“Zombie” is referred to a fictional undead being created through the reanimation of a human corpse. The term comes from Haitian folklore, where a zombie is a dead body reanimated through various methods, most through magic.
A zombie cocktail refers to the name of the “knock you on your ass,” drink made of light rum, dark rum, 151 proof rum, vodka, freshly squeezed lime juice, bitters, grenadine syrup, grapefruit juice, and soda. There are variations of this drink which all contain two characteristics, extremely high alcohol content, and a participant who turns into a “zombie” after consuming one of these drinks. This cocktail was invented in 1934 by a waiter of Hollywood’s Don-the-Beachcomer restaurant as a solution to a hang-over. A patron, after consuming the cocktail stated that he felt like a zombie. I refuse to confess whether I have had that experience, I’ll plead the 5th.
What Is a zombie company? Zombies refer to companies that earns little or no profit, or barely enough profit to continue operating and servicing debt. Such companies tend to run monthly, by scraping together enough cash flow to pay wages, rents, fixes or expenses, but not earn enough to pay for interest payments or principal reductions of accrued debt. They are unable to reduce or pay off debt. Never mind, the thought of research and development, or reserves for replacement.
The original plan for all zombie companies was to increase business so that economies of scale eventually work, and the increased profit would become available to reduce debt, and all participants could live in a financial happily ever after? Some zombie companies operate in the crony system of special tax incentives, to prop up the appearance of economic viability. Any guess about who I am referring to? Can’t say it? It would be politically incorrect!
Zombie companies usually resort to issuing additional stock and/or taking on more debt to keep operating. Of course, when their lenders discover their stressed financial condition then borrowing cost goes up or possibly stops? Many zombies can function for years under this condition, until economic headwinds become turbulent, lenders quit lending, the stock and bond holders discover the life support condition of the “living dead,” “zombie stocks,” or a bankruptcy occurs.
Loose monetary policy by the Federal Reserve tends to feed zombies and helps keep them alive. When the market shifts, interest rates rise, business constricts, and customers disappear, the company’s insolvency will become more apparent, and will eventually go bankrupt. A zombie’s life expectancy is usually precarious because of the thin possibility of success. Hope in becoming an early adopter with high profit margin with a new miracle drug, new electric car, new advanced technology, or a new and improved gadget is preferred, but hope is not a sustainable strategy.
Just think about all the countries in the European Union, and Japan who went on a buying binge, investing sovereign funds into stocks, bonds, and debt. Their mood may dramatically change when they wake up one day and discover a house-of-cards collision while they try to unload “zombie” securities! The Chinese Government owns over 12,000 companies full of zombies.
Some zombie company’s employee many people, and gain so much political power, in our crony capitalist system that they will or assume that they can, rely on the “too big to fail” philosophy, and will have the government bail them out. This means encouraging these companies to take risk, while enjoying the financial successes, but in the event of failure, dumping the risk on the backs of the taxpayers. Remember the terms, risen from the dead and reanimated by various means, such as General Motors and AIG.
It is estimated that 1 in 10 US companies are “zombies” with a high probably of failure. Let’s not mention disruptive technologies, that constantly take what appeared to be a practical strategy but may become obsolete overnight for these members of the walking dead.
How about another form of zombie referred to as a “zombie consumer.” This type of zombie much like a company zombie, operates in a similar fashion. They accrue debt and complexity in life until there is no possible financial exit. The only option is to borrow more, get more credit cards, or go bankrupt. Many zombie consumers spend 105% of their annual income and credit cards are the “brains” they need to eat to stay alive. Their need for an expensive set of new tires or an engine over-hall would constitute a crisis for these zombies.
You may be shocked to learn what percentage of the American consumers can be considered as “zombie consumers?” Another article perhaps?
How about a “zombie country?” The US Gross Domestic Product is about 22 trillion per year. The cost to operate the federal and state government, including the 22 million government employees, excluding military employees, and pay for all the demands, including medical, entitlements, housing, and military is approximately 5 trillion per year. The government currently only raises about 4 trillion through taxation and other income generating schemes. The difference is created by printing fiat money, and taking on more debt issuing US Treasuries, US Bonds, all that become obligations of the taxpayers. A discussion for a later date is the fact that the top 20% of the taxpayers pay more than 80% of all the taxes.
A zombie country may have direct debt including US Treasuries, US Bonds, Corporate bonds, direct borrowing, but they also rely on a concept called “under funding, off balance sheet, and accrued obligations,” hidden from the public eye. How about 220 trillion for the USA only.
Whether it be companies, governments or consumers, it’s helpful to understanding the concept of the “Zombie business.” The meaning may have changed over the years, but the core definition remains the same. When a large mass of braindead “zombies” participate in the same habits or activities that above entities engage in it will most likely end in financial destruction.
After all this, maybe it’s time for our “Zombie” cocktail! While at the same time, I intend to sift through my old 45 vinyl record collection and enjoy the timeless hits “Time of the Seasons,” “She’s Not There,” and “Tell Her No.” from the mid-60’s British rock band, The Zombies.
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This article is intended for educational purposes only and is not a solicitation.