Doomsday Cycle targets America nextCommentary: Warning: Money + politics = ticking time bombBy Paul B. Farrell, MarketWatchSAN LUIS OBISPO, Calif. (MarketWatch) — Warning bells, alarms screamlouder. But our banks and politicians can‟t hear, are deaf, in denial. Won‟ttake action ... not until it is too late.That‟s the latest from Simon Johnson and Peter Boone in “The Doomsday CycleTurns: Who‟s Next?” Who is next? America, Japan, the euro zone are the triplethreat next in the line of fire, in danger of collapsing, thanks to a doomsdayconspiracy where global “political and financial systems have aligned to buildthese dangers rather than suppress them.”America has ignored the lessons of the 2008 meltdown even though coming “remarkably close to anotherGreat Depression. Next time, we may not be so lucky.”Three years ago, the first warning: “The Doomsday Cycle.” Since then SimonJohnson, former IMF chief economist, co-authored two bestsellers, “13 Bankers:The Wall Street Takeover and the Next Financial Meltdown,” and recently, “WhiteHouse Burning.” Peter Boone is a research associate at the London School ofEconomics, which published their doomsday warnings.In the first they warned: “Over the last 30 years, we have built a financial systemthat threatens to topple our global economic order, we have let an unsustainableand crazy „doomsday cycle‟ infiltrate our economic system.” This doomsday
“cycle will not run forever … The destructive power of the down-cycle willoverwhelm the restorative ability of the government, just like it did in 1929-31.”America has ignored the lessons of the 2008 meltdown even though coming“remarkably close to another Great Depression. Next time, we may not be solucky.”First. Risks shifted from emerging nations to big developed nationsWhy? The “next time” is accelerating. But Americans are distracted by electiondrama, can‟t see the oncoming train. Are Johnson and Boone alarmists cryingwolf? Chicken Littles?Cassandras? No, they do see the collapse coming, its drivenby a conspiracy of “political and financial systems” that will not act “until it is toolate.”So in this new warning, they ask: “Who‟s Next? ” Here‟s a summary, someparaphrased, some direct quotes:Earlier, smaller emerging nations were at risk of collapsing. The threat has nowshifted to developed countries, their financial institutions, government finances,and economic growth prospects are at great risk: And that world has “createdenormous, complex financial structures that can inflict tragic consequences withfailure and yet are inherently difficult to regulate and control ... there are more andworse crises to come.”Second. Financiers and politicians align in „symbiotic‟ conspiracy“There is a common problem underlying the economic troubles of Europe, Japan,and the US: the symbiotic relationship between politicians who heed narrowinterests and the growth of a financial sector that has become increasingly opaque.Bailouts have encouraged reckless behavior in the financial sector, which builds upfurther risks — and will lead to another round of shocks, collapses, and bailouts.”That‟s a doomsday conspiracy: money and politics.The Doomsday Cycle became visible in 2007-08 in the months following the fallof Lehman, and Iceland, Irish banks and “endless lending programs by the IMFand the EU” for Greece, Ireland, Portugal, Italy, Spain, other euro-zone countries.Today some are claiming that the euro zone “put the worst of their problemsbehind them.”
Wrong, they‟re in denial: “The doomsday cycle is indeed turning,” but it‟s“heading towards Japan and the U.S.” where “the current level of complacencyamong policy makers in those countries is alarming,” warn Johnson and Booth.Worse, they‟re now predicting the cycle will “hit Europe again and probablyharder than before.” Yes, Europe “is in big trouble:” Massive budgets, no growth,no bailout money and a loss of political support.Third. Doomsday cycle accelerating, America is targetedBack “in the 1980s and 1990s, deep economic crises occurred primarily in middle-and low-income countries that were too small to have direct global effects. Thecrises we should fear today are in relatively rich countries that are big enough toreduce growth around the world.”Why? Because America‟s “financial infrastructure makes it possible to borrow agreat deal relative to the size of an economy ... far more than is sustainable relativeto growth prospects.”Worse, “the expectation of bailouts has become built into the system,” fromTreasury and the Fed. Unfortunately, what‟s owed is far “more than can ultimatelybe paid,” and growing fast.From a behavioral-economics standpoint, our financiers are now so totally addictedto these unrealistic expectations and delusions they cannot see the risks from insidethe “thought bubble” we‟re trapped in. Johnson and Boone see into our warpedreality in three key areas:1. Politicians ... only see “great opportunities” and reelections. Politicians areobsessed with power, government as an opportunity “to buy favor and win re-election,” as “repeated bailouts have become the expectation not the exception.”2. Financiers ... sees only “easy money and great fortune.” “The complexity andscale of modern finance make it easy to hide what is going on. The regulatedfinancial sector has little interest in speaking truth to authority; that would justundercut their business. Banks that are „too big to fail‟ benefit from giant, hiddenand very dangerous government subsidies. Yet despite repeated failures many topofficials pretend that „the market‟ or „smart regulators‟ can take care of thisproblem.”
3. Voting public ... see too little, “until it is too late.” “The issues are abstractand lack the personal drama that grabs headlines,” as becomes ever clearer in thedebates, cable reports and political ads. Worse, our policy leaders are in conflictand “complicit in the schemes of big banks and politicians. The real costs ofbailouts are disguised, millions of jobs lost, lives ruined, balance sheets damaged— and for what, exactly? The public is baffled and our leaders are driven by greed,selfishness and denial.Doomsday recycling ... targeting America, Japan, euro zoneJohnson and Boone warn, the entire world is being swept up in this historic shift:“Over the past four centuries, financial development has strongly supportedeconomic development. The market-based creation of new institutions andproducts encouraged savings by a broad cross-section of society, allowing capitalto flow into more productive uses.”But since the 1980s “our financial development has gone badly off-track,” thanksto their alliance with politicians” resulting in “irresponsible public policy.”Johnson and Boone see Japan on a “long march to collapse”: an aging population,declining population, slowing growth, and a debt-to-GDP ratio that‟s skyrocketedfrom about 70 to over 200 in the past 30 years.“The symptoms are different in the U.S.” but the impact will be the same: collapse.The 2008 crisis increased debt by 50%. Banks got bailouts, now too-big-to-fail.That created an army of lobbyists and “pro-bailout” politicians. After each newcrisis, politicians promise it‟ll “never happen again ... but still it happens, again andagain.”And “with each crisis, the financial risks are getting larger ... more unaffordable.”Soon we will “run out of enough savers to buy the bonds needed to bail out thesystem” and “suffer the ultimate collapse.”Johnson and Boone see “no sign that the euro zone will emerge from crisis anytime soon.”The euro zone is a magnet for 17 nations, drawn to the ECB liquidity window,which “converts unattractive government and bank-issued securities into highlyliquid collateral ... at low interest rates.” Banks love it.
But its “easy to understand how the system got abused and why it will be sodifficult ever to make it safe,” loaded now with risky derivatives that balloonedfrom nothing in 1998 to 19 times the entire GDP of the euro zone, a ticking time-bomb.America + Japan + euro zone are a ticking time-bomb to collapseThe “Japanese can‟t control their public finances ... the U.S. can‟t control its too-big-to-fail banks” ... plus pile on the “complexity of merging 17 regulators and 17national governments into a system where someone else can be made responsiblefor bailing out the intransigents.” Unfortunately our system has become “crisis-prone” a “financial and regulatory nightmare” posing “great dangers to globalfinancial stability.”“The tragedy of the euro zone appears unavoidable,” warn Johnson and Boone,with “far greater risks that will spread to Japan, the U.S., and other advancedeconomies.”The run-up to the 2008 meltdown is replaying and we‟re in denial: “We havecreated enormous, complex financial structures that can inflict tragic consequenceswith failure and yet are inherently difficult to regulate and control.” And yet, wenaively assume our political systems will “check these dangers,” even as ourleaders “develop symbiotic relationships that encourage irresponsible growth.”This is self-deceptive: “There are more crises to come and they are likely to beworse than the last one.” The world is now controlled by a doomsday conspiracywhere “political and financial systems have aligned to build these dangers ratherthan suppress them.”And unfortunately, the conspiracy will not wake up and voluntarily “fix theirunderlying fiscal and financial problems ... until it is too late.” Yes, too late. Worldmarkets and the global economy must first collapse.