Escape From The Zombie Economy

In 1998, with a succession of global financial crises, the problem appeared to solve itself. A major Japanese bank, Long-Term Credit Bank of Japan, went bankrupt, as did Yamaichi Securities, one of the “Big Four” securities houses (investment banks). A credit crisis was only averted by an injection of funds from the government. Many of the zombie companies began to be liquidated.

All would have been well, and Japan would have recovered fairly quickly thereafter, had a Princeton economist named Ben Bernanke not visited Japan, and convinced the Japanese authorities that interest rates should be kept close to zero indefinitely, in defiance of market forces. As a result, an 8-year downturn in Japan has become a 30-year downturn and zombification has continued far beyond the end of its natural life. The Bank of Japan and the government pension fund between them own 15% of Japanese industry, government debt is rising towards 300% of GDP, and there is very little entrepreneurship in the Japanese economy. Only the egregious Softbank (OTC: SFTBY) a sprawling speculative conglomerate with negative net worth, a zombie of zombies, represents the tech sector; it has a market capitalization of $140 billion and an economic value of less than zero.

The effect of Japanese zombification was beautifully illustrated in the 2007 classic time travel movie “Bubble fiction” in which a brilliant, affluent young graduate of 1990 is shown rejoicing in his new job with Long-Term Credit Bank and is next seen in 2007 as a small-time debt collector for the yakuza. Zombification of companies and the economy involves much blighting of promising careers of this kind; their talents are wasted in the value-destroying companies and they can only get jobs in the underworld once those companies have finally gone bust.

In the U.S. today as in Japan from 1990 onwards, zombie companies have proliferated. According to the FT, using figures from the Bank for International Settlements, the percentage of U.S. companies that are zombies, around 5% in 1990, started rising in the 1990s, as monetary policy became artificial after 1995. It reached 8% in 2000 despite the long economic boom of that decade, and then continued to increase, declining only slightly from its peak of 16% in 2010 and then pointing sharply upwards in mid-decade (there are as yet no post-2017 figures). The probability of companies remaining zombie has also increased in parallel, before spiking upwards since 2010, from 65% in that year to 85% in 2017.

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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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