Ep. 487 – The Zombie Economy

The Kapital News
The Kapital News
Ep. 487 - The Zombie Economy

According to estimates from Deutsche Bank, nearly 18 percent of US companies can be classified as “zombie” businesses. This is 50 percent higher than levels seen only two years ago. Zombies are generally defined as firms that can pay their operational expenses and make debt servicing payments, but are unable to pay off their debt(s). Their existence, especially at these levels, are extremely dangerous and destructive to the economy and society. Many, if not all, are “kept alive” by governmental and monetary policies. However, these actions in the long-run prove detrimental to the economy because the capital and/or liquidity injections into the system come at the expense of more debt, less investment, and fewer to no gains to productivity and innovation. Furthermore, it also hurts successful businesses more than otherwise would be the case in the event of an economic downturn. This situation arises, because in a well-functioning market economy, these zombies would go out of business or restructure, thus allowing the healthier firms to grab more market share. Well, if the zombies are kept alive, then it becomes harder for the well-run firms to acquire a bigger piece of the market. This essentially is policy making for the short-term at the expense of the long-term.

What becomes more disconcerting is that there is currently around $1.4 trillion of debt obligations on the books of these zombies. This is more than double the amount seen during the depths of the GFC. In fact, if about $1 trillion of this amount were paid down, we’d still be staring at GFC levels – just to provide some perspective. This is completely unsustainable and unhealthy. The federal government through the Nobody CARES Act, and Federal Reserve through several of their “emergency facilities,” have served to prop up these zombie firms. What should have happened is rates should have increased, poorly managed firms would have went bankrupt or insolvent, malinvestments would be flushed out throughout the economy, and well-managed firms would begin to gain market share. This is not an easy process and because of the size of this massive bubble, the correction would prove devastating to a lot of people. Nonetheless, this would have been a correction on which to build a solid foundation for future prosperity. But because politicians and central bankers do not want to be held to account, they take the “easy” way out and borrow, print, and spend money we do not have, in order to make it appear that the economy is in good shape – it is not. Stay diversified, stay vigilant, and stay with The Kapital News. #Economy #Zombies #Bailouts #Recession #Liberty #Revolution #BananaRepublic #Debt #USA

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