Zombie economy rising from the crypt?

Zombie Dollar

In the financial world, companies on life support are called “Zombie” companies. These are companies that are not able to cover their debt-servicing costs with current earnings. To stay afloat, they often keep borrowing and restructuring debt to make up the difference. Most likely, these companies should have gone out of business already, but lenders keep lending in the hope the company can recover, so they don’t have to take a loss.

The problem with Zombie companies is that it is hard to make new investments to initiate growth because any excess profits get eaten up by debt-servicing. If it is just one company among 1000s, a Zombie company can be ring-fenced from the rest of the economy. But if one Zombie turns into Zombies, we have a problem. Then we can also have Zombie cities, regions (states), and countries. Zombies are rising from the financial crypt.

Corporate Debt Zombie 2019

Business cycles normally occur – a period of business expansion that coincides with credit expansion creates excesses, followed by a period of retraction in business and credit to work off any excesses. The retraction is often called creative destruction – cleaning out the old to make way for new business. These business cycles typically are 7 to 10 years in length – see inset chart. We currently are ending a business expansion period. Hence this is why many feel that we usually should be heading into a business retraction period.

But something has occurred after the 2008 Great Recession. Central Banks, in a sense, have not allowed the business cycle to work. Instead, they have used bailouts and easy monetary policy to ease the political pain of an economic recession – credit upon credit, leading to Zombification. Again looking at the inset chart, we see Zombie companies are on the rise. Many economists defend the Zombification of economies under a social premise that it is a preferred economic model. Trading normal high growth business cycles for low steady stagnant growth.

Remember (understanding that there are ups and downs), Zombie economies need ever-increasing lines of credit and/or lower rates. This explains the general downturn in global credit rates. GDP has been growing, but most of the GDP gains are going to the top 1 to 10% of the population – the rest of the population GDP is stagnating – Zombified.

Zombie Chart 2019

Most of the Zombified monetary base is sitting in financial assets to keep the economy afloat – the money is not moving. Take a look at money velocity. It is sitting at generational lows. The velocity of money is a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period. Take a look at the inset chart that shows this Zombification of the economy – Debt, GDP vs. Median Income, and Money Velocity.

It should be noted that though the monetary base is growing, people are scratching their heads to understand why inflation is not raging. This is because money velocity is low, and the money created has not gotten into the economy – the money is sitting in Zombie money crypts.

With this background, the question becomes, where does this go? News Forecasters believes that Zombies can live a long time Рafter all, they are Zombies. Japan has been in a Zombified economy for nearly three decades Рsome believe this may end soon, but we would differ on this opinion Рanother topic why.

When does it end? It will take a catastrophic trigger event, that won’t be related to this Zombie economy system. Many believe that it is the Zombie economy itself that would crash on its own. We do not hold this view. It can last as long as people accept it. When the trigger event occurs, the Zombie falls easily and quickly – but not on its own. The trigger event could be many things – natural disaster, political, war event, just to name a few. But for sure a trigger event will eventually come – keep your eyes open.¬†

A video presentation of this subject:

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