From The Next Panic in the Atlantic Monthly:
(Written by Peter Boone, a director at Salute Capital Management and a visiting senior fellow at the London School of Economics, and by Simon Johnson, a professor at MIT Sloan and senior fellow at the Peterson Institute for International Economics)
Europe’s current financial crisis will be followed by a more devastating one, likely beginning in Japan. The Japanese government is using private savings to fund current spending, such as pensions and wage payments. With projected annual budget deficits between 7 and 10 percent of GDP, Japanese savers are essentially tendering their savings in return for newly issued government debt, which is not backed by hard assets. It is backed only by an aging, shrinking population of taxpayers.
The most worrisome implication of Japan’s increasingly precarious position, particularly in the wake of the 2008 crash and Europe’s ongoing crisis, is that our financial systems appear to be returning to their inherently unstable nature, which plagued the 19th and early 20th centuries. Financial institutions back then were not too big to fail—they were too big to save. Their balance sheets dwarfed most governments’ ability and willingness to provide support.
Through the development of central banks and active fiscal and monetary policy, the rich world has managed to avoid serious depression for seven decades. Yet big finance—which tends to grow ever larger when crises are rare and credit risks seem muted—hides deep political flaws, the costs of which compound over time. Relative to the size of the world economy, global debt markets overall are two to three times their size in 1970.