Doomsday Cycle targets America next

Commentary: Warning: Money + politics = ticking time bomb

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Warning bells, alarms scream

louder. But our banks and politicians can‟t hear, are deaf, in denial. Won‟t

take action ... not until it is too late.

That‟s the latest from Simon Johnson and Peter Boone in “The Doomsday Cycle

Turns: Who‟s Next?” Who is next? America, Japan, the euro zone are the triple

threat next in the line of fire, in danger of collapsing, thanks to a doomsday

conspiracy where global “political and financial systems have aligned to build

these dangers rather than suppress them.”

America has ignored the lessons of the 2008 meltdown even though coming “remarkably close to another

Great Depression. Next time, we may not be so lucky.”

Three years ago, the first warning: “The Doomsday Cycle.” Since then Simon

Johnson, former IMF chief economist, co-authored two bestsellers, “13 Bankers:

The Wall Street Takeover and the Next Financial Meltdown,” and recently, “White

House Burning.” Peter Boone is a research associate at the London School of

Economics, which published their doomsday warnings.

In the first they warned: “Over the last 30 years, we have built a financial system

that threatens to topple our global economic order, we have let an unsustainable

and crazy „doomsday cycle‟ infiltrate our economic system.” This doomsday

“cycle will not run forever … The destructive power of the down-cycle will

overwhelm 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 so

lucky.”

First. Risks shifted from emerging nations to big developed nations

Why? The “next time” is accelerating. But Americans are distracted by election

drama, can‟t see the oncoming train. Are Johnson and Boone alarmists crying

wolf? Chicken Littles?Cassandras? No, they do see the collapse coming, its driven

by a conspiracy of “political and financial systems” that will not act “until it is too

late.”

So in this new warning, they ask: “Who‟s Next? ” Here‟s a summary, some

paraphrased, some direct quotes:

Earlier, smaller emerging nations were at risk of collapsing. The threat has now

shifted to developed countries, their financial institutions, government finances,

and economic growth prospects are at great risk: And that world has “created

enormous, complex financial structures that can inflict tragic consequences with

failure and yet are inherently difficult to regulate and control ... there are more and

worse 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 narrow

interests and the growth of a financial sector that has become increasingly opaque.

Bailouts have encouraged reckless behavior in the financial sector, which builds up

further 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 fall

of Lehman, and Iceland, Irish banks and “endless lending programs by the IMF

and 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 problems

behind 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 complacency

among policy makers in those countries is alarming,” warn Johnson and Booth.

Worse, they‟re now predicting the cycle will “hit Europe again and probably

harder 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 targeted

Back “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. The

crises we should fear today are in relatively rich countries that are big enough to

reduce growth around the world.”

Why? Because America‟s “financial infrastructure makes it possible to borrow a

great deal relative to the size of an economy ... far more than is sustainable relative

to growth prospects.”

Worse, “the expectation of bailouts has become built into the system,” from

Treasury and the Fed. Unfortunately, what‟s owed is far “more than can ultimately

be paid,” and growing fast.

From a behavioral-economics standpoint, our financiers are now so totally addicted

to these unrealistic expectations and delusions they cannot see the risks from inside

the “thought bubble” we‟re trapped in. Johnson and Boone see into our warped

reality in three key areas:

1. Politicians ... only see “great opportunities” and reelections. Politicians are

obsessed 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 and

scale of modern finance make it easy to hide what is going on. The regulated

financial sector has little interest in speaking truth to authority; that would just

undercut their business. Banks that are „too big to fail‟ benefit from giant, hidden

and very dangerous government subsidies. Yet despite repeated failures many top

officials pretend that „the market‟ or „smart regulators‟ can take care of this

problem.”

3. Voting public ... see too little, “until it is too late.” “The issues are abstract

and lack the personal drama that grabs headlines,” as becomes ever clearer in the

debates, cable reports and political ads. Worse, our policy leaders are in conflict

and “complicit in the schemes of big banks and politicians. The real costs of

bailouts 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 zone

Johnson and Boone warn, the entire world is being swept up in this historic shift:

“Over the past four centuries, financial development has strongly supported

economic development. The market-based creation of new institutions and

products encouraged savings by a broad cross-section of society, allowing capital

to flow into more productive uses.”

But since the 1980s “our financial development has gone badly off-track,” thanks

to 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 skyrocketed

from 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 new

crisis, politicians promise it‟ll “never happen again ... but still it happens, again and

again.”

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 the

system” and “suffer the ultimate collapse.”

Johnson and Boone see “no sign that the euro zone will emerge from crisis any

time 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 highly

liquid collateral ... at low interest rates.” Banks love it.

But its “easy to understand how the system got abused and why it will be so

difficult ever to make it safe,” loaded now with risky derivatives that ballooned

from 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 collapse

The “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 17

national governments into a system where someone else can be made responsible

for bailing out the intransigents.” Unfortunately our system has become “crisis-

prone” a “financial and regulatory nightmare” posing “great dangers to global

financial 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 advanced

economies.”

The run-up to the 2008 meltdown is replaying and we‟re in denial: “We have

created enormous, complex financial structures that can inflict tragic consequences

with failure and yet are inherently difficult to regulate and control.” And yet, we

naively assume our political systems will “check these dangers,” even as our

leaders “develop symbiotic relationships that encourage irresponsible growth.”

This is self-deceptive: “There are more crises to come and they are likely to be

worse than the last one.” The world is now controlled by a doomsday conspiracy

where “political and financial systems have aligned to build these dangers rather

than suppress them.”

And unfortunately, the conspiracy will not wake up and voluntarily “fix their

underlying fiscal and financial problems ... until it is too late.” Yes, too late. World

markets and the global economy must first collapse.