Tuesday, May 5, 2009

Economic Forecast: 70% Chance of Zombies

With the return to cheap (but not yet plentiful) credit and the incredible steps taken by central banks the economic forecast is starting to get quite interesting. Things are looking a lot like they did in Japan around 1999 or so. The economic forecast thus calls for a 70% chance of Zombies.

In this context a zombie is a company that is not profitable, is incredibly unlikely to be profitable in the future, and by all rights is dead, but doesn’t know it yet. Sounds like a B movie.

The Japanese economy has been plagued by zombie corporations during the last 10 years. The easy and cheap credit has allowed a remarkable number of companies to survive without making profits contributing to the growth of the economy. These corporations are largely responsible for the so called “lost decade”.

The worst part about zombies, both corporate and movie is their drive to devour brains. These corporations make use of resources and produce things that people don’t choose to pay for. They survive through repeated subsidies from the general populace. In this way, poor decision making, management practice, and inefficiency from the head office to the factory floor is allowed to continue unabated.

The problem is that a market based system is supposed to work somewhat like natural selection. Companies based on bad ideas are supposed to be pushed aside by better ones. The result will be a somewhat chaotic system as people lose their jobs through no fault of their own and have to live through the upheaval of finding new work, maybe even in a different location. The result, is in theory at least, a stronger more vibrant system that is really good at allocating resources to where people would like them to be.

This doesn’t work as well when the economy at large is shrinking. Those workers that lose their jobs through no fault of their own can’t find new jobs. It also doesn’t work too well when there are a lot of zombies roaming around. These zombies prevent new firms growing and needing new workers. Result, no new jobs.

Super cheap credit and government bail outs create a wonderful zombie buffet. Get your cricket bat ready.

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