Zombie firms have been haunting economists and investors as The Federal Reserve (The Fed) has created hordes of them. These “undead” firms are been sucking the life out of the United States economy.
But things are about to get rough for the zombies. They face potential extinction from the same entity that created them — the Fed, which spawned hordes of zombies as part of its plan to stabilize the economy, will kill them.
A zombie firm is a company that is alive, but dead because its profits are not enough to cover the interest expense on their debt (most have not made principal payments). They are “alive” because of the Fed’s sustained policy of low-interest rates and easy credit but have no real growth prospects. The only way one can survive is by rolling its debt at ever lower interest rates.
Why Should You Care?
When a zombie firm goes under, it can cause a chain reaction of defaults and bankruptcies, unemployment for those formerly employed by them and a reduction in the supply of goods and services they produced.
What Could Kill A Zombie Company?
The economic weapons that could kill a zombie company include a sudden interest rate increase and/or a sharp market prospects decline. In a rising interest rate environment zombie firms can no longer roll their debts at artificially low rates. This can lead to a “death spiral” where their expenses are greater than their revenues — ending in eventual bankruptcy.
How Are Zombie Firms Still Standing?
This is where the concepts of leading and lagging indicators comes into play. A leading indicator is a signal that suggests a change in general economic activity is about to happen. Conversely, a lagging indicator is a signal that shows up later, after the policy has made a direct hit and its blast radius confirmed.
In the case of the Fed’s hiking interest rates, each zombie firm has different debt terms and maturities coming due at different times. No company wants to roll its debt to a higher rate unless there is no other choice. If and when it does that is when we would see the disastrous effects of this policy.
Perverse Policies Produce Perverse Outcomes
The Fed’s policies sow seeds of destruction no matter how they turn. In the case of Zombies, rate hikes simultaneously kill and create. As older Zombies die from the higher rates, new ones are then created by the higher interest rate hurdle. Companies that had enough profit to cover the interest expense on their debt at the lower rates may not have enough to do so at higher rates.
Those teetering on the margin are now suddenly plunged into zombie status. It’s a vicious cycle benefitting no one while weakening the economy. Death of these zombie firms leads to defaults, layoffs and potentially more inflation.
The Fed’s policy turns viable firms into brain-munching zombies, who will then employ people for businesses that have no business being in business.
While traditionally only effective against vampires, werewolves, and witches, is there a silver (or gold) bullet to eradicate Zombie policies? What impact does the zombification of the economy have on gold and silver prices?Among other things, labor indicators have a surprising relationship to silver prices. Consider that once zombies start dying it will surely have an effect on the labor market, which affects wages and consumer spending, which in turn affects broader economic measures. It’s almost as if it’s all connected or something…
Powell may be the creator and killer of zombies, but the real victims are those businesses and individuals caught in the crossfire.
Keith Weiner is founder and CEO of Monetary Metals (www.monetary-metals.com)
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