INVESTMENT

The Next Panic

Peter Boone & Simone Johnson

Government officials and private individuals finally seem to have realized that the crisis in the Eurozone is not a passing aberration. The euro turmoil has been damaging to nearly all Europeans, and its negative impact is being felt worldwide.

Japan could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt and its banking system; its government is one of the most indebted in the world, with a gross debt that’s 235% of GDP.

Japan’s taxpayers are already rebelling against the small tax increases needed to limit escalating deficits, leaving little hope that they will accept the larger increases need to repay debts.

As in Europe, Japan’s financial system could face a wave of insolvencies, triggering a broader loss of confidence. It will soon be unable to meet its pension and other social obligations; investors will be horrified to see the disappearance of the private savings previously used to buy government debt, whether through debt defaults and bank failures or through high inflation. For ordinary Japanese, public promises about retirement benefits and price stability will be broken just as their private savings for retirement collapse.

The message from Japan is that the world’s financial systems are returning to their inherently unstable nature. Financial institutions are not too big to fail; they are too big to save. The US is not immune: it needs to issue debt worth about 25.8% of GDP this year, just to roll over its debts and finance the deficit.

Increasingly it seems that future generations will not be the only ones harmed by today’s decisions; we are already feeling the negative impact. In recent decades, financial sectors throughout the rich world grew at historically unprecedented rates; now they are dangerously outsized relative to the rest of the economy. Changing that dynamic in any orderly way seems impossible. Yet history suggests it will change, and soon. The era of large-scale, uncontrolled financial booms and busts—last seen in the 1930s—is back

source: Theatlantic