Zombie Companies with Nicolás Águila

Today Nicolás Águila will be joining us from Germany. Nicolas is a doctoral researcher in Economics (@nicolasaaguila) at the Unizersitat Witten in Germany. He co-authored a paper with Juan M. Grana in the International Review of Applied Economics called “Not All Zombies are Created Equal."
https://www.tandfonline.com/doi/full/10.1080/02692171.2022.2045911
He also co-authored a more conversational article in Jacobin discussing Zombie companies which I will link to. It’s called “The Rise of Zombie Firms Risks Another Disastrous Crisis”.
https://jacobin.com/2022/05/zombie-firms-neoliberalism-debt-productivity-crisis
What are Zombie companies?
Firms that can’t make enough profits to even cover the debt payment on their interest. The phenomenon started in the mid 1960s and then skyrocketed in the beginning of the 1980s. There are two types of Zombie companies, making up around 40% of firms in the United States.
1. Negative profitability even before the payment of interest
2. Negative profitability only after payment of interest.
The share of Zombies, on the whole, is increasing in the economy and may be a reason for stagnation.
How do they manage to survive?
They manage to get more debt to pay back their existing debt, or to sell off some of their equity.
Why are firms investing in these unproductive businesses?
Some zombies are startups that we wouldn’t expect to be profitable (Uber, for example) — but as a startup gets older it should start to show some profitability. Some won’t (Theranos, WeWork) but some will. Others are retailers like Macy’s that investors think may become profitable one the future. Some, like Boing, have a great history.
Another reason is because of the financial context of the past decade with lots of credit, liquidity and low interest rates. This can prop up some sketchy firms.
Will this crisis be as big as the Great Financial Crisis of 2007/2008?
Nicolás is worried this is a much bigger problem than most people think, and that the results could be way bigger than the recession in 2007/2008. He thinks we need to be very careful about how we plan for the potential tsunami of bankruptcies to come. He recommends a government jobs guarantee as a buffer against the unemployment crisis to come. He hopes for eventual transitioning of these employees to the private sector, once the private sector begins to heal.
Could the U.S. itself be considered a Zombie Company?
No — the US’s debts are always denominated in dollars so it can always issue more of its own currency to pay its debt —so it always has an escape hatch. The crises in other parts of the world (Global South, for example) will probably lead to a flocking to the dollar, also, which will make it easier than ever to sell their bonds. They can just inflate the debt away, which Ray Dalio and Lyn Alden have mentioned recently. He also said that the flight to safety from countries in the global south will likely lead to
What does Nicolas think about Bitcoin adoption?
El Salvador has suffered a lot with the collapse of crypto, and this should give a clear warning sign to other countries. Central bank digital currencies may have a future, but he’s not an expert and didn’t want to speak too much on it.