Don’t Fear The Zombies.
"As it became clear the pandemic would significantly disrupt economies across the world, markets for longer-term debt also faced strains", Jerome Powell explained, in prepared remarks to the Senate Banking, Housing, and Urban Affairs committee delivered Tuesday, via video conference.
He proceeded to further detail the rather straightforward rationale behind some of the Fed's emergency lending facilities rolled out over the last two months.
"The cost of borrowing rose sharply for those issuing
If the world as we knew it allowed tightening in 2018/19 there would have been a more orderly outcome now.
Reserve currency is not allowed to tend its own garden and this will all play out later. You have been so correct about this whole situation. Why fix the rig while the boat is obviously sinking.
Good comment on Reserve Currency….I agree !!
Still chuckling about that last sentence and not wanting to awaken the snark but I comment as follows….. Zombie companies and a zombie economy are a real phenomenon…. I saw a literal trash-load in my career and succeeded in avoiding their number.. Seems to me they do materialize as a result of long series ‘ of Hobson’s choices made mostly by the people charged with running these enterprises..The problem with these choices is that they present more bad choices laying bare an ideological mis -function … The phenomenon becomes self
perpetuating if Darwin’s law is suppressed and sooner or later we wind up where we are at…
For the sake of argument I agree that given the circumstances of three months ago the correct choices (only ones that were likely workable) were made short of social disasters beyond comprehension…..At the same time the system set itself up for this kind of situation because the failings of our species and the predatory nature of Capitalism as well as the inability of the public to separate needs from wants…. I wonder if some ground up changes brought on by these hard times (for some individuals ) will not on the long run prove beneficial as a whole because of the inevitable realignment of people’s aspirations … Seems like the great depression of the thirties had such an effect for future generations. History can sometimes be a good guide !!
“Zombie companies and a zombie economy are a real phenomenon”.
Yes, I know. That’s why I’ve written enough about it over the years to fill up several textbooks, including the recap and diagram from this article.
But I look at this way (and this is, I think, instructive for the extent to which it conveys how all things, even COVID-19, are relative):
Coronavirus and the possibility of dying from it are a real phenomenon too. But if you’re living in Yemen or Syria, that’s likely below 3 or 4 on your list of daily worries, for the simple reason that 1 and 2 are occupied by “dodge bullets/bombs” and “feed self”.
Same is true here. Zombie companies and the prospect of a zombie economy are very real phenomena. But that concern should be below “public health” and “avoid outright implosion” on our list of priorities.
This is an excellent read and analysis, I find it fascinating that the “zombie” problem has been persistent in develop economies since the GFC on account of the low interest rate environment, now that the issue has been understandably been kicked down the road I wonder if it will become a real problem at some point. If the deflationary supernova is here to stay in the immediate future presumably the “zombies” will multiply and as we all know zombies are hard to kill, will inflation be the weapon of choice when it is time to chop the zombies’ heads?…
So the only way to “kill” a zombie company is for the Fed to buy the debt and then forgive that debt ??
So if US wipes out all student debt (I am still shaking from reading prior justifications for this), all zombie debt….shall we add in auto loans and mortgages??
Screw the people who lived a financially responsible life….it is “for the good of our collective citizens”!!!
Then we get that “magic” reset??
Hahahaha
I don’t think you understand these facilities. The Fed isn’t “buying this debt and then forgiving it”.
I do understand- just wondering what comes next after Fed buys zombie debt
Inflation wouldn’t kill zombies with loads of debt as that would merely prove that borrowing was a better choice than saving.
Tightening lending (i.e. the oppopsite of what the Fed just did to save the US and World economies) would starve zombies from free (or yield seeking) money.
Raising interest rates (and reducing government spending) is an orthodox way to tighten but regulatory capture and cowardice of political consequences means neither of the 2 parties will actually get us there… so get used to zombies at your MMT parties?
Or he could speak like Greenspan in which no one would understand him. LOL
Debt pervades our entire culture, and it leads to perverse outcomes. Interest on debt is tax deductible; income from savings are taxed. The cost of debt for most companies is cheaper than the cost of equity. Wall Street generally punishes companies that hoard too much cash, and reward cash burning enterprises. Taxpayers subsidize companies taking on more debt in order to buy back their own shares, transferring value from the public to corporations. The Federal Reserve has suppressed interest rates for years, punishing pensioners and others who derive income from Treasurys. Bankruptcy laws in most states are lax by international standards. Goldbugs, hard money types, and Austrian School members may deride the Fed for lax monetary policies, but there is a fiscal, financial, and cultural component as well. Moral hazard is everywhere.