Debt zombie – a corporation which can only function by continuing to borrow money.
Debt is a part of corporate finance. Even the most successful companies are constantly manipulating debt vs income to maximize return.
If I can invest money and get a 10% return (say, during a stock or housing bubble), why not borrow all I can at 5%?
Basically, why not gouge your neighbor for all you can? In America, that counts as good business sense.
(I believe Jesus had a rather different opinion on this matter, but that’s a topic for another article.)
For these businesses, when hard times hit, they have to tighten their belts. Maybe they have to repay debt. People are laid off.
But they survive.
Ponzi Turns Green
Debt Zombies have a different balance sheet. For Uber, Lyft, Pelaton, Spotify – and possibly for the secretive Amazon, Google, and Facebook (none of which pays a dividend on its inflated stock) – debt is not simply good finance.
It’s a lifeline.
Charles Ponzi must be green with envy. Or mould. Or maybe both.
Ponzi actually had to convince investors that he had a money-making scheme (by buying US postal coupons in Italy and shipping them back to the US for cash-in, producing a small net profit on each transaction).
The scheme was probably unprofitable once you factored in labor, and in any case Ponzi simply lied about the transactions. Promising huge dividends, he paid early investors with money obtained from later investors, giving his name to the classic sucker’s game, the Ponzi Scheme.
Uber and its ilk go Ponzi one better – they actually have no business plan at all except “be the biggest and the money will roll in.”
So Much For That Plan
Spotify is the biggest streaming service – and still hemorrhaging money. So much for that plan.
Uber jumps from rides to eats to on-demand house cleaning (really!), losing money on every one.
Lyft cries out: “We lose less than Uber!!”
And Pelaton, raising billions for what is at best a minor niche product, digs its own grave with the most ineptly patriarchal ad campaign of the decade.
The bottom line – not one of these tech giants could function without massive infusions of new credit.
The Day of Reckoning
In Summer 2008, the credit markets froze up. Loans became nearly impossible to obtain even for solvent companies.
Imagine that scenario today. A dozen top tech companies would be unable to meet payroll.
Employee loyalty will be put to a severe test. Techies with huge condo mortgages will have to jump ship.
San Francisco, for 20 years a gold-rush cesspool, will become a ghost town – tons of housing – but no jobs.
No Bailout This Time
In 2008, central banks around the West bundled “rescue” packages to bail out companies like Wells Fargo and Bank of America, which teetered on the edge of collapse due to irresponsible home loans.
Prime rates were cut. Billions of dollars were pumped into the banks at cut-rates.
The massive new credit slowly did the job, and by 2011 the housing market and stock market were reviving.
(As for the actual economy – flat-lined since the 1970s – that’s a different matter.)
So why can’t we just do it again?
Easy – because the Fed (under pressure from Trump) has already cut rates below 2% to pump up the current stock bubble.
Trump’s tax cut pumped billions into corporate treasuries – most of which has simply been poured into stock buy-backs that mainly benefit about 5% of Americans.
Basically, we’ve used up most of our silver bullets during a bubble.
When the crash comes this time – and it will, as I explain in a separate post – there won’t be many tools left to cope.
Expect to hear talk of the benefits of negative interest rates (a last-ditch effort that has never done more than keep a flaccid economy afloat – cf Japan since 1990).
And expect a major bout of inflation in the near future. It’s impossible to pump so much “cash” into completely non-productive sinkholes without producing inflation.
Capital Bids Adieu to the Zombies
As far as prevention, forget it. All the Trump/Fed cuts are doing is delaying the inevitable.
Capitalist recessions are not avoidable. They are not even a problem for the larger system. They’re a cleansing mechanism – the way the system wipes away moribund and redundant businesses. (See Recession link below for more.)
The global system has been teetering on the edge a year or more. China has been in a slump for two years. Europe is staggering to realign. Russia is a corrupt , decadent police state. India and Brazil, for all their efforts, aren’t going to make up the difference.
Capitalism in its cyclical splendor will soon wipe the debt zombies away. One or two might pick up the pieces and slowly become viable. Some (like Spotify) will be bought by bigger players.
Most will become punchlines of depressing jokes – “Remember when investors poured billions into subscription exercycles?”
What Do We Do?
We can’t prevent this crash. Nor can we prevent the knock-on effects it will have on millions of working people, who will lose jobs and income as the economy contracts.
What we can do is prepare for a major recession.
Prepare to live more modestly. Prepare to help one another. Prepare to value people more than possessions.
Prepare to ride your exercycle without a subscription.
Prepare to take back our cities. Prepare to squat vacant housing. Prepare to make cities a place we live, not the plaything of speculators.
Let’s go further – imagine a city with no cars – let alone robot-driven Uberlyfts.
There may actually be an upside to all of this…
Image: ClipArt Library.