The euro zone is well down the path to severe crisis, but other industrialized democracies are hot on its heels. Do not let the euro zone’s troubles distract you from the bigger picture: we are all in a mess. Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system? Think about Japan.Traders have lost their shirts for a decade shorting JGBs, ie predicting a crisis in Japan. It hasn't happened. But long delays do not mean the problem could come with a major bang.
The problem is systemic. Easy debt facilitates bad behavior.
Bankers and politicians seem to enable the worst characteristics and behaviors of the other. The past few years have led us to focus on half of that phenomenon: the degree to which government guarantees have facilitated irresponsible risk-taking on Wall Street. And this is, of course, an issue that demands continued attention.
China is looking wobbly too. It is always hard to tell the next step in a crisis, however. Often the loudest voices of panic come at the trough.
But Japan illustrates the other half of the phenomenon—the extent to which finance has allowed and encouraged politicians to make attractive short-term decisions that are eventually damaging. This may ultimately yield worse crises than the one we faced in 2008 or the one now unfolding in Europe. Greece, Ireland, Portugal, Spain, and Italy found their own ways to economic devastation, but each road was paved with easy credit. Those whom the gods would destroy, they first encourage to borrow cheaply.
What is clear and a sure thing, however, is we are not finished with turbulence yet.
(H/t Via Meadia)