The zombies of capitalism
The policy of zero interest rates was crucial in avoiding total financial collapse following the subprime crisis, the credit crunch, and Europe’s sovereign debt psychodrama, just as it will play a major role over the next few episodes of stock market crashes and exacerbated volatility that hurts the real economy. On the other side of the coin, keeping rates at or near to zero for such a long time – basically since 2008 – brings with it pernicious effects: it keeps on life support companies that would have otherwise disappeared in the absence of credit at modest prices. In fact, according to a report by Bank of America Merrill Lynch, nearly 20% of American companies are becoming paralysed in the sense that they require large liquid injections just to survive. This is indeed reflected on the financial markets because – contrary to the indicators that appear to be inducing euphoria – the US and global stock markets would not have appreciated at all without the active contributions of Facebook, Amazon, Apple, Netflix, Google and Microsoft.
While these six companies have more than doubled their profits in 5 years, pretty much no other listed company has enjoyed the same kind of revenue. It is nothing unusual that the profitability of the stock markets comes down to a small number of huge companies traditionally offering weak indexing against each other. It is nevertheless a novelty that the stock market breakthroughs – dizzyingly high as we have seen – are due to shares that are active in just one sole sector: technology shares. The aberrant development of stock market indexes is therefore nothing but an illusion, smoke and mirrors, because 80% of IPO’s that took place in 2018 in the US were losing tickets: a record number, unprecedented in the history of integrated nations’ stock markets. Keeping zombie companies alive via these zero rates hurts the economy badly: in this regard, Japan and its double, even triple lost decade, and its negative rates in force since time immemorial is the living proof of it.
Nowadays, Uber, Pinterest and Tesla are the case studies. For example, Tesla has had – since 2014 – only 5 profitable quarters out of 14! In other words, since its creation, this company, lavished with praise from all sides, was able to turn a profit for only a quarter of the duration of its life. However, not content with its debt of 12 billion dollars, it recently announced that it wants to borrow 650 million more, after the 2 billion pumped into China, and after losing more than 700 million in the first quarter of this year. According to accounting standards, Tesla is therefore also a zombie company that would probably have seen its demise if it weren’t for the current environment of zero rates that is keeping alive companies barely or not at all profitable, and that put real strain on the global economy.
A zombie company eats up precious resources and scuppers the chances of truly productive companies arising. The increasing number of these decaying companies prevents the efficient allocation of capital that then barely serves to benefit industrious businesses. The often impassioned debates on interest rate levels is therefore preventing the remedy of another weighty problem, albeit silent and unassuming, that is threatening the entire global economy: the spread of zombie companies that leech off the system.