If there’s one thing we can all agree on, it’s this: zombies are the last thing that we need right now (even if it would be peak-2020).
Okay, the chances of a human zombie outbreak are unlikely, to say the least.
But what about a corporate zombie outbreak? Could that even happen? And what the hell is that anyway?
Well, here’s the thing: corporate zombies are real.
Not only do they exist, but they’re also multiplying.
Like imaginary zombies, we should be a bit concerned because fighting their spread could take years and cost trillions.
The Zombie Company Origin Story
As you’ll recall, Zombies are the undead — shells of humans reanimated by either voodoo curse or some unknown virus.
Zombies serve no purpose, devoid of the logic and higher thought processes that define the living. Instead, their modus operandi is to eat brains and propagate other zombies.
During an attack, humanity grinds to a halt. In its wake lays a post-apocalyptic world of decked out armored cars, fancy firearms, and doomsday survivalism. It’s fun, scary, and fiction (as far as we know. God help you 2020 if you turn this fantasy into a reality).
Zombie companies, like their fictitious human counterparts, share similar characteristics.
Their business purpose and model no longer make sense. Instead of operating efficiently and generating profit, these firms are, from an economic point of view, brain dead. However, due to market conditions, these otherwise inefficient firms stay around. They provide no real value and prevent free markets from functioning.
How zombie companies spread
Zombie companies started spreading after the last recession in 2008.
At the time, central banks embarked on two main programs to kickstart growth:
- They lowered interest rates to make it cheaper for companies to borrow money, stimulating investment
- They bought hundreds of billions of dollars/euros worth of higher-interest loans from investors. In turn, they received cash to reinvest into companies.
These plans stayed in place for the better part of twelve years. Further, up until this spring, politicians hesitated to spend money to support their economies. Part of that was due to austerity programs, another part of the nature of politics.
As the economy stuttered and politicians avoided spending, central banks continued to slash interest rates. You probably noticed that your savings account’s interest rate dropped to near-zero over the past few years.
While terrible for individual savers, inefficient companies were in cheap-credit heaven.
Now, rather than making structural reforms to stay profitable, poorly-run companies had an unless money supply at their disposal. Vital corporate tasks like cost reduction or boosting sales and efficiency became irrelevant. Throwing someone else’s cash at a problem was deemed a viable strategy.
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Before long, a once-living and viable company would become a zombie. No longer beholden to the laws of economics, these firms served no real economic purpose.
With interest rates continuing to drop, the zombies increased. More and more firms began to ignore the economic laws guiding efficiency, preferring to feast on ever-cheaper loans, shareholder responsibility be damned.
By the time March 2020 rolled around, zombie companies around the world owed trillions of dollars to investors. But by then, it was too late.
Central banks put their loan-buying plans into overdrive. Fearful of an even economic steeper drop, the bankers began buying zombie debt, turbo-boosting this vicious cycle.
In other words, the corporate zombie outbreak is real.
Why we should care about zombie companies
Markets and economies work best when they’re at their most efficient. Failure, as painful as it is, ultimately spawns efficiency, innovation, and competitiveness. Rewarding companies for poor business decisions go against these economic laws.
Zombies prevent markets from being fair, and in turn, free. If central banks continue to prop up unviable businesses, the economy won’t be able to recover as quickly.
Are we next?
The zombie effect could potentially spread beyond companies and on to individuals.
Right now, tens of millions of workers are on some sort of government-backed furlough. These programs serve two purposes:
- Keep income in people’s pockets until the economy normalizes and;
- Allow companies to keep talent for when demand returns
In the short run, these are noble and necessary steps. But just like zombie companies, will these programs hinder recovery?
Economic growth, especially in a downturn, comes from people changing jobs, taking their acquired skill sets, and applying them to innovative and (hopefully) efficient companies.
When companies have little incentive to remove employees and workers little reason to leave, we hold back the recovery.
We wrote about this phenomenon a while back. The risk is still out there, and policymakers should be aware.
How we can fight zombies
Unfortunately, there’s not too much we can do as individuals. (That is, unless you’re the governor of a central bank. In that case, I’m flattered you read this newsletter. Please contact me, I’d love to chat).
Both central bankers and governments should do their part to find a balance between support and allowing the markets to do what it does best.
It will also require that politicians make data-driven decisions to manage the current health crisis. Playing opportunistic politics can lead to unintended consequences, which economists know will derail the recovery. Sadly, for some parts of the world, that threat is too real.
The faster we can get back to ‘normal,’ the sooner we can let markets work. More importantly, the longer we drag out furlough problems, the more it will cost governments. Once these programs stop, unemployment will go up. Governments should ensure that they can still fund these safety nets while the economy does its magic.
For now, we’ll have to let the central banks fight the zombies. I hate to disappoint you, but this battle will take place in sterile meeting rooms (or video calls) with policies as the ultimate weapon.
Then again, it’s 2020. Anything can happen.
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