We think the truth lies somewhere in between the rosy scenario of the Goldilocks crowd and the manic hysteria of the Chicken Littles. As a model of prudent analysis and forecasting, we appreciate Pimco’s co-CEO Mohamed El Erian, who began 2009 with a widely circulated prediction about a “new normal” for the West that is frugal compared to the heyday of conspicuous consumption. We concur with El Erian and also would argue that a society that transforms itself from a nation of spenders into a nation of savers will not necessarily be thrown back to the Stone Age.

Japan is a notable model in this respect. By March 2009, its stock market had declined more than 80% from the 1990 bubble peak and share prices still remain quite depressed, but Japan is nevertheless the second largest economy in the world and their society is quite functional, even with a devastated stock market. The Nikkei and the Dow are now trading in commensurate ranges, each around 10,000, but the Nikkei got here from a peak of nearly 40,000 nineteen years ago.

Let’s look into the crystal ball for a moment. Based on the Nikkei, a comparable rate and depth of decline in the Dow would take it to 2800 by 2026. That may be a shocking number, but if that decline occurred over a period of two decades it might not feel traumatic at all. From current levels, the target would be reached with an average decline of around 570 points per year. Given its present degree of volatility, the Dow can cover such a range in a week, which means that if the market were destined to reach such a severe downside target, it could get there without any obvious “crash.”

Would you even notice? Perhaps not, if you mostly paid attention to Wall Street pundits and fund managers. Their job is to match their benchmarks, not create absolute returns. If our prediction is correct and the Dow does follow the route of the post-bubble Nikkei, we also predict that in 20 years Wall Street executives will still be among the highest paid on the planet. In fact, just one year after the bail out, Wall Street will probably award record levels of compensation