Economy Zombie companies

[ElKarlo]

One thing that always got me scratching my head about Quantitative Easing, was that it made money so cheap for companies. So cheap, that to juice their ROE, it made sense to borrow money and use that money to buy back shares. Basically that money ended up just being tied up into debt that really did almost nothing of economic value. ie almost no jobs nor capital improvements came out of that money

Now with rates being so low, and basically zero, it has made servicing debt much easier. But there is a downside to that, this has allowed companies that should have gone under a chance to survive. But not so in a way that they can recover, but basically survive and pay their debts.
That also is bad for the economy, as those companies will suck up resources that should go to those that survive and thrive.
Creative destruction has been removed from the marketplace, which can be a good thing in many cases

The list inclucdes 600 companies including 'You've heard of all of them: Macy's, the four major airlines (Delta, United, American, and Southwest), Carnival, Exxon Mobil, and Marriott International, to name a few.' Some will survive like Exxon and Marriott, but others like the airlines might not.
13% of all companies are zombies btw

Europe also has it pretty bad
'Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland.

Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period.

The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors:

• Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years.
• The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy.'
• https://wolfstreet.com/2020/09/15/n...ean-banks-and-think-tanks-saving-the-zombies/

This will keep productivity down and with it wages. Japan suffered for a good decade under the fall out of the bubble. Zombie companies were allowed to stagger on for decades with low rates and semi bail outs.
It is kinda the Greeification of the world's economy. A dragged out slow recovery that never seems to go anywhere.
Should we allow creative destruction to happen and just bail out the workers? That seems a less awful idea imho

https://www.msn.com/en-us/news/othe...what-does-that-mean-for-investors/ar-BB1cBXnu

https://www.marketwatch.com/story/b...unning-rampant-in-the-stock-market-2020-11-24

 

[Yehudim]

It seems like one of those things that is here to stay. All of the aging, stagnating European countries have this problem. Seems like they’d rather have mediocre companies afloat over a potential economic restructuring.

Hard decisions, I don’t know what the answer is.

 

[lsa]

so what about zombies?

 

[MichiganMMA1978]

so what about zombies?

They feed on the brains of regular companies?

 

[Yehudim]

They feed on the brains of regular companies?

They feed off the brains small business and start ups could be feasting upon instead

 

[Cole train]

28 TPS reports later

 

[panamaican]

I said back in 2007 and 2008 that we shouldn't have bailed any of the corporations out precisely because it would have been keeping companies in business that needed to finally die and be replaced by something newer and better.

 

[TryggeTryggvar]

Came in expecting a thread about Umbrella Corporation, left disappointed

 

[Jack V Savage]

They feed off the brains small business and start ups could be feasting upon instead

I was just thinking that the same logic here suggests (rightly) that the small-business fetish that politicians in both parties have is extremely misguided.

 

[Social Distance Warrior]

biggest false advertising of a thread title ever.

I expected this:

 

[Social Distance Warrior]

Came in expecting a thread about Umbrella Corporation, left disappointed

same...very dissapointed...

or at least a reference to Racoon City

 

[Prefect]

I said back in 2007 and 2008 that we shouldn't have bailed any of the corporations out precisely because it would have been keeping companies in business that needed to finally die and be replaced by something newer and better.

You couldn't have done that because you would have had more unemployment. Zombie companies exist due to the government trying to accelerate the economy out of a recession. They are essentially government subsidized employers that will lose out eventually due to interest rates increasing, declining investor enthusiasm, or increasing interest rates. They usually in limbo due to being able to get by but unable to invest in themselves. They either get bought out or continue declining but that happens years later. It happens though because eventual a CEO gets put in charge to "fix" the company and he or she fixes it or what usually happens is that it fails. CEOs are trying to position themselves for the next job or position and almost by nature make risky moves for their potential benefit.

 

[panamaican]

You couldn't have done that because you would have had more unemployment. Zombie companies exist due to the government trying to accelerate the economy out of a recession. They are essentially government subsidized employers that will lose out eventually due to interest rates increasing, declining investor enthusiasm, or increasing interest rates. They usually in limbo due to being able to get by but unable to invest in themselves. They either get bought out or continue declining but that happens years later. It happens though because eventual a CEO gets put in charge to "fix" the company and he or she fixes it or what usually happens is that it fails. CEOs are trying to position themselves for the next job or position and almost by nature make risky moves for their potential benefit.

I thought more unemployment, in the short run, was a necessary evil. Propping up failing companies or industries because of a fear of unemployment is the wrong approach, imo. New companies and new industries will replace the failing ones and they will absorb the workers.

 

[Jack V Savage]

I thought more unemployment, in the short run, was a necessary evil. Propping up failing companies or industries because of a fear of unemployment is the wrong approach, imo. New companies and new industries will replace the failing ones and they will absorb the workers.

Depends. If they'd fail because of a short-term, economy-wide demand shortage, keeping them alive is better. If their underlying model is failing in normal times, it's not.

 

[panamaican]

Depends. If they'd fail because of a short-term, economy-wide demand shortage, keeping them alive is better. If their underlying model is failing in normal times, it's not.

I think part of the problem is that we didn't know the underlying model was failing until there was a shock to the system and the problems got exposed.

 

[Jack V Savage]

I think part of the problem is that we didn't know the underlying model was failing until there was a shock to the system and the problems got exposed.

But if the shock is just short-term panic, it's not necessarily a problem if the business can't hold up to that. Like every single bank would go broke if people panicked and there were no mechanism to coordinate a response to that, but as a society we're better off with the existence of banks (we know this because we used to be hit with constant panics that devastated the country). Or if the auto industry collapsed and the related industries that supported it also did, and they weren't saved, we'd be far worse off as a country. That's different from the zombie-company problem.

 

[panamaican]

But if the shock is just short-term panic, it's not necessarily a problem if the business can't hold up to that. Like every single bank would go broke if people panicked and there were no mechanism to coordinate a response to that, but as a society we're better off with the existence of banks (we know this because we used to be hit with constant panics that devastated the country). Or if the auto industry collapsed and the related industries that supported it also did, and they weren't saved, we'd be far worse off as a country. That's different from the zombie-company problem.

I don't know how different they are. If the auto industry collapsed because of short term reduction in demand that would indicate that there's a failing in how they're managing their companies if they can't weather short term crises. The same with banks.

My main response is that even if banks and the auto industry collapsed, do we really believe that an auto industry or banking would not return? If Ford, GM, etc. failed that no one else would step in to make cars? PRobably more affordable cars to reflect the changed economic circumstances of the nation. As far as I know, most nations have a local auto industry even many of the poorest. I doubt we'd be without new cars for long.

It speaks to what I consider a general failing in thinking. We claim that the U.S. economy is a great engine of innovation and business but also claim that this engine cannot be relied upon to bring us out of crisis. One of those 2 things has to get dialed back it would seem.

 

[Jack V Savage]

I don't know how different they are. If the auto industry collapsed because of short term reduction in demand that would indicate that there's a failing in how they're managing their companies if they can't weather short term crises. The same with banks.

It's inherent in the business model. The upshot of your position is that there shouldn't be banks.

My main response is that even if banks and the auto industry collapsed, do we really believe that an auto industry or banking would not return? If Ford, GM, etc. failed that no one else would step in to make cars? PRobably more affordable cars to reflect the changed economic circumstances of the nation. As far as I know, most nations have a local auto industry even many of the poorest. I doubt we'd be without new cars for long.

It speaks to what I consider a general failing in thinking. We claim that the U.S. economy is a great engine of innovation and business but also claim that this engine cannot be relied upon to bring us out of crisis. One of those 2 things has to get dialed back it would seem.

We could go back to having bank panics that cripple the economy for a few years at a time every decade (and note that we still required some coordinated action to get out of those jams--we were just way worse at it). I don't see how that's a good outcome or what the tradeoffs that would make the overall situation an improvement are. We've learned from past mistakes. And you're not appreciating agglomeration effects with the auto industry. There's regional stickiness that exists because of surrounding support industries. If they all fail, yes, we'll still need cars, but there's no particular reason they'd continue to be based in the same area. The U.S. would likely just lose a lot of the industry permanently. And if every country was as foolish in response to short-term downturns as we would be in the hypothetical, no-bailout world, it would just keep moving around, and generally be less efficient.

Creative destruction is a real thing that has value, but stability also produces value.

 

[panamaican]

It's inherent in the business model. The upshot of your position is that there shouldn't be banks.

That's not remotely close to the upshot of my position. The upshot of my position is that banks should be allowed to fail because banks will return. Not that there shouldn't be banks.

We could go back to having bank panics that cripple the economy for a few years at a time every decade (and note that we still required some coordinated action to get out of those jams--we were just way worse at it). I don't see how that's a good outcome or what the tradeoffs that would make the overall situation an improvement are. We've learned from past mistakes. And you're not appreciating agglomeration effects with the auto industry. There's regional stickiness that exists because of surrounding support industries. If they all fail, yes, we'll still need cars, but there's no particular reason they'd continue to be based in the same area. The U.S. would likely just lose a lot of the industry permanently. And if every country was as foolish in response to short-term downturns as we would be in the hypothetical, no-bailout world, it would just keep moving around, and generally be less efficient.

Creative destruction is a real thing that has value, but stability also produces value.

Or we could just develop better banking practices.

And I certainly am appreciating agglomeration effects, it simply changes none of what I'm saying. I'll simplify it - long term things will return, therefore there is no reason to avoid short term pain.

All of your arguments are arguments that the existing models should not change and we should do everything possible to hold them together. My argument is that change is essential and that when they fail, we should trust that something new will replace them.

The only foolish idea is that we can avoid economic turndowns and recessions if we just bail out enough companies. There will always be another economic crisis, another pullback, etc. Bailing ourselves out of every one of these is like trying to avoid getting old.

 

[JohnnySagebrush]

It seems like one of those things that is here to stay. All of the aging, stagnating European countries have this problem. Seems like they’d rather have mediocre companies afloat over a potential economic restructuring.

Hard decisions, I don’t know what the answer is.

Economic restructuring at this point is politically untenable. I just can’t envision that changing. The next 50 years in World history is going to be an expose on the inherent weaknesses of Democratic systems; it pains me to say that and is in no way an endorsement of totalitarianism. We need to get our shit together, pronto, and figure out a transition to a successful low/no growth system.