The world's sovereign debt crisis should be tackled in the same way one tackles fictitious zombies – “save those you can, but leave many to die,” Nicoholas Colas, ConvergEx chief market strategist, wrote in a research note.
“Any serious contagion – financial, flu, or undead – means that policymakers have to recognize that they cannot save everyone,” Colas wrote.
Inspired by Max Brooks’ novel World War Z, Colas explains why the analogy isn't as frivilous as it seems.
According to Colas, policymakers have been trying to do too much by socializing losses among taxpayers over generations.
While this may be harmless on the surface, as it “spreads the pain”, it destroys market confidence (indicative by the equity market sell-off, and flee from euro zone assets in recent weeks.)
Instead, Colas argues that policymakers should be fending off financial crises like they would fend off a zombie attack: save those people you can, and resign many to die.
"Slowly rebuild the core population, and take back ground over time," Colas wrote.
There are other parallels between zombies and crises that he explained.
“Zombies do not move very fast – their limbs have a nasty habit of falling off through decomposition… they can infect others before they 'turn' and start to smell bad.” He likens this “contagion” effect to the situation in Europe, which started in Greece but quickly snowballed to other countries.
Brooks chose zombies over the other monsters because they do not think. They will consume everything in their path until there is no food left. A vampire or a werewolf, by comparison, is still a rational entity, at least part of the time.
Colas believes the current financial crisis is unique because a whole currency – the euro – is now threatened, which could affect member countries’ ability to issue debt.
He is not ready to write off the euro entirely, but believes that sovereign debt should be virtually riskless – a far cry from its current valuation.
“Once you start down the path of questioning one large economy’s ability to repay its debt, it really is just a matter of time before the market moves its focus to the next country,” he wrote.
The recent crisis could permanently change in the global economic order, Colas argued.
By the end of Brooks’ novel, all the developed countries had been destroyed and a few closed societies have become the fastest growing countries on the planet.
While it’s hard to predict which economy may come out “zombie-free” in real life, Colas believes China is well-prepared because “it’s quasi-command economy leaves it better suited to managing its internal problems,” and the long-shot contender is "Sub-Saharan Africa," which is poor but resource-rich, and has not been affected by the subprime crisis.