Over-Leveraged Zombie Companies Threaten Economic Recovery, by Peter Schiff

Nothing destroys the resilience of either a business or an economy like debt. There is no way, given present global debt levels, that the economy is going to bounce back from the hit administered by the coronavirus response. From Peter Schiff at schiffgold.com:

There seems to be mounting optimism that the US economy will rebound relatively quickly as states begin opening up and there is progress toward a coronavirus vaccine. But the optimism ignores deep problems in the US economy that existed before the pandemic  – chief among them staggering levels of debt and the proliferation of zombie companies.

In the last couple of years, corporate debt has blown through the roof. So much so that the Federal Reserve issued warnings about the increasing levels of corporate indebtedness late last year.

Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”

The government shutdowns in response to COVID-19 have only exacerbated the problem. The Federal Reserve’s prescription has been to encourage even more borrowing. Companies have obliged. As Bloomberg recently reported, “many of the companies hardest hit by the coronavirus outbreak have priced billions of dollars of bonds and loans in recent weeks.”

Never mind that profits have been wiped out, and that their business operations aren’t viable right now or likely anytime soon. As long as they’re propped up by the Fed, investors are willing to lend.”

Continue reading→

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.