Friday, June 26, 2020
The Walking Dead
I have a friend who convinced me to stream The Walking Dead. I tried, but all those zombies were a bit much for my taste. But my ears perked up when I listened to conversations about the rise of zombie firms. Zombie firms are those that are still operating and generating revenue but not enough to service their debt. In a normal, healthy economy, those firms would die a natural death. But we’re not in a normal, healthy economy.
The Federal Reserve is throwing everything at this crisis. They are pushing interest rates down, making debt more appealing. They are buying corporate bonds to prevent defaults. They are pumping up liquidity in any way possible to get us through this pandemic. And that is exactly what they should be doing, but it’s creating more zombie firms.
Creative destruction is an economics term that describes the dynamic process in a capitalistic system. Old ways, old ideas, old companies are constantly being shed or destroyed. New, more efficient ways arise from the ashes. Innovation comes about when outdated firms are allowed to die a natural death.
Right now, we’re in a Walking Dead type of economy. The Federal Reserve is propping up a lot of zombie firms, but that is exactly what needs to happen… for now. First, we need to get through the pandemic and its economic damage. Then those firms who are no longer viable can die. And many will, all at once. So for all the headlines about bankruptcies and doors closing, there are many more zombies out there waiting to take their last breath. When this is all over, expect a lot of destruction, but that will be followed by a burst of innovation and creativity. Watch for the live ones!
Posted by Nancy Anderson, Ph.D., CFA