Zombies Are Taking Over the Global Economy

Zombies Are Taking Over the Global Economy

Does the economy make you feel uneasy or even a bit frightened at times? Well, you’re not alone. A looming economic apocalypse lays heavy in the back of most everyone’s mind.

You can’t swing a dead cat without hitting a stock market doomsayer.

They’ll tell you that the global financial system is inches away from falling off a cliff. You will hear them preach bitcoin, gold, canned food and silver bullets.

Obviously, these economic fortune tellers have been wrong for several years.

The more they’re wrong, the easier it is to disregard their warnings and move on. But even the happiest, go lucky, overly optimistic investor can tell something is off.

It’s because zombies are taking over the global economy.

Zombie economics, zombie companies and corporate zombies are spreading like well, zombies.

What Is a Zombie Economy?

Zombies Are Taking Over the Global Economy

The term “zombie” in economics is primarily speaking of zombie companies. A zombie company only makes enough money to pay its loans. These companies are being kept alive by cheap debt and quantitative easing.

These debt zombies keep growing throughout the globe as central banks cut rates and print money.

It almost feels as though the global economy died during the 08-09 financial crisis. Instead of letting the economic system fail, it’s been artificially reanimated with financial engineering.

In a zombified economy, there’s a persistent sense of impending doom. The economy is sick and there is no cure, those in control aren’t even sure how to fix it.

Consumers, corporations and banks are turning into empty vessels, mindlessly feeding on debt.

Zombie Banks

A financial institution becomes an undead corpse when its net worth goes negative. The only thing keeping the bank from becoming insolvent is government support.

The zombie bank can march forward and even grow if creditors remain confident in the government’s ability to keep it afloat.

The term emerged from the 1990 Japan market crash. Banks went bankrupt and the Japanese government bailed them out. This resulted in a decade long economic stagnation period known as “the lost decade.”

If Lehman Brothers received a bailout in 2008 it would have become one hell of a zombie bank.

Zombie Companies

Also known as zombie firms a zombie company is making just enough to pay the interest on its debt.

Zombie companies depend on low-interest rates to keep them out of the grave. If interest rates increase too much, Zombie companies are among the first to fold.

Zombie Consumers

Debt-ridden consumers that take advantage of relaxed lending conditions become zombies. The majority of their income goes to interest and their debt levels never shrink. It’s easier to keep interest rates low and allow them to rack up credit cards.

The more consumers consume, the longer the zombie economy can shuffle forward.

The Best Worst Economy Ever

The stock market keeps lurching forward and breaking new highs. Unemployment is ultra-low and the economy is just peachy! But not every American is ecstatic about it, and maybe they shouldn’t be. Wage growth is stagnant, the cost of living is rising and inequality is at the highest level in 50 years.

For the average American, the zombie economy is draining their livelihood.

Source: fred.stlouisfed.org

The chart above illustrates the U.S. GDP since the 1940s. The grey areas are periods of contraction or recession. Over the last ten years, there has been steady growth but compared to past economic cycles, it’s not nearly as robust.

Record-low unemployment and a record-high stock market doesn’t make the economy great. There are plenty of jobs, but most do not pay a decent wage, even if you have a college degree.

A surplus of low paying jobs is helping create more zombie consumers.

Frankenstein Finance

The U.S. Federal Reserve has cut interest rates 3 times this year. Usually, a measure that’s done to help spur an economic recovery during a recession.

An economy isn’t strong if it can’t handle a modest increase in rates.

And it’s not just rate cuts. The Fed has been injecting billions into the financial system since September. They’re telling the public that it is not quantitative easing but, come on, that’s exactly what it is.

This Frankenstein financial engineering will ultimately end badly. The central banks are running out of ammo. And the balance sheet is ugly even though the economy is supposedly doing great.

Below is a graph of all the assets on the balance sheet of Federal Reserve banks. Notice the small uptick at the end?

Fed Balance Sheet
Source: fred.stlouisfed.org

How to Survive

To survive in a zombie economy you’ll simply need to live within your means. Living outside of your means will inevitably lead to becoming a debt zombie.

Hope for the best and prepare for the worst. Be smart about your finances, diversify, and beef up your emergency savings.

No one knows for sure how this will play out. Instead of filling your cupboards with canned beans and ammo, live your life.

The economy is cyclical, even all the QE in the world can’t stop an unavoidable recession. But a recession doesn’t mean the end of the world.

The living will eventually regain control of the zombies and things won’t be so gloomy. However, there is likely to be some pain before we get there.