Reply #6: How To Survive a 'Zombie Economy'

[ozymandius]

Perhaps America's purpose in life, like Japan, is to serve as a warning to others.

Imagine if the U.S. economy grew just 1 percent per year over the next 20 years. The Dow Jones Industrial Average would plunge by 60 percent, to less than 4000. The average price of a home would fall by nearly 50 percent, from $184,000 to about $100,000. The economic carnage would make the Great Recession seem gentle, upending families, devastating communities, and transforming America for generations.

That's the outer edge of a "Japanification" scenario painted by economists at Bank of America Merrill Lynch, meant to examine what would happen if the U.S. economy got stuck in a deep rut like the Japanese economy did in the 1990s. It's an unlikely outcome, yet a weakening U.S. recovery has sent economists back to their textbooks to study the world's most famous "zombie economy." And there are some unnerving similarities between Japan then and America now. Both countries experienced a real-estate bubble fueled by greedy speculators and complicit banks providing the funds. In each case, the bust came quickly, leaving banks, investors, and consumers with steep losses that would take years to absorb. And both wipeouts challenged policymakers hoping to jump-start the economy by pulling conventional levers.

Japan's zombie economy is generating new interest now because a recovery that looked like it was taking root in the first half of the year seems to be unraveling in the second half.

...the next phase of Japanification, in which banks restrict credit while they work through a large pool of bad loans, and the nation as a whole pays down excessive debt. This seems to be precisely where the U.S. economy is right now--and might stay for awhile. U.S. banks, for example, probably have enough reserves to handle underwater mortgages and defaults on credit cards and other consumer loans. But it's not clear that those losses have peaked, and the longer unemployment stays high, the worse that problem will get.

http://news.yahoo.com/s/usnews/20100823/ts_usnews/howtosurviveazombieeconomy

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The throbbing pain I feel comes from those powerful few who steered us into this crash with the words "this time, it's different." Alan Greenspan is at the top of the list of pollyannas whose m.o. was fashioned on the naïve rationale that complicated markets were somehow "different."