The credit markets are still in deep trouble, says Bill Bonner in The Daily Reckoning.

CDO values are in “free fall,” says the Financial Times.

U.S. stocks aren’t faring much better. The Dow fell 180 points on Monday. On Tuesday, it dropped 130 more. Yesterday, U.S. stocks seesawed all day. The Dow finally closed with modest gains of 68 points.

The only way to end the influence of serial credit bubbles on the U.S. markets is to turn Japanese, says Bill. That means less spending, less GDP growth… and recession. A long, slow recession a la Japan. This form Bill… 

What is needed in the United States, says an article in the International Herald Tribune, is a “long period of frugality.” No doubt about that. Thanks largely to reckless and dishonest credit cues from the Greenspan Fed, more people made more financial mistakes than at any time in history. It will take years of scrimping and saving to correct them. We don’t have to tell you what that means; less spending = less GDP growth = recession. A long, slow recession a la Japan.

Many investors are now betting that the whole world economy will fall into a soft, Japan-like nap. They’re buying the dollar…and U.S. Treasury bonds…as a protection. But we caution Daily Reckoning readers that there are big differences between the United States and Japan…between the dollar and the yen…and between today’s globalized economy of 2008 and Japan, Inc. of 1990. In a nutshell, Japan could drop into a cushy bed of savings and sleep for a decade or two.

When the United States gets knocked down, on the other hand, Americans fall onto the cold concrete of debt. Rather than live off the credits they built up over the past 20 years, they’ll have to service the debt they incurred.

The U.S. is still running a trade deficit of about $2 billion per day. In order to continue financing that shortfall, it has to guarantee the rest of the world that its dollar will be at least as solid in the future as it has been in the past. But in a severe downturn, the pressure to let the dollar slip will increase.

All through the ’90s, the Japanese maintained a positive trade balance…and a strong yen, with falling consumer prices. Japan tried to stimulate the economy by running huge fiscal deficits and lending money at zero interest. The economy did not recover; but it didn’t collapse either.

But when the feds become desperate to revive the U.S. economy - if it comes to that - the results could be calamitous. More on that as the story unfolds…

Source: Turning Japanese