swift and so global trade for them has been more difficult. Now internationally, most international trade is conducted in dollars. So if you can transact in dollars, then it makes your life more difficult and we hear that Russia is conducting more transactions in RMB but I'm sure the life would be easier if they had access to dollars. So if you transact in dollars, no matter where you are at the world, you are basically using the US financial system and the US government has leverage over you.
Let's talk about how this might work in an example where a Japanese company buys something from an Indonesian company. Now these two parties have nothing to do with the US but more often than not, their transaction will be in dollars. So the Japanese company, they would have an account at a Japanese bank with dollars. And the Japanese bank of course would have an account at an American bank holding the Japanese banks dollars. And that American bank would have an account at the Fed holding its dollars. Now looking to the Indonesian bank, now the Indonesian company would have an account at an Indonesian bank which would in turn have an account at a US bank which would in turn and have an account at the Federal Reserve.
So this whole web of relationships is called corresponded banking. So in international trade, when you use the dollars at the end of the day, the transactions are going to be settled at the Fed through a US bank. So because of that connection, the US government can really make your life difficult if it does not like you. So there have been many attempts to try to find a way around this because no country, no matter whether or not your friends with the US, wants another country to have leverage over them. After all, what if the US just says, do this or I will make your life difficult with the dollar then that's going to hurt your economy.
Now there are also though, of course, in bricks, many smaller countries who are just far from these great power politics and don't really care about them. Now recently there's a paper released in Russia with involvement of the Russian government basically making the pitch to all members and bricks as to why you should try to have the financial system that is different from the dollar one we have today. Now in that paper, there's this very interesting chart where they say that, hey guys, you trade a lot with each other. But when I look at the financial flows, all of that money you make trading with each other, that all flows to the developed countries.
It flows to the US to buy Treasuries, to buy Nvidia or something like that. If we have a different financial system, maybe that money could stay in your own country and finance development in your own country. You know, that would be so much better for you. So what is this different financial system they're proposing? Well, first off, what they're not proposing, no new reserve currency. So their thinking is that, hey, reserve currency is a thing of the past. Today, markets are much quicker, much more liquid, much cheaper. I can look at my screen and immediately get quotes for any currency pair.
So we don't really need to have that reserve currency stuff that we did in the past simply because of bounces in markets and in technology. So in any case, there's no chance that they could create a new reserve currency. The dollar is still super, super dominant. But what they want is two things. One is a decentralized current, decentralized financial system where you can pay and local currency into a new clearinghouse called BRICS Clear. Let's talk about their decentralized payment system first. Now, going back to that example of a Japanese company buying something from an Indonesian company, again, many, many layers. There's a long chain of correspondent responded baking relationships and ultimately, it's within the control of the US.
So both it's cumbersome, which makes it expensive, and also it's centralized within the US financial system. Now, what they're proposing sounds a lot like what's something similar to Project Enbridge, which is a technology being developed by the Bank of International Settlements, which some of the BRICS nations participated in demoing. So what Project Enbridge or something like that is, again, BRICS may not use Project Enbridge, but it sounds a lot like something like Project Enbridge. It's basically a huge decentralized ledger system where commercial banks would all be on part of the ledger. So going back to my example, the Japanese bank would have an account on this decentralized ledger and the Indonesian bank would also have an account on the decentralized ledger, and so they can trade directly with each other through this common decentralized ledger. And because it's decentralized, it's a lot harder to kick anyone off. And because it's decentralized as they trade directly with each other, they can also trade in local currency. Maybe the Japanese company, when it wants to buy something, can send over yen and the Indonesian seller. If it doesn't want yen, again, their argument is, you can simply sell yen and buy another currency. Markets are very liquid and cheap today.
So their vision is not a new reserve currency structure. It's just this huge, huge, new decentralized structure where everyone trades in their local currency, don't need to have anyone try to control what they do financially. Now, in conjunction with this is their second proposal, something called BRICSClear, which is a clearing house for BRICS. What is a clearing house? So if you, clearing houses is basically what people use when they want to settle securities transactions. So if I want to buy a treasury security, I would have an account on the, okay. So not me personally, but in sophisticated institutions would have an account at the clearing house and the clearing house would also have, and the seller of the security would also put the treasury security in the clearing house's database.
And so the clearing house, once it sees that the seller of the security, deposits the treasury, the buyer of the security, puts the money in the clearing house's account, the clearing house then would swap. So give ownership of the security to the buyer and again, send over the money to the seller. So it's this organization that facilitates clearing and settlements and minimizing counterparty risk. Now, notice that in the past, when the US went after the foreign reserves of Russia, some of that involved freezing the securities that Russia held in clearing houses, say, you're all clear. So again, it's in the Russian interest again. They're thinking about trying to create a world where they can't be sanctioned.
So they're thinking that maybe if we have this new independent clearing house, that's not under the Western powers, maybe they won't have their securities frozen so easily. But again, that can't just be the pitch. So the pitch is of course, if you have a BRICS clearing house, maybe you could issue more debt in your local currency. And so again, trying to build a robust financial system, that's not just dollar based, but maybe we can have capital markets, again, the buying and selling of debt in your local currency as well and a BRICS clearing house could help that. Now having a new clearing house again, very difficult thing to do. Right now odds are against it, dollar is too very dominant. But again, this could potentially be the beginning of something new and where there's a will, there's a way. Let's see how it develops in the coming years. Very difficult, of course, but not impossible.
All right, the next thing that I wanna talk about is the latest IMF fiscal report. So the IMF fiscal report is basically a report that talks about the fiscal situations of governments throughout the world and in the due this twice a year and in the previous fiscal report, they kind of highlighted how the Chinese and the US's fiscal situation is not good. Well, this issue comes up with some new graphs that highlights just how not good it is, especially for the US. Now here's a forecast of the debt to GDP for many countries. Now notice that for the sample, looking at the quartile ranges, it's okay, it's kind of wobbling, it's not great, but look at the red line there. That's the projection for the United States, the debt to GDP for the future.
And it looks like it's going to the moon. It's just so, so much higher than everyone else. As we all know, the fiscal situation in the US is not sustainable and depending on what happens at this election, maybe it will become even more unsustainable. There are projections that suggest that our new Trump presidency could increase the deficit on top of its current estimates, an additional several over 10 trillion. So the US fiscal situation is unlike those of any other country.
Now then, now in addition to this, they also made an interesting point that when you're estimating this fiscal deficit, it's not all about what's on the books. A lot of things happen that are often hidden. And what do they mean by this? Well, stuff happens that you don't foresee. And so when that happens, the fiscal deficit gets even larger as governments react to it. Now, a common example they give is problems with the baking sector. If you have problems with the baking sector, what happens is that the government jumps in to try to stabilize everything. And the way they do that is through big bank bill outs that add to the deficit.
But it could be anything else as well. Let's say, for example, maybe you have a recession and maybe the government comes up with these new programs, STEMIs or something like that to stabilize that. Or maybe you have another added elsm, disaster that requires unforeseen spending. So there's a lot of these unforeseen things that are not even in the official legislation and so forth that could jump out and get you. And to be clear, in the US, when we make fiscal forecast, it's based on the current numbers. If we have a recession, that could really jump up much higher.
So the estimates that we have for the fiscal deficit, for anyone who is likely an underestimation. So we all know this is unsustainable. What does the IMF say that we could do to fix it? Well, it's just so easy. If you look at their prescriptions, all you have to do is cut spending and raise taxes. And basically austerity, some version of austerity. And that, of course, is very, very difficult to do in the US political situation. If you listen to a president Trump or vice president Harris are saying, nobody, nobody is talking about cutting spending. Everyone wants to spend more money.
Now, vice president Harris talks a bit about raising taxes on the wealthiest Americans. President Trump talks about cutting taxes for everyone. So they are very far from the solution. And I think the big, big financial event for the coming years, and maybe it's not even that far away, is how this all comes to head in the global financial system. And that's what I'll think about for my blog post this week. But we'll also note that the 10-year treasury has been steadily rising the past week, seemingly in relation to the higher probability of a Trump win associated with much higher fiscal deficit.
Okay, the last thing that I want to talk about is home prices. Now, there's some interesting work by Zillow and Bloomberg showing that home prices across many metros this year are becoming more and more affordable. There are more metros at least that are becoming affordable. And affordability is mentioned as mortgage payments as a fraction of income, where I think the expectation is, say maybe about 30% of your income is spent on mortgage payments. So, however, as we've been talking about, say, Fed cuts maybe rekindling the housing market, something interesting has also happened that mortgage rates have actually gone higher. And in line with this, we also see pretty sharp drops in home transactions.
Now, there's some interesting work by Fannie Mae suggesting that in order for affordability of homes today to be comparable to pre-pandemic, you have a few things that could potentially happen. Again, the measure of affordability as, say, mortgage payments with relative to income. So, for things to be more affordable, you obviously have to have lower mortgage payments to income. So, you can do that either by home prices following, say, 38%, and that would make your mortgage smaller and thus more affordable. Or you could have incomes rise by 60%. Again, that could make, again, mix it more affordable because your mortgage payment to income ratio declines. Or you could have mortgage rates come down to 2.5%, which would also shrink your mortgage payment.
Now, I think none of that is very likely to occur. So, but we could have a little bit of all of that happen to try to make homes a bit more affordable. And what strikes me is that the most likely way that we get homes to be affordable again is actually to just have a recession and have all this reset. And I know many people don't like to hear that, but again, there are costs and benefits here. If we do have a recession, I don't think we'd have home prices drop 38%, but maybe they can drop 10%, maybe they can drop 15%. And mortgage rates, again, right now it looks like they're between 6% and 7%. If we have a recession rates will come down, maybe they can get to 5% mortgage rates, right?
Over there. Now, again, it's not going to help your income if we have a recession. And unemployment is going to rise by a few percentage points. But keep in mind that impacts not everyone, it impacts a few percent of the people. So that's a place where we would not be in a good place. But it seems like in order to get housing to be affordable, we're going to have to have movements on all three parts, home prices, income, and interest rates. A recession is probably the only way to do this. And maybe we'll have one in the coming months. We do have some interesting data that suggests the economy is slowing, although of course not yet in a recession.
Now, what we also have to keep in mind is that when there's a recession, the equity market will also decline. Now, that's going to help affordability because it seems like a lot of people are buying homes with cash. Now, there's this interesting work from Bloomberg, suggesting that in some markets, the percentage of cash buyers are absolutely surging. And these seem to be buyers that are in best stores, again, making a lot of money in NVIDIA or something like that, and then buying homes. If there was lower equity prices, then maybe there are fewer cash buyers as well, less upward pressure on home prices.
So we're in a difficult situation for home affordability, and I think the only way to get through this is a recession. And it will be painful for a few percentage of the people, but overall, it may be the way for people to have more home ownership than achieve their American dream. All right, so that's all prepared for today. Thanks so much for tuning in. And remember to like and subscribe. Talk to you guys next week.