Much talk has recently centered around "currency wars" and the specter of competitive currency devaluations, with the G7 trying to dispel concerns, albeit somewhat unsuccessfully. But what about the collateral damage left in the wake of the rounds central bank are firing?
The Federal Reserve, for example, began ZIRP – its zero interest rate policy – in 2008 and has kept it going ever since. While the Fed would have us believe record-low interest rates are propping up the economy, some critics argue they are counterproductively propping up the living dead among us: zombie companies.
Here’s the idea, according to Jim Grant, founder of Grant’s Interest Rate Observer, an independent journal of the financial markets.
“In the life cycle of a capitalist boom-and-bust there, by definition, is failure as well as success,” Grant tells The Daily Ticker. “One must acknowledge failure, re-price and liquidate it, and move on to the next thing. “
This process is known as creative destruction, a phrase coined by influential 20th century economist Joseph Schumpeter. Grant explains that long ago Schumpeter proposed capitalism is like the forest floor – there is life, death, and regeneration. And you’re looking at stagnation without the death and regeneration part of the equation.
According to Grant, the U.S. was always pretty good at this process.
“The U.S. historically has been expert at this art of failing, without so much stigma to the entrepreneur who tried but didn’t succeed,” he says. “It’s a wonderful aspect of this country – very little noted.”
Where Grant says this history has started failing to repeat itself is in the world of ZIRP, where he argues “subsidized credit thanks to the Fed” is extending the life cycle of unproductive companies.
An example Grant names is Tenet Healthcare (THC).
In September of 2002, the Dallas-based owner of hospitals was a $198 stock. These days it’s priced under $40 per share.
It’s rated on B1 according to Moody’s, which Grant says means it’s “knocking on the door of finance difficulty.” Grant says the company is highly leveraged and not doing well with respect to its free cash flow.
Yet in January, Tenet was able to refinance a debt issue that cost it 10.5% originally to one costing 4.5%.
As Grant puts it, “Bernanke is king and he has decreed Tenet Healthcare can borrow at these record low rates. No company rated so low has borrowed at this level ever.”
Grant argues this may be great for employees and even stockholders who might be looking at share repurchases. But, he notes, it is not so good for an entrepreneur who’s trying to make a new idea work in the area in which Tenet operates. The entrepreneur is looking at a competitor which subsidized credit is helping to keep afloat, according to Grant.
Grant notes this is happening the world over. While Japan is infamously the home of zombie companies, a recent FT column and other articles have lamented the detrimental role of zombie companies in the UK and Europe.