As we peer into society’s future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow.  We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.  We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

Dwight D. Eisenhower

U.S. 34^th President 1953 to 1961

Allied Supreme Commander Europe WWII

The Rise of Zombie Firms:

 Causes and Consequences

Zombie firms, meaning firms that are unable to cover debt servicing costs from current profits over an extended period, have recently attracted increasing attention in both academic and policy circles. Caballero et al (2008) coined the term in their analysis of the Japanese "lost decade" of the 1990s. More recently, Adalet McGowan et al (2017) have shown that the prevalence of such companies as a share of the total population of non-financial companies (the zombie share) has increased significantly in the wake of the Great Financial Crisis (GFC) across advanced economies more generally. 

Previous studies have focused on the role of weak banks that roll over loans to non-viable firms rather than writing them off (Storz et al (2017), Schivardi et al (2017)). This keeps zombie companies on life support. A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit (Borio and Hofmann (2017)). Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors.

DYI:  Interest rates peaked in September of 1981 as measured by the 10 year Treasury bond at 15.32% continued dropping in a saw tooth manner until July 8, 2016 at 1.37% [currently 3.07%].  Companies that were heavily leveraged with debt at those lofty levels were able to hold off bankruptcy as they were able to refinance as rates subsided.  As rates continued to decline healthy corporations began borrowing more and more money as rates declined they increased their leverage.  The 2009 downturn reduced some of the leverage but as the Fed’s went to a policy of sub atomic low rates soon almost every company was in on the leverage game.  Around 15% of corporate America is a Zombie company; add on those who are in the junk bond arena around 25% in total.  These firms are skating on very thin ice.  Any downturn or even marginal increase in interest rates a cascading effect will occur.  This is the madness that gave us the great depression of the 1930’s.

 DYI