Escape From The Zombie Economy

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According to statistics collected by the Financial Times, the number of zombie companies, those that do not earn enough to service their debts, has increased steadily since 2010. What is more, the probability of those companies remaining “zombie” has also increased steadily. This is not surprising; 25 years of artificially low-interest rates and easy money will increase the proportion of zombie companies, whose life would otherwise end in bankruptcy. However, zombification isn’t capitalism, and it will have the same dire long-term effect as other non-capitalisms have historically had.

Joseph Schumpeter (1883-1950) propounded the theory of “creative destruction” that capitalism would only succeed if bad companies representing poor allocations of capital were allowed to go bankrupt, thus replacing the poor allocation of capital with a better one. Interestingly, and less well-known, Schumpeter like Karl Marx believed that capitalism would eventually collapse. However, in Schumpeter’s view, it would not collapse through its own failings, but because intellectuals, who have most power to affect the course of events, would increasingly oppose capitalism and attempt to replace it with failing corporatist measures. In an age when the Fed has signed on to the “green” allocation of capital, this appears increasingly prescient. Well done, old boy!

“Zombie” companies were first recognized as a problem in 1990s Japan. During the crazed bubble of the late 1980s, many Japanese companies had created “tokkin” funds that speculated in the ever-rising stock market, boosting their profits thereby. When the bubble burst in 1990, the tokkin funds ceased to be profitable, and in most cases made large losses. Hence, even though leverage in Japan was not excessive in 1990, and interest rates were at conventional levels in the early 1990s, many companies found themselves with huge losses, combining the natural difficulties of a downturn with the tokkin losses.

In the usual Japanese way, banks were “guided” by the Japanese authorities not to use normal credit standards when deciding whether to continue lending to these companies. The problem was worsened by Japanese real estate companies, which showed large losses and often capital deficits when the Imperial Palace ceased to be worth more than the state of California. These too were allowed a continued existence in the middle 1990s. Western observers, generally critical of Japan and enjoying the “schadenfreude” of watching its massive bubble burst, coined the neat “zombie” designation, noticing that these companies continued to exist and employ resources when they would economically be better dead.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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