zombie

All right, zombie. All right.

How Asia Copes with America s Zombie Consumers

What would you do in the event of a zombie apocalypse?

First, while a purely Austrian response (that is, austerity) to bursting asset and credit bubbles may lead to a depression, QE policies that postpone the necessary private and public sector deleveraging for too long may create an army of zombies zombie financial institutions, zombie households and firms, and, in the end, zombie governments. So, somewhere between the Austrian and Keynesian extremes, QE needs to be phased out over time.

On this foundation of zombie economics and slipshod research rests the case for austerity. In fact, the austerity boosters in the UK and Europe frequently cited the Alesina and Reinhart Rogoff findings.

This might trigger a positive domino effect as well, as other states on grounds of international financial integration adopt similar procedures for controlled liquidation of their own insolvent banks. Zombie assets would be destroyed.

If China is successful in implementing its pro consumption agenda, the rest of Asia will be well positioned to avoid the fallout from America s new generation of zombie consumers. How the United States copes is a different matter altogether.

And what happens then is not that our consciousness contracts, it expands, so that those three days in Paris seem to be more full of consciousness and experience than all the months of being a walking, talking, faculty meeting attending zombie back home.

Most businesses in the eurozone rely on bank finance, and while credit conditions have improved somewhat, lending is flat (and continues to fall in southern Europe). As long as zombie banks are weighed down with bad loans, that is unlikely to change much.

Some enterprises do not meet the changes in the market environment and the production and management is difficult to sustain or even on the brink of collapse. But restrained by some institutional factors, they become zombie enterprises due to many obstacles to the market.

(The Fed raised its benchmark federal funds rate from 1 in 2004 to 5.25 in 2006 and held it there until August 2007). As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers.

A post crisis generation of zombie consumers in the United States is likely to hobble growth in global consumption for years to come. And that means that export led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers.

But at the margin, economic growth is heavily skewed toward exports and fixed investment as the primary means of absorbing surplus labor and spreading prosperity. In a post crisis world impaired by America s zombie consumers export led Asia is in serious need of a pro consumption rebalancing.

With retrenchment and balance sheet repair only in its early stages, the zombie like behavior of American consumers should persist. The 2.1 consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.

From quantitative easing to record high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance sheet repair and structural adjustment. As a result, America has created its own generation of zombies in this case, zombie consumers.

Instead of a eurozone caged in by Germany s narrow interests as a creditor, Europe needs a monetary union that works for all of its citizens. Zombie banks should be restructured, excessive debts (both private and public) written down, and increased investment combined with reforms to boost productivity (and thus wages).

Moreover, the Fed s approach is severely compromised by the so called zero bound on interest rates. Having run out of basis points to cut from interest rates, the Fed has turned to the quantity dimension of the credit cycle injecting massive doses of liquidity into the collapsed veins of zombie consumers.

Finally and most important even if Krugman had been right about everything, there would still be no justification for the numerous crude and often personal attacks he has made on those who disagree with him. Words like cockroach, delusional, derp, dope, fool, knave, mendacious idiot, and zombie have no place in civilized debate.

Whereas Sweden adopted this approach successfully during its banking crisis in the early 1990 s, the current US and British approach may end up producing Japanese style zombie banks never properly restructured and perpetuating a credit freeze. Japan suffered a decade long near depression because of its failure to clean up the banks.

The upshot is that the eurozone as a whole is likely to struggle with a zombie banking system, with only patchy efforts to restructure banks decisively and fairly. Worse, the north south, core periphery divide will harden, with taxpayer backed banks on one side and banks that must fend for themselves on the other.

Meanwhile, Europe's zombie banks will have to be rapidly resolved by acquisition or temporary takeover, cleanup, and asset sale, as was done by the Resolution Trust Corporation during the US savings and loan crisis in the 1980s. Structural reforms that increase labor market flexibility and reduce red tape and related obstacles to new business formation must also be implemented.

Japan crossed that line in the 1990 s, as its corporate zombies prevented the painful but necessary adjustments in its post bubble economy. That could happen in the US if Washington continues to favor policies that condone the reckless excesses of the recent past and inhibit the deleveraging and balance sheet repair that America s zombie consumers now need for post crisis healing.