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🔔 What is a Zombie Company?

🔔 What is a Zombie Company?

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Economic commentators LOVE to talk about zombies.

Zombie companies, the zombie economy, even zombification crops up every so often...

But it's not always clear what a zombie is, or why anyone should care...

Let's try and clear things up.

First up, a zombie company is basically defined as follows:

a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal.

They have no 'spare' capital to invest and grow, so exist as the Walking Dead, close to insolvency, making just enough to service debts/refinance but with no real hope of recovering.

This brief post by Daniel Lacalle highlights all of the negative associations.

Basically...

A “zombified” economy rewards the unproductive and taxes the productive
Destruction of savings through financial repression and the collapse of real wage growth.
Savers pay for zombification through low interest rates, under the mirage that it “keeps” jobs.

This limits the positive impact of creative destruction (industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one)

Perhaps the simplest way of thinking of this is to imagine a zombie landscape.

The living dead are slowly shuffling about, getting in everyone's way.

They don't eat brains. Instead they consume all of the same resources as other humans, so there's less to go around the healthy population.

Want a loan?

Gave it to the zombie firm. Reached our lending limit for the month.

Want a government work contract?

Gave it the zombie firm, they need the work or they can't pay their debts

Want a table at the restaurant?

Fully booked. Zombie special tonight

Over time, too many zombies consume too many resources without providing sufficient value to society to compensate.

Many economists argue that central banks should load higher interest rates into their monetary shotguns, kill off the zombies and build a more productive economy/society.

It's a solid argument, but there are tradeoffs...

~20% of U.S firms are considered to be zombies...