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The Next Financial and Stock Market Crisis

Last update on: Feb 27 2020

The U.S. seems to have stabilized its financial crisis. Thanks to substantial Fed stimulus, the economy is settled into a low growth, low inflation path. Europe, after a lot of fits and starts, just might have stumbled on policies that will prevent a meltdown and duplicate the U.S. environment. Some investors believe that means we can relax, not worry about another big crisis, and instead focus on making money. Peter Boone and Simon Johnson, a couple of economists, disagree in an article in The Atlantic.

They point to Japan as the next big crisis. This will surprise many, as Japan has stumbled through a depression since 1989. It appears to many that Japan is winding down its problems and waiting for the next growth surge. The authors say things are going to become worse in Japan, not better. They point to excess debt, an aging society, and poor government decisions.Don’t relax just yet, they say.

Given Japan’s demographic decline, it would make sense to invest national savings abroad, in countries where populations are younger and still growing, and returns on capital are surely higher. These other nations should be able to pay back loans when they are richer and older, supplying some of the funds needed to meet Japan’s pension promises and other obligations. This is the strategy that Singapore and Norway, for example, have undertaken in recent decades.

Instead, 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.

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