The Spring of the Zombies

New York – As spring comes to America, optimists are seeing “green sprouts” of recovery from the financial crisis and recession. The world is far different from what it was last spring, when the Bush administration was once again claiming to see “light at the end of the tunnel.” The metaphors and the administrations have changed, but not, it seems, the optimism.

The good news is that we may be at the end of a free fall. The rate of economic decline has slowed. The bottom may be near – perhaps by the end of the year. But that does not mean that the global economy is set for a robust recovery any time soon. Hitting bottom is no reason to abandon the strong measures that have been taken to revive the global economy.

This downturn is complex: an economic crisis combined with a financial crisis. Before its onset, America’s debt-ridden consumers were the engine of global growth. That model has broken down, and will not be replaced soon. For, even if America’s banks were healthy, household wealth has been devastated, and Americans were borrowing and consuming on the assumption that house prices would rise forever.

The collapse of credit made matters worse; and firms, facing high borrowing costs and declining markets, responded quickly, cutting back inventories. Orders dropped abruptly – well out of proportion to the decline in GDP – and those countries that depended on investment goods and durables (expenditures that could be postponed) were particularly hard hit.