{"id":4716,"date":"2021-12-01T21:59:26","date_gmt":"2021-12-02T03:59:26","guid":{"rendered":"https:\/\/trends.ufm.edu\/en\/?post_type=articulo-semanal&#038;p=4716"},"modified":"2021-12-01T21:59:26","modified_gmt":"2021-12-02T03:59:26","slug":"covid-19-economic-zombification","status":"publish","type":"articulo-semanal","link":"https:\/\/trends.ufm.edu\/en\/article\/covid-19-economic-zombification\/","title":{"rendered":"COVID-19 Economic Zombification"},"content":{"rendered":"<p>More and more economists and finance specialists are warning of the potential arrival of a new \u201cMinsky moment.\u201d The last time this term was used with such conviction was in\u00a02008\u00a0at the onset of the Great Recession. It seems that\u00a02021\u201322\u00a0could have some parallels with the world\u2019s last severe recession.<\/p>\n<h2>The\u00a0Twentieth-First Century: The Century of Debt<\/h2>\n<p>Up to now, the\u00a0twentieth-first century could be called the century of debt, and if things continue the way they are, it could well be called the century of the great debt default. At the beginning of the century, the extremely low interest rates promoted by central banks in practically the entire developed world caused a frenzy of private credit creation and a gigantic financial and real estate bubble that exploded in\u00a02008\u00a0with dire consequences for the world economy.<\/p>\n<p>Central banks, heavily pressured by politicians, redoubled their commitment to low interest rates, causing public overindebtedness to a degree unprecedented in times of peace. In\u00a02020, when the growth model based on the accumulation of public debt and low interest rates seemed to start to weaken, the COVID-19 recession arrived. The worldwide excess of public spending in\u00a02020\u00a0has not been corrected,\u00a0and it does not appear it will be corrected anytime soon. The new public debt is adding fuel to the fire. And the accumulation of it (and also private debt, especially that issued by companies) could be reaching the point of no return.<\/p>\n<p>Global debt reached $200\u00a0trillion at the beginning of\u00a02011,\u00a0while global GDP was $74\u00a0trillion (275\u00a0percent debt\/GDP). In the second quarter of\u00a02021, global debt reached almost $300\u00a0trillion with GDP of $83.9\u00a0trillion (330\u00a0percent debt\/GDP).<\/p>\n<p><iframe id=\"datawrapper-chart-sSHVk\" style=\"width: 0; min-width: 100% !important; border: none;\" title=\"Figure 1: Global Debt and Global GDP\" src=\"https:\/\/datawrapper.dwcdn.net\/sSHVk\/1\/\" height=\"400\" frameborder=\"0\" scrolling=\"no\" aria-label=\"Interactive line chart\"><\/iframe><script type=\"text\/javascript\">!function(){\"use strict\";window.addEventListener(\"message\",(function(e){if(void 0!==e.data[\"datawrapper-height\"]){var t=document.querySelectorAll(\"iframe\");for(var a in e.data[\"datawrapper-height\"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data[\"datawrapper-height\"][a]+\"px\"}}}))}();\n<\/script><\/p>\n<h2>What Is a Minsky Moment?<\/h2>\n<p>Hyman Minsky was a post-Keynesian economist who developed a very insightful taxonomy of financial relationships.<a href=\"#_ftn1\" name=\"_ftnref1\"><\/a> According to him, the finances of a capitalist economy can be summarized in terms of exchanges of present money for future money.<a href=\"#_ftn2\" name=\"_ftnref2\"><sup>[2]<\/sup><\/a> The relationship proposed by Minsky is as follows:<\/p>\n<ol>\n<li>Present money is invested in companies that will generate money in the future.<\/li>\n<li>When companies make a profit, they return the money to investors from their profits.<\/li>\n<\/ol>\n<p>Income or profit expectations determine the following:<\/p>\n<ol>\n<li>The flow of present money to companies<\/li>\n<li>The price of financial assets such as bonds and stocks (financial assets that articulate the exchange of present money for future money)<\/li>\n<\/ol>\n<p>Present business income, meanwhile, determines the following:<\/p>\n<ol>\n<li>Whether expectations about past income (included in already-issued financial assets) have been met<\/li>\n<li>How to modify expectations about future income (and therefore, indirectly, the flow of present money to companies and the price of financial assets issued in the present)<\/li>\n<\/ol>\n<p>Minsky articulates three possible types of income-debt relationship in companies (although he extends the analysis to all economic agents):<\/p>\n<ol>\n<li><em>Hedge. <\/em>Hedge finance companies can meet all of their debt obligations with their cash flows. That is, their inflows exceed their outflows. Such companies are stable.<\/li>\n<li><em>Speculative. <\/em>Companies can pay the interest on their debt but cannot pay down the principal. They are forced to constantly refinance. These companies are unstable, as any minor problem can bankrupt them.<\/li>\n<li><em>Ponzi. <\/em>Ponzi companies do not generate enough income to pay down the principal or pay the interest. They must sell assets or issue debt just to pay the previous interest on their debt. They end up defaulting on the new debt sooner or later. Their chances of survival are minimal.<\/li>\n<\/ol>\n<p>According to Minsky, when things are going well in an economy and income expectations are met, corporations begin to err on the side of optimism and excessively increase their debt. This causes a shift from a stable situation (in which hedge companies are the norm) to an unstable one (in which Ponzi companies are the norm). In a Ponzi situation, the economy will experience widespread defaults and a financial and economic crisis.<\/p>\n<p>An economy is said to be in a Minsky moment if debtors are unable to pay down their debts (a speculative situation) or unable to pay the interest and the principal (a Ponzi situation).<\/p>\n<p>Minsky was partly right. He accounts for a common truth of financial crises: issuance of debt was abused in previous periods. As a caveat, though, taking into account monetary and financial state interventions\u2014mainly but not solely those of central banks\u2014perhaps the cause of this degradation of debt quality is not a market problem, or at least not exclusively. The crisis may be exogenous to the market (caused by public authorities) or endogenous but amplified by exogenous factors (public authorities contribute to it).<\/p>\n<h2>The Economy Has Been Zombifying for Two Decades<\/h2>\n<p>As already discussed, global debt has grown more rapidly than the global economy over the last ten years, so it seems credit quality has indeed degraded. The income needed to pay off debt is growing much more slowly than the debt itself.<\/p>\n<p>An additional piece of evidence to support this argument is the increase in the number of \u201czombie companies.\u201d A zombie company is one whose earnings before interest and taxes are less than or equal to its debt service (it coincides exactly with Minsky\u2019s definition of speculative and Ponzi companies, taken together). A zombie is a wonderful metaphor because a zombie moves and appears to be alive but is in fact dead. A zombie company also moves and appears to be alive\u2014it generates activity, employs workers, and produces goods\u2014but in reality is (almost) dead. It is (almost) certain to die given its inability to pay its debt with its own means. The number of zombie companies has increased exponentially in the United States in recent years, according to a Bank for International Settlements (BIS) report.<a href=\"#_ftn3\" name=\"_ftnref3\"><\/a> Furthermore, the probability of remaining in a zombie state has increased. And in fact, zombification is a reality in almost every part of the world.<\/p>\n<p style=\"text-align: center;\"><strong>Figure 2<\/strong><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-4719\" src=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-2-1024x737.png\" alt=\"\" width=\"1024\" height=\"737\" srcset=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-2-1024x737.png 1024w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-2-300x216.png 300w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-2-768x552.png 768w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-2.png 1382w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p style=\"text-align: center;\"><sup>Source: Banerjee &amp; Hofmann<\/sup><\/p>\n<p style=\"text-align: center;\"><strong>Figure 3<\/strong><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-4720\" src=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-3-812x1024.png\" alt=\"\" width=\"812\" height=\"1024\" srcset=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-3-812x1024.png 812w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-3-238x300.png 238w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-3-768x969.png 768w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-3.png 1124w\" sizes=\"auto, (max-width: 812px) 100vw, 812px\" \/><\/p>\n<p style=\"text-align: center;\"><sup>Source: Banerjee &amp; Hofmann<\/sup><\/p>\n<p>However, the BIS data end in\u00a02017. What has COVID-19\u2019s impact been on an already-zombified global economy?<\/p>\n<h2>COVID-19 Hit a Zombie Economy: Now What?<\/h2>\n<p>The most recent data on company interest coverage (financing cost\/earnings) are from the Fed and refer to the North American economy. In the figure below we can see that the median coverage ratio began to fall at the end of\u00a02018, which is consistent with our hypothesis that the economy\u2019s growth model, based on cheap debt, was beginning to run its course. The pandemic has hammered the median coverage ratio. Although the ratio has been recovering since the second half of\u00a02020, it is currently at the level seen in\u00a02009, in the middle of the Great Recession.<\/p>\n<p><iframe id=\"datawrapper-chart-hsTjc\" style=\"width: 0; min-width: 100% !important; border: none;\" title=\"Figure 4: Interest Coverage Ratio Has Plummeted in the COVID Era\" src=\"https:\/\/datawrapper.dwcdn.net\/hsTjc\/1\/\" height=\"400\" frameborder=\"0\" scrolling=\"no\" aria-label=\"Interactive line chart\"><\/iframe><script type=\"text\/javascript\">!function(){\"use strict\";window.addEventListener(\"message\",(function(e){if(void 0!==e.data[\"datawrapper-height\"]){var t=document.querySelectorAll(\"iframe\");for(var a in e.data[\"datawrapper-height\"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data[\"datawrapper-height\"][a]+\"px\"}}}))}();\n<\/script><\/p>\n<p>Even more revealing is the interest coverage ratio of the companies in the first quartile (that is, the\u00a025\u00a0percent of companies with the lowest ratio). This indicator has been below 1 since\u00a02012; in other words, zombification has accelerated since then. Keep in mind that a ratio lower than 1 means that a company\u2019s profits are insufficient for it to pay its financing costs (it is a Ponzi company).<\/p>\n<p>The interest coverage ratio for companies in the\u00a0twenty-fifth percentile reached almost 0 just before the pandemic (their profits had almost disappeared). Since then, the ratio has been negative (these companies recorded losses). Observe that these companies have not recovered, while companies in other quartiles have. Their ratio is currently just above \u22121, which means that their losses (before interest) are nearly equal to their financing cost. This is a total disaster. At least\u00a025\u00a0percent of US\u00a0companies are financially dead.<\/p>\n<h2>Valuation of Zombified Companies<\/h2>\n<p>One would expect that these companies would begin to go bankrupt, and this is indeed what is happening. According to the <a href=\"https:\/\/www.federalreserve.gov\/econres\/notes\/feds-notes\/us-zombie-firms-how-many-and-how-consequential-20210730.htm\">Fed<\/a>, 2.5\u00a0times more zombie companies (as a fraction of all companies) went bankrupt in\u00a02020\u00a0than in\u00a02019 (&lt;2\u00a0percent in\u00a02019\u00a0and around 4.5\u00a0percent in\u00a02020).<\/p>\n<p>Curiously, the zombie companies that survived\u00a02020\u00a0are seeing their valuation skyrocket. Their aggregate value already exceeds $6\u00a0trillion, while in\u00a02019\u00a0it was close to $2\u00a0trillion.<a href=\"#_ftn4\" name=\"_ftnref4\"><\/a><\/p>\n<p style=\"text-align: center;\"><strong>Figure 5<\/strong><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-4721\" src=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-5-1024x525.png\" alt=\"\" width=\"1024\" height=\"525\" srcset=\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-5-1024x525.png 1024w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-5-300x154.png 300w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-5-768x394.png 768w, https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2021\/12\/art.258-5.png 1552w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<h2>Conclusion<\/h2>\n<p>Markets are now extremely complacent. The fundamentals do not seem to justify their optimism. Zombie companies, which were already a problem in\u00a02019, have not only not been killed off but have multiplied. The zombie apocalypse could be closer than we imagine, and we do not have enough Will Smiths in the world to save us.<\/p>\n<p>In a future article, we will analyze the impact of restrictive monetary policy (tapering) on zombie companies.<\/p>\n<p><strong>Legal notice: the analysis contained in this article is the exclusive work of its author, the assertions made are not necessarily shared nor are they the official position of the Francisco Marroqu\u00edn University.<\/strong><\/p>\n<p>-<\/p>\n<h2><strong>Notes<\/strong><\/h2>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> In our opinion, the main problem with Minsky\u2019s view is that he situates his taxonomy in a very flawed macroeconomic theory (a Keynesian one centering on aggregate demand and aggregate supply).<\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> The various layers of financial intermediation hide this underlying relationship as if it were behind a veil.<\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> The BIS definition of a zombie company is even more restrictive than ours. It requires, in addition to having an interest coverage ratio lower than 1, a Tobin\u2019s Q lower than the average for two consecutive years (meaning the market values these companies lower than their competition).<\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> Part of the increase can be explained by a greater number of zombie companies and another part by an increase in each company\u2019s valuation.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Is the Global Economy Heading toward a Minsky Moment?<\/p>\n","protected":false},"author":104,"featured_media":4717,"comment_status":"open","ping_status":"closed","template":"","meta":{"anio":"","mes":"","id_estadisticas":"","newsletter_link":"","portada_informe":"","subtitulo":"","footnotes":""},"tags":[269],"class_list":["post-4716","articulo-semanal","type-articulo-semanal","status-publish","has-post-thumbnail","hentry","tag-zombification"],"_links":{"self":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4716","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal"}],"about":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/types\/articulo-semanal"}],"author":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/users\/104"}],"replies":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/comments?post=4716"}],"version-history":[{"count":5,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4716\/revisions"}],"predecessor-version":[{"id":4726,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4716\/revisions\/4726"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media\/4717"}],"wp:attachment":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media?parent=4716"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/tags?post=4716"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}