KW: Carmen M. Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government. She is no fool. When financial panics begin, they play out in similar ways. First, one asset class has a surprise drop. The leveraged investors sell the sinking asset, but soon the asset is unwanted by anyone. Investors then sell good assets to raise cash. This spreads the panic to banks and dealers who were not originally involved. Soon the contagion spreads to all banks and assets, as everyone wants their money back. Banks begin to fail, panic spreads and finally central banks step in. What varies in financial panics is not how they end but how they begin.

Now prominent economist Carmen Reinhart is now saying that the place to watch is U.S. high-yield debt, aka “junk bonds.” Here’s why this famed economic analyst believes that signs of the next crisis are emerging and how it could impact the American economy.

A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.

Source: The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart – Project Syndicate