“Easy money is a curse for capitalism.” You can also find the podcast on Apple Podcasts, Spotify, Stitcher, Google Podcasts, iHeart Radio, and others.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Not to worry, Economique Nouveau Du Jour theory says that pyramid schemes are good and proper and everything is OK. Profitless cash burn is a righteous thing. Nothing to see here, move along.
Considering that cash is free, burning it is the right thing to do as that does not mean destruction of the cash created out of thin air but rather its transfer into the hands of those dependent on the checks from these zombies and cash-burn machines. To the extent those are workers and suppliers and suppliers’ workers etc. this isn’t such a terrible fate for the free money.
Not arguing with the point of this being horrible for economic health at large. It is.
“Pyramid schemes” and “zombie” companies are not coming but have been here for a long time. Our major banks, for example, are very often drastically under- capitalized for the actual risks that they face: their derivatives gambling, real estate gambling (since they hold RE assets in a grossly inflated RE market due to the “Fed’s” ultra-low interest rate policy, which has funded RE acquisitions that would be untenable in a normal-interest economy), etc.
Many other companies are also grossly over-leveraged. Look at future reports of banking finances that will be slowly released in coming years. I predict that you will learn that most banks and many of the banksters’ crony companies became legally insolvent in the middle of 2020 but received trillions or at least hundreds of billions of dollars in covert assistance through some undisclosed mechanism.
If the pandemic will continue through 2021 as some experts have hinted due to some delays in finding viable vaccines, etc., all businesses that will be affected by customers’ reluctance go to dangerous areas or to take off their masks (e.g., to eat) and share germs with a crowd, are toast. Malls sold overpriced merchandise/services that was palatable only because you got to wander around and enjoy the experience. They are almost certainly toast.
Well said Wolf… wish there was a way to tell when all this would blow up in investors faces…. I’m the oldest millennial. I’ll be 40 next month and during my adult life I’ve witnessed a string of bail out after bail out. Very lucky to have a good job in a trade and make a good living. I see my friends who are good hard working people and they can’t get ahead because there is never price discovery resetting what asset prices should be. This stimulus and zombie making is a vampire on them and what they should be accumulating to set themselves and their families up to pay for their homes, college tuition for their children, and retirement. Instead they buy overvalued starter homes they can barely afford and are constantly coming up short on other expenses.
The only socialism I see is for the investor class, which I’m lucky to be a part of. Things blow up and the fed prints money to save the investor class and socialize their losses. What an amazing game! Makes me want to throw up.
The consensus is that the FED will continue to bailout the Treasury, will provide liquidity for states and cities ,will buy the debt of both high rated and low rated securities, and will bailout Wall St hedges . All of this while keeping both short term and long term interest rates at all times lows. Maybe in the Alice -in Wonderland world of current finance , all of these actions will have no negative consequences , but in the real world , there will be nothing but negative problems.
Let’s start with the effects of the dollar. In the last 3 months , the dollar index has declined from over 100 to the current 93 level.Now suppose the FED continues to bail out the Treasury along with all those other entities who are begging for money. Does anyone believe that such actions will not pressure the dollar even more. A lower dollar will cause the value of equities , debt , real estate to fall for foreign buyers.
A lower dollar will raise the prices of all imported goods and lower the prices of exported goods. Even though it will theoretically increase the amount of goods that we export and decrease the amount that we import thus decreasing our trade deficit, it could easily actually increase our trade deficit .
At a certain point a lower dollar will destroy the dollars status as the worlds reserve currency. The consequences of the dollar losing its reserve status are the subject of another discussion,but they are all negative.
The second major consequence of further FED bailouts is increasing the the wealth disparity between the richest and everyone else even further. The current wealth disparity is the reason that 2/3 of millennials favor socialism and is the reason underlying the riots this summer.
The dollar would have lost its status as a reserve currency a long time ago if there was anything better to replace it with, but there isn’t.
I disagree. The recent moves are unprecedented. Printing $3 trillion in just a few months is unlike anything that has been done before, and will require the next print session to be $6 trillion. Not to say that the other countries don’t have problems, but they have been much more restrained in their monetary policy, relative to the size of their economies. That’s not to say that the dollar will be REPLACED as a reserve currency, but that other currencies (or other forms of value store) will take market share from the dollar.
The value of the dollar has little to do with the debt. In order for debt to be a factor, there would need to be some concern about the ability of the US to service the debt, and there is none.
What you should really be concerned with, it the implications servicing that debt is going to have on future taxes. The problem with Americans is they have very short memories, and never seem to learn from the past. We had debt levels similar to today’s levels in the Great Depression, and the result was 90% top tax rates.
The government will continue to service its debt, and they will take as much of your money as it takes to do it.
Gold as reserve currency.
I think it is on the way out due to a variety of reasons beyond economics and the dirty shirt excuse. I expect a basket a currencies, or the Euro to replace.
Not to mention 5800 nuclear war heads, the back stop of last resort
“but that other currencies (or other forms of value store) will take market share from the dollar.”
Like what? China’s funny money which they need to exchange for dollars because no one outside of China wants it because the nation which issues it has no real rule of law when outsiders want to litigate anything within China and where fraud is the rule rather than the exception?
Or the Euro from a collection of nations with a financial sector in even worse shape?
“…….but they have been much more restrained in their monetary policy, relative to the size of their economies.”
Haven’t looked at China , have you?
Their numbers make the USA look like a joke.
I’m not talking about China. I’m talking about the other Western economies.
At some point the $ will be replaced by a digital currency. Not bitcoin or Facebook’s ill fated attempt at developing a digital currency but one whose development and adoption are supported/endorsed by national governments and central banks. Not imminent as there are a number of obstacles that will need to be overcome but it will happen at some point in the future. At that time the $ will lose its status as the world’s reserve currency.
Real Capitalism is dead in this country and on the planet in general because REAL Capitalism implies risk and potential of failure and loss. But as you pointed out, loss is anathema to this modern generation of investors who go screaming to the govt (of whatever nation they live in) to rescue them.
No truer words ever spoken.
Well said indeed
Here’s what Minsky said would happen if there were lots of Zombies–which he described as “Ponzies.” Maybe explains why the Fed is in such a panic to support the bond market–i.e. at all costs NOT “exorcise inflation by monetary constraint”:
“Furthermore, if an economy with a sizeable body of speculative
financial units is in an inflationary state, and the authorities
attempt to exorcise inflation by monetary constraint, then
speculative units will become Ponzi units and the net worth of
previously Ponzi units will quickly evaporate. Consequently,
units with cash flow shortfalls will be forced to try to make
position by selling out position. This is likely to lead to a
collapse of asset values.”
Collapse of asset values sounds right to me.
reference: Hyman Minsky
Because throwing good money after the bad money cannot fail… as long as you find a bigger sucker.
PE firms swallow a Zombie, chew on it to create debt restructure fees and then puke out a bigger Zombie. If the Fed is not bailing them out (jawboning only), then someone will eventually hold the bag (PE firm #3 or 4 down the line)? At some point, like with the Frackers, the Zombie gets shot in the head but because Zombies are already dead, there is no blood left to drink.
Zombie Companies? That’s ok. What’s problematic is we have a Zombie country with Zombie citizens.
You are awesome and spot on!..and maybe we are doomed.
Unless the remaining Middle Class get it and revolt…we are doomed.
You are the reinvention of Ralph Nader in this new century.
You spread the truth clearly I but can only hope enough people can get the message to stop this race to the end where we all are serfs or peons in the new game.
Sorry about repeating “we are doomed” but this is serious.
They must believe that the Fed will have their backs if the bonds fail. The Fed has indicated and acted that they do.Failure of bonds are Deflationary. The Bond Market dwarfs the Stock Market. The Fed will de-base the currency before it allows itself to die on a deflationary sword. If the dollar keeps collapsing a Volker moment will appear that will seal the fate. A slight wavering of trust in the dollar and game over. They may have already lost control and even they much less anyone else knows it. A big fiat price was payed for this interlude before the next Act.
“They must believe that the Fed will have their backs if the bonds fail. The Fed has indicated and acted that they do.”
Powell manages “perception”….and probably makes “promises” behind closed doors to keep the “inside word” as the manager of that perception.
Right. I’ve seen very little evidence that the Fed will actually DO what it has convinced the private sector that it will do. At some point though, this will be tested, private investors will no longer be willing to pick up the slack in the credit market based on Fed jawboning, and the Fed will have to put up or shut up.
Given the political climate, I don’t think it’s a foregone conclusion that they actually will act.
“A Volker moment”? Does that mean raising interest rates to save the dollar, even if it means a spike in unemployment?
A Volker moment or Shock was the timely raising of interest rates to deal with inflation which forced Congress to act on deficits. This saved the dollar and gave us the recession of 1981. Volker created a recession , Jerome got his forced on him and he has wasted it.
Wait, what do you mean by “wasted it?”
91.6% of HY bonds with avg maturity of ~5.6 years and median of ~6 years, are uncollateralized from friday close
so if you are gonna load up on a portfolio of defaulted HY paper, trading at or below 8.4% of par is breakeven. ~10.5% of par was breakeven a couple of months ago lol.
Having a good laugh remembering how Republicans in the 1990s used to lecture on how “free market capitalism” kept America strong and kept us out of the trap of having an economy full of zombie companies like Japan, Korea, and China.
Now after 30 years of their policies, we have so many zombies that the whole economy falls apart the second Powell ever stops shoveling money into the money pit.
I have to say, the US is learning fast. For years, the Europeans were ahead of the game, keeping Zombies alive, using NIRP to float their economy. And I think millions of Keynesian were dismayed at the fact that the US wanted to go along and do crazy things like… gasp… raise interest rate.
Then… then… JP showed the Europeans what men of will can do. He helicoptered so much money that they had to switch him over to a B-52 where he was carpet bombing money to the asset holders. Now, we have zombies, and eventually when JP recalls the second Fed mandate, he will switch to NIRP to keep those jobs alive.
JP is indeed a powerful master here.
Helicopter money ain’t gonna cut it! The largest generally usable bill is the $20, and most helicopters can barely carry one ton in payload. As freight, there are about 1 million bills in a metric ton, but that’s only $20 million. Since the Fed’s gotta deliver $Trillions, helicopters ain’t big enough!
A few heavy-lift copters can carry about 20 tons, about the same as a standard shipping container or semi truck. That’d be a $400 million payload. And the vaunted B52 only has a 31 ton payload, about $620 million. But the Fed needs to move $Trillions! Planes and trucks can’t do the job.
The Fed needs to upgrade not just from helicopter to B52, but much further.
Now, a freight train can haul around 500 semi-trucks or B52s worth of cargo. That works out to about $20 billion per trainload. But the fed needs to move $Trillions! The Fed would need at least 100 trains to get the job done.
Now, the largest cargo haulers on the planet are ginormous ships. A good cargo ship can haul 10,000 or more semi-trucks or B52s worth of stuff. 10,000 x $400 million is a big number. Maybe this is why nearly all the Fed’s money gets dropped into inflation-hungry coastal port cities?
But is a ship hauling 10,000 containers, worth $400 million each, big enough for the Fed? That ship can haul $4 Trillion in cash, which is enough for even a the most spendy Congressional re-election stimulus package this year.
But what about the future? At the rate the Fed’s balance sheet is expanding, the Fed will require the services of more ships each year. Within a few years they may need the entire global shipping fleet! And then what happens?!?!
Now, wouldn’t it be far better to “rezone” the financial system, and seed the entire economy not just in New York and Washington, but all over? Set it up so that money can just grow locally, and be harvested by the people living in each area, without having to ship it all over? Such “organic” local growth must be a better way to run an economy than the current print-and-spend global-transport paradigm!
(Tongue –> Cheek!)
Local economy is exactly the way it was before the establishment insisted on making the Fed in 1913.
Little Old Ladies of all ages, genders, races, ethnic groups saved their money by putting it into canning jars in the back yard, and although some of that keeps getting ”discovered”,,, most of it went right back into the local economy as soon as the next crash made it worth more than when it went into the dirt, and the (real) LOLs made out as they should have then and they should again ASAP now.
The advent of the Fed, and its takeover of the entire money supply, etc., led quickly to the issue of ”paper” instead of gold and silver money as had been the case for many years other than the ”notes” of various banks, discounted mostly for cash until the war of 1865, when it became clear that it was pretty much worth less the farther one went from the individual bank, and the discounts went way down accordingly.
Time and enough to get rid of the Fed and make the LOLs ”proud” once again, as they should be.
Otherwise, just another scam/ponzi scheme, as has been pointed out by Wolf and many comments on here from us ”Wolfers.”
“The largest generally usable bill is the $20,”
This reminded me: as of a few months ago, I’m able to get $50-bills out of my regular ATM. Sign of the times, since a $20 doesn’t buy anything anymore.
At least one of Jamie Dimon’s magic money machines in my area will spit out paper with Ben Franklin’s picture on it, if requested. It is in what most people would refer to as “the hood.” Strange times.
The Fed created this monster, especially after the 08/09 crash, when we enlightened people of the USA decided not to take our medicine for a huge near-decade of malfeasance.
Also the lessons we imparted on countries like Russia, Japan & Argentina were forgotten. No painful austerity for us! We are the pigs that are ‘more equal’ than others.
Now we find ourselves doubling and tripling down on stupid. The Fed (and the fools in Congress) have committed us to a path of no resistance—everything must be saved!
Except the middle class. Oh, and the purchasing power of the dollar. Oh yeah, and the dollar itself.
Powell talked s good game, but has become Wall Street’s handmaiden. For over all else, the Fed will do whatever needs be done to perpetuate itself, just like all other institutions out there. It alone must never fail as it alone has the ‘brain trust’ of the nation. LOL!
Money printer go “brrrrrrrrrrr”.
Congress will get on board yet again.
As youTuber Gordon T Long (always worth a watch) ends every video — “Don’t worry, they’ll print the money!”
Dead on , Dan.
The world changed in 2008 with Bernanke and others….QEing and promising when “things got better” it would all be unwound. But they could not undo that which they set in motion.
Powell is very much engaged in managing “perception” and it’s power.
It’s also, it’s only hope for survival. If growth really is over, capitalism in its fractional reserve form is over. More likely national governments get rid of national banking, it’s central banks and use region/local banks as for profit utilities to handle your personal loans. While treasuries create debt free money as a medium of exchange for industrial policy. All paper gone, only real physical assets left.
No wonder they are trying to extend and pretend.
I notice that HYT, a BlackRock high-yield junk bond ETF, is trading at just a -3% risk discount. I take that to mean that there is consensus that the Fed will buy everything: the underlying bonds, the ETF shares itself, when the inevitable defaults hit.
How do you default at negative interest rates?
With negative rates, borrowers don’t default – lenders do! LOL!
Your loan goes bad when your lender can no longer make interest payments to you.
With NIRP creditors are debtors and debtors are creditors.
To be fair, it depends on whether we’re talking about amortizing loans or balloon notes. An amortizing loan still leaves the borrower with payments to the lender, unless the rate is extremely negative.
But I’d be quite happy to take out a “balloon loan” for $1,000,000 at -1% interest for 10-30 years. I’d be getting paid $10,000/year to invest in something with an actual return and pocket the profits too.
Hey wait… that sounds just like a hedge fund gig! Don’t even need NIRP if you can find some deep-pocketed trust-fund babies with more money than brains, and persuade them to load up your fund and give you 2-and-20…
The operation (FED intervention) was successful, but the patient (economy) died.
The Zombie companies are not coming they are already with us. As Warren Buffet famously said; When the tide goes out is when you see who has been swimming naked.
For me the question is; how long before the tide goes out. The money printing and zero interest rates can not last forever.
I agree with you but the performance of the stock market since it’s low in 2009 has many of those with 401K’s convinced otherwise…even though almost 100% of the funds are passive investing instruments the majority of folks do not see the internals as negative…Interest rates have been at near zero levels now for over 10 years…the one thing no one has been able to do is provide details on what is going to break the dam…
It’s interesting to think about what is the endgame. What we see now (imo) that we are morphing from credit money into fiat money.
Government “borrowing” money and the debt is bought by central banks. So in effect the central banks are just issuing fiat money and government spending it. At the same time multipliers collapse because bank assets like CRE collapse, so banks can issue less loans and Fed/gvt steps in.
What you could end up with (as multipliers go to zero) is a kind of full reserve system containing lots of basemoney, so essentially the money in circulation is not that much more as it was in a “healthy” system with well capitalised banks and functioning multipliers.
Actually, this may be the way to salvage the system: acknowledge that the monetisation of goverment debt is permanent (basemoney is now about 10x what it was before the GFC) and abolish fractional reserve banking. If multipliers don’t collapse by themselves, the Fed could require banks to hold larger reserves, up to the point of going to a full reserve system.
Of course, that means banking as we know it is history, so vested interest will oppose this. But consider this: the greatest asset the government has is the reserve currency status of the USD. None of this massive stimulus/ bail-out party had been possible without that. So this is the main thing that needs to be preserved in order to remain in power. In a hyperinflationary outcome I believe governments/ elites will lose that power, so although they like a somewhat higher inflation, I believe they will fight a hyperinflationary outcome tooth and nail. If things threaten to go out of control, they will need a Volker type response.
I doubt we’ll see any such transition to something new. What we’ll see is a stock market crash, combined with a fall of the USD (which ties the Fed’s hands), and austerity. That means much higher tax rates on the wealthy and handouts for the poor. Once they do enough wealth transfers to smooth out wealth disparities, demand will return. It’s going to be a hard decade, like nothing we’ve seen in 80 years.
I don’t think the modern Fed and politicians have the guts to fight inflation. Instead they’ll just look for someone to blame it on.
Do you remember Church Lady on SNL? She blamed it all on Satan.Just replace Satan with China and there you have it.
You also have to keep in mind that the policy making politicians are very well off themselves.Do you really think they would enact policy that would tax the hell out of themselves?
“Actually, this may be the way to salvage the system: acknowledge that the monetisation of goverment debt is permanent (basemoney is now about 10x what it was before the GFC) and abolish fractional reserve banking. If multipliers don’t collapse by themselves, the Fed could require banks to hold larger reserves, up to the point of going to a full reserve system.”
As the Fed operates for the betterment of the big banks (and the banks owners) and all other so-called mandates are only paid lip service, I believe any change to fractional reserve lending will go the other way, e.g. 20x or more as the Fed simultaneously inflates the banks reserves.
“… I believe they will fight a hyperinflationary outcome tooth and nail. If things threaten to go out of control, they will need a Volker type response.”
I very much doubt that the Fed will acknowledge any inflation beyond 2% (and only that amount when true inflation is more than double that) – their eyes have been absolutely wide shut on that for decades.
The key premise here is that to remain in power, they’ll need to retain the ability to bail everybody out. And that only works as long as the USD remains a credible currency. All the power of the supposedly omnipotent Fed ends when the USD dies.
I think the whole system is beyond evil, but these people are not stupid.
The system taxed essential businesses and gave free money to nonessential tourism industry businesses. With the highest unemployment since the great recession, people have been buying boats and looking for boat storage places as their deed restrictions will not allow them to park boat trailers in their yards. A fisherman’s wharf was converted to shops and restaurants as they overfished the sea and some species and sizes of fish catch are prohibited.
In the GFC, very large companies went bust – AIG, GM, Fannie Mae, RBS.
In the next crash, countries will go bust – Japan, US, EU.
Not far away now?
Say what you will about the decrepit EU, their policies and their Euro. Not only have they somewhat come together after lifetimes of war and competition, they do so with a variety of languages, interests, and cultures to overcome.
Granted, Alabamian is sometimes hard to understand, but for all the melting pot nonsense often referred to, the US speaks one official language and has just one central Govt. The EU can expect to be somewhat dysfunctional, by definition. I see no excuse for the US other than corruption of the political process and a system that thrives on it.
The US is a big country and some people see the Fed government as a protector and some see it as oppressor. I like federalism where you get a good balance of local, state, fed. But since early 20 the century Feds keep amassing power probably because they the printing press and the power to tax.
Given that all of the companies you mention still exist – I can’t say that your pronouncement of national bankruptcies is very meaningful.
Among other things: a nation *cannot* bust so long as its debts are owed to its own citizens and/or in its own currency.
C1ue – “cannot go bust” is a furphy – even you asterisked it, because you know it does not stack up.
A country might print, but it cannot repay in purchasing power – not the same thing.
That matters when you are on the other side of the debt – “one man’s debt is another mans asset”
The country doesn’t promise you purchasing power. It promises you its fiat.
Japan won’t go belly for a long, long, long, long time.
The EU will go first or maybe China will.
Cut off Chinese companies from the US capital markets and treat them extactly the same when it comes to financial accounting and reports.
I’ve never understood why those compaies get special treatment in those areas and are allowed to trade on US exchanges without complying with US laws as US companies have to.
Estimate – The US govt refinances/issues about $34 billion of debt every working day.
Annual deficit $1trn = $4.5 billion each working day. (220 of 365)
Existing debt $26trn say 4 year avg maturity => $29.5 billion daily
Total $34 billion every working day.
You can visualize that as a huge freight train, powered by about 20 locomotives*, with every single freight car loaded with $20 bills. The US government finances require a train like that every single day.
* It really only needs 4 locomotives, but on any given day 40% of the engines are in the political minority and pulling the wrong way.
I think financial repression is the way the government is going to go. Stock assets are only temporarily inflated and must reset someday. If you say the current interest repression is 3% of my assets, then that is enough to pay my social security check. It’s a more subtle tax than an outright high income tax or telling me that the social security check is going to stop coming.
“It’s not their fault”, therefore these companies need to be bailed out, because people will loose their jobs, investors will loose their savings and all the hangers on will get hurt. So, we must provide “free’ help. That is the mantra of today. Eventually the powers will overload the economic life boat and it will tip over sending us all into the deep. So every time you hear someone say, here’s some (free) help whether its money, a government program, bond buying, loan deferring, etc….just think of the phrase, “come on board, lots of room”….do you feel the boat starting to tip yet?
You look at the EU and Japan and you see in place social safety nets, and corporate regulation. China is still a developing economy, and the US is a former developing economy whose leadership stayed too long at the fair. America has a self effacing economy (passive consumption and investing). Eventually the money is turned against us, because of wealth disparity. The status quo economy is used to fund the revolutionaries.
I have a friend who mentions Zombie Apocalypse quite a bit. The last year, since we moved off Salt Spring Island to new provinces, ZA had become a popular tagline with our emails.
It’s not unknown around the web that I know a thing or two about celestial bodies, coming and going, dead.alive, so I looked at my friends birth from the Suns perspective, and mentioned to him a time two years out, when you think 2020 was different, add two more.
Easy Money is a curse for the Art world too. Today is the second anniversary of an art world story on Damien Hirsts’ 2008 auction, which garnered a lot of attention occurring at the same time Lehman blew up.
Why am I posting this? Because Hirst had come out recently, and put the world on notice, that the Art Basel Banana needs to be re-appraised: Neowise was a bulls eye, and the two AP’s have been given dates.
It’s hard for me to believe that the Fed is rescuing all these zombie companies out of the goodness of its heart. Someone is likely getting bribes (campaign contributions) and kickbacks for this to occur.
Time to modify Citizens’ United so that only debt-free entities are granted freedom of political speech?
Bernanke told the lie that QE was temporary and rates will normalize. Jerome said in a mystical way that just one big shot of QE and stimulus and that’s it. Really?. Rasing interest rates would be immediately catastrophic and the bottom would be definitive and real. The Carnage would be fast and terrible.The alternative will be a long slow slide downward that will grind and grind painfully down and render many to a pitiful state at the end.
Au, Ag and LEAPS on the right choices look real good at this point in time.??
Zombie companies have been with us since Long Term Capital, and they have become part and parcel of the two-party corporate war machine, the Congressional, corporate, you-give-me-a-tax-break, I-cover-up-your-criminality grift, that the Republicans are so much better at than the Democrats. Eisenhower tried to warn us…..
I love Trump as our President because he has done what his predecessors only hinted at – tearing the velvet glove of democracy off of the iron fist of fascism, to paraphrase Orwell’s most pithy quote.
Joe Biden will quickly sew up the loose threads, so that we Americans can go back to feeling good about our steep decent into imperial backwater.
It looks like to me that zombie people are created in mass numbers now more than just 10 or 20 years ago. They think they are all entitled to money but what they fail to understand or don’t want to believe is the more everyone has easily obtained by not working for it, not taking responsibility for it, it becomes less and less in value.
This is why I noticed how Hollywood and the main stream media always portrays that economics in school is boring, not important, for losers etc. Look back at many flicks back in the 80’s, 90’s you will see what I am talking about. Keep the population not only dumbed down but make them into zombies now with ever increasing technology, on demand services and other newly invented distractions daily.
Sooner or later, everything boils down to fundamentals. It is possible to ignore fundamentals for a while, but not for ever.
Zombie companies are in the state they are because of problems in their core business or their business model is no longer viable.
Floating loans and stock buy backs do not address those problems, and therefore will not do anything to address the core issues.
The more these companies are subsidized, the more they will ignore their fundamental problems and focus on making fast money, instead of the long term health of their businesses. That is not the environment I want to be risking my money in…
By the way, the other term for “Zombie” is “Ponzi” (They even rhyme)
Hyman Minsky described the same situation pretty clearly some years ago: businesses that issue new debt to pay for both old principal and interest on previous debt.
Bailouts are poisonous to free markets. Basically a bailout is the opposite of a free market. It is socialism for the rich.
I suspect this type of governmental market control will also be destroyed by some event, but I have no idea what it is.
One of the worst things to do would be to take everything else to a socialist/central planning expectation, e.g. food, shelter, clothing, etc.
The right answer is to ban the bailouts. (by going through orderly, legal, and regulated bankruptcy processes).
One thing you realize if you watch Congress is they speak and act as if there is plenty of money whether it’s boom or bust times.
What “free markets?” There aren’t, and never have been, any such thing. Markets, like capital, are creatures of law — all the way back to the Bronze Age when the Temple/Palace set weights and meaures.
You’re too focused on zombie companies. You need to start thinking about zombie countries who live entirely on fiat money without the economy to back it up.
Look around you — the “zombie countries who live entirely on fiat money” are the the most powerful in the world. Good luck with your little crusade against them, though …
With this wild expansion of corporate credit, why is the Fed buying?
Head zombies no longer exist. Democratic socialism has made everyone equal. But nice try.
Seriously, very good report. Thank you.
I think most posters here would agree that financial statements are a model of a company, not the company itself. When financial statements no longer reflect the actual company and its productive capacity, management skills, etc, and people notice, bad things happen to the company.
Dear Leaders have convinced the public that banks, financial markets, and the FED are the actual economy, rather than a model of our actual productive assets, natural resources, and people. The model no longer reflects reality, as shown by all the data presented by Mr Richter, and the deviation is worsening every day.
What happens when people notice that Uncle Sam’s financial system no longer reflects reality? I’m thinking they will reject Federal Reserve Notes and US Treasury bonds, and it will be Hello Hyperinflation.
Might hit other ‘core’ countries first – the UK is a very rotten apple for instance.
Nationalize the Fed and 7 trillion in debt basically disappears as no more divvys to the private bank owners of the fed–now of course after divvy and expenses(no one outsied of the Fed knows these amounts) the remaining profit from interest payments received is returned to the treasury!!
The president could remove all GSE guarantees from the Fed balance sheet, which would reestablish it’s independence. Under 43 the Fed went to cabinet meetings, which some thought was the future of the Fed. Buying corporate debt suggests they are becoming more of a hedge fund, and they might assume risk arbitrage for the banks. Perhaps the split is inevitable. Whether than makes the Fed an ECB grade central bank, who knows? Pundits have always claimed the Fed’s balance sheet can implode if interest rates rise, an arcane notion. Might make more sense if the Fed swapped Treasuries with the states, and not with multinational companies. When interest rates rise it will likely come from the margins, municipalities which must balance their budget.
Not possible, the FED has the US Government by the short hairs.
The problem with the US is that everyone has to hustle.
There is no compassion for the bottom 50% in the land of the free market.
But 100% of the people can’t make it into the top 50% of the wealth brackets.
The problem with the US is not enough people hustle. Most are lazy and complacent and refuse to take responsibility for their own lives. Being in the top 50% is not everyone’s goal, nor should it be. We are all different, and have different priorities and goals. To expect financial success without the work and effort required to get it is stupidity personified.