In finance, the appeal is obvious: products with low volatility and good, predictable returns. We instinctively shy away from the pain that comes with loss. Therefore, our financial structures are designed to escape volatility and turn it into an enemy.
Enter the central banks, the anesthesiologists of the corporate world. Be it the US Federal Reserve, which has been protecting the economy time and time again since the Greenspan era, or Europe’s solution to the pain of a single currency, ensuring that Greece and Germany have a level playing field, Japan, a pioneer of this approach, began numbing its economic woes as early as the 1990s.
However, consider the case of Elaine, a girl who, due to her innate insensitivity to pain, could not feel a cut, bruise, or burn. For her, the pain wasn’t a warning; it just didn’t exist. But the lack of this signal often puts them in danger.
Even if Elaine’s lack of pain didn’t mean she was doing well, economies protected from immediate discomfort are not immune to long-term damage.
Insensitivity to pain spawned zombie companies in Japan, the US, and Europe. But let’s look at China, a nation that has chosen a different path. With the decision to face the malaise that has prevailed since 2015, particularly in the real estate sector, the strategy was clear: protect the macro by taking risks on the micro scale. Although they too have their Achilles heel: social instability.
Meanwhile, the US and Japan face a different kind of pain: geopolitical tensions aimed at containing China. In a world reeling from the side effects of declining globalization, it is difficult to rely solely on monetary policy as a painkiller. As globalization fades, transaction costs rise, and inflation spirals out of control, tying the hands of central banks.
Truly high interest rates may be torment for the zombie economy, but they are a breath of fresh air for the global economy. The mandate is clear: strive for productivity or perish. There is a powerful lesson in pain. Properly hugged, it forms stars. Dodge and spawn zombies.
